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Monday, 05 December 2011 11:57

Every Facebook user has a price on his head

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For some considerable time there have been nay-sayers who remind us that Facebook users are not 'customers,' they are the 'product.'  With plans for an IPO, we now know what they are likely to be worth.

We reported recently of strong rumours that Facebook will execute an IPO in the new year attempting to sell 10% of the company for $US10B, thus valuing the entire company at $US100B.

Obviously such a pricing exercise will depend entirely on the market's appetite for the stock (far from certain) and assuming there is interest, at what price they wish to buy-in.

The recent Groupon IPO (along with the LinkedIn event even earlier) found plenty of interest in the stock along with a quick peak, but both followed that early interest with a steady decline, but perhaps that was a result of the heavy sales effort on the part of the underwriters and other supporting consultants, the cheery glow waning once their attention turned elsewhere.

One might opine (history is on our side here) that whatever price the Facebook IPO lists at, there will be a brief and rapid rise, followed by a less brief but steady decline down to what everyone hopes is a fair value for the company.

But, what is it that makes Facebook worth so much money?

Is it the assets and infrastructure?  Hardly, those have been purchased with early investment money and with early trading income and would be worth a few billions at most.

Is it the staff?  Probably not.  With no disparagement intended to anyone there, amongst the various tech companies, there's nothing particularly special about the Facebook team.

So, what's left?  Pretty-much the only thing left is the user base.


Facebook's primary asset is it's user base.

That happy coterie of 800 million people who use Facebook to share so much more information about themselves than they really ought.  Well, there's probably considerably fewer than 800M as there are a lot of corporate accounts and (one would assume) a bunch of people with multiple accounts along with a considerable number of dormant or semi-dormant accounts (my own amongst them!).

So, when traded on the open market, what is a Facebook user worth?  Let's do a simple calculation: $100B divided by 800M users (we're being generous here, 500M might be more accurate) equals $125 per user ($200 on the less generous user count).

With this in mind, it becomes very obvious that the users are the product being delivered to the advertisers (the real customers) and one would hope that Facebook can demonstrate that there is sufficient click-through to keep these advertisers happy, because that's an awful lot of clicks to satisfy such a high valuation.

Hint: now do you understand why Facebook needs to provide as much information about its users to advertisers and other related parties?  It's all about targeted advertising and improved click-through.  And that pesky privacy policy keeps getting in the way!

If you want to reduce Facebook's value, don't ever click an advertising link; mind you, that might reduce the value to zero, which would mean no more Facebook.

Just like Google, Facebook is an advertising company; pure and simple.  Pretty-much their only revenue stream is derived from the advertisements placed on every page; and the more that can be earned from these advertisements, the better for the company.

 

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David Heath

David Heath has had a long and varied career in the IT industry having worked as a Pre-sales Network Engineer (remember Novell NetWare?), General Manager of IT&T for the TV Shopping Network, as a Technical manager in the Biometrics industry, and as a Technical Trainer and Instructional Designer in the industrial control sector. In all aspects, security has been a driving focus. Throughout his career, David has sought to inform and educate people and has done that through his writings and in more formal educational environments.

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