Why Facebook $2 billion is absurd - a rough calculation

OK - apparently under the radar screen, teen media holding company Alloy acquired Sconex, a.k.a. Facebook for high schoolers.  Ironic that real dollars were being exchanged and totally overshadowed by the Facebook $2 billion buzz.

So let's do some back of the envelope calculations.

Using registered users as the unit of currency - after all, social networks are like soylent green - its people!  How else are you going to monetize those page views?

• July 19, 2005:  News Corp+Myspace.  $580 million for 67 million registered users = $8.66 per registered user.
• March 28, 2006:  Alloy+Sconex.  $8.7 million for 500,000 registered users = $17.40 per registered user.
• Speculation:  tbd+Facebook.  $2 billion for 9 million registered users = $220.75 per registered user.

How did I get 9 million?  This post pegs Facebook at 5+ million registered users on 10/27/2005, with 20,000 new users daily.  It's been 153 days since then.  Let's make 5+ = 6 and 153 * 20k = 3 million.

The knock on myspace is that only a small percentage of users are active.  OK so reduce myspace by 82% and you get 12 million users, for a cost of $48.09 each.  Still a bargain.

So if you want to look at your Facebook on myspace terms, we're talking roughly $78.5 million.  I still say Facebook should take the money and run - if it's still on the table.  Look - if I had more time I would construct a proper DCF model and post it here - but that's not my job and I have some other interesting research I'm taking a break from writing right now.  If you have any links to a model let me know and I'll post.

(btw I ran across this article at Reuters while looking up figures - I think you have to use a different figure for Sconex b/c the stock is reported as guaranteed.)

I haven't heard any buzz about LinkedIn - which seems pretty successful with a corporate user base.  Lots of potential - how much would it be worth on the block?

And considering that social networks are made of people - when are they going to revolt and realize they're the ones creating the value and being sold out?  My guess is that the execs will say "let them eat cake."

Tags: facebook, for sale, sconex, alloy, myspace, news corp Add to del.icio.us

Comments

[Jeff Clavier]

A couple of comments:
- NewsCorp has acquired Intermix Media, that owned MySpace and other properties. So the consideration of $580M can not be fully accrued to MySpace.
- At the time of the acquisition, MySpace "only" had about 25-ish million users.
- At the time of the acquisition, I calculated that NewsCorp paid $20 to $25 per registered users.
- There is then the question of the monetization, i.e what ARPU can Facebook generate vs. MySpace in advertising, sponsorship and affiliate fees. My guess is that it is higher on Facebook b/c of a more specific demographic, but I don't know for a fact.

All in all, pegging Facebook at $78M is undervaluing the company by a factor of ten. But I don't disagree with the statement that if (big if) it was for real, $750M was not a bad deal.

[Peter Kim]

Great points and thanks for the perspective. While acquisition cost per user is a handy short cut, it's only a proxy for ad revenue that gets refined on a site's composition, as you mention.

I'd like to know why there isn't more uneasiness about the fuel behind today's exuberance - advertising. Although spend is higher than ever, these new media companies are starting to resemble each other as they extend their focus to target additional users, thus competing more directly for the shares of the same pie.

How long until we see the social network equivalent of WB + UPN = CW? United Online buys Facebook and merges it with classmates.com? Or Dogster, Catster, and Hamsterster tie the knot to create a virtual animal kingdom....

[Jeff Clavier]

Well, you have a point re advertising and competing for attention, but the percentage of advertising budgets having gone online is fairly limited - all in all. And there is a need to target some of these demographics via an online medium b/c these kids don't watch TV or listen to the radio.

As to Dogster and Catster coming together, they already are. And Hamsterster... we'll see...