Monday, 16 May 2011

Do you like Adverts? If not, don't buy Facebook.

Microsoft paid $8bn for skype, a business which competes directly with MSN messenger and generates substantially no revenue per user (though may do so in time if the computer replaces the 'phone). And it probably helps Microsoft get into the smart-phone market where they are currently getting their arses kicked by Google's Android and RIM's blackberry and that other one, "fruit" or something... you know, the phone your coke-dealer's girlfriend has. Microsoft paid with money they sort-of had lying around and couldn't do anything with for tax-reasons, and by removing a competitor, the deal makes sense -but only to Microsoft in a perverted "not-directly financial return" way.

LinkedIn's doing an IPO now and is prospectively valued at $3.3bn or something like $33,000 per user, but at least they're selling something people might actually want to buy - jobs, networking and sales. Though I'm on LinkedIn, I have not really worked out what it is FOR. So perhaps it's not worth that much. As there is a paid subscription service, I can see revenues, but If and only If it really becomes a peer-to-peer business resource, it may be worth money. But perhaps not that much.

Facebook - average (mostly advert-generated) revenue per user $2.57, with the company being valued at $50 billion or $200 per user, the assumption is that 1) that the number of facebook users will expand to around 7 times the world's population, 2) everyone will start paying to use facebook or 3) Companies' adverts will be targeted and therefore valuable (this contains the sub-assumption that users won't find this annoying or creepy and won't find ways around it or leave). Of course I prefer 4) This is a fucking bubble and if facebook ever comes to market at anything like Goldman Sachs' investment price it's only worthwhile as a stag, but If anyone offers me shares in facebook, I will tell them to bugger off.

With valuations an order of magnitude or two out, this is the most obvious bubble since the last one. The founders of these businesses get mightily rich at the investors' expense. Users continue to get their service for free in return for being subjected to adverts. Until, of course those adverts become too intrusive and users, the high-value ones first, leave to another "exclusive" network. Anyone ever go to MySpace any more - their best users left for facebook, which initially was a graduate thing. Then the grockles started throwing sheep, and polluting one's wall with illiterate gibberish. How long before the educated abandon facebook for something new and exclusive?

History may not repeat itself, but it certainly rhymes. Goldman Sachs may well find a bigger fool to shift their facebook stock onto before it's shares collapse to its real value of a few tens of millions, but it won't be me. The money in the web is in the businesses selling the picks and shovels - data storage/archiving/and search, back office e-commerce software and cloud server space to those business taking part in the social networking gold rush. These businesses have profits & dividends and so can be valued. It's boring. Like all good investments.



2 comments:

Anonymous said...

You read Flashman, don't you?

Patrick

Jackart said...

I have read EVERYTHING by George MacDonald Fraser. I highly recommend the McAusland series too. Quartered safe out here is also very good and a required text at RMA Sandhurst.

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