Facebook’s IPO is scheduled for May 18th, 2012. I have no doubt that it will be fully subscribed. If you are a Facebook user, and if the stock is sold at the planned price of $38/share, YOU are worth $115.43 to investors. That’s what Facebook is selling: Us!
Facebook is selling the details about our lives and access to us to advertisers. Advertisers would need to agree that access to us and information about what we and all of our friends are doing is worth that much to them over our lifetimes.
So, here’s my question: Am I worth $115 to a Facebook investor? The stock price reflects the net present value of the future PROFITS Facebook expects to reap in selling ads and/or information about me and/or commissions on physical or virtual purchases I make through Facebook to companies who want me to buy their wares.
What Am I Worth to Advertisers? That’s why it was interesting to me that General Motors announced that it would not be advertising on Facebook in 2012. Of the $40 million GM spends on its Facebook presence each year, apparently $10 million is spent on actual advertising of its brands to the target market for those brands. That’s the part of its budget that GM is cutting. On the other hand, GM apparently does spend $30 million/year on maintaining Facebook pages, running social media campaigns for its brands, and on developing Facebook apps and/or Facebook-connected apps. That’s quite a lot of money. But how much of that revenue goes to Facebook? None. Most of it goes to the digital agencies in the Facebook ecosystem that design and maintain GM brands’ Facebook pages and develop GM’s Facebook apps.
What Am I Worth to the Facebook Ecosystem? If I were a GM customer, I might value an application that lets me keep track of my car’s mileage and maintenance, remind me when I need to get the oil changed, give me coupons for those oil changes, schedule them, and keep track of the fact that I actually did them. I might not mind if that application were connected to my Facebook profile if that enabled GM to tell me how well my mileage compares to others who drive like me and have similar cars and to alert me if there are ways I could be getting better gas mileage.
So that raises the question: how does Facebook earn money on Facebook-connected applications? The answer: it makes money when people actually buy things using Facebook payment systems. So, if I pay for my oil change using Facebook currency (highly unlikely), the service station would pay a commission to Facebook.
Notice that, in the GM example, the Ecosystem players who actually reap the revenues are the digital media agencies who specialize in building Facebook applications and maintaining your social media presence. Maybe those are the companies people SHOULD be investing in?
Am I Actually Worth $115?
How much of my future discretionary spending, or how much of my total share of my future wallet, will be influenced by what I see on Facebook? (My answer: very little—in fact a lot less than when I search on Google or Bing, because when I search on Google, I’m looking for something.) How much of my total share of wallet is influenced by what my friends do, like, and talk about on Facebook? (My answer: somewhat more). How much of my total share of wallet is influenced by where I am when I want or need something—e.g., food, gas, cash, quick oil change, hat, dog toy? Right now, not a lot; eventually, when my smartphone suggests things to me based on my current location—like “you have time to get an oil change; here’s a coupon for the service station around the corner, they have an opening, there's a dog park around the corner, it's sunny, but there's a hat shop across the street, and a pet store down the block”—a bit more. That’s a marketer’s pipe dream. It’s probably not how I would manage my life!
Paying $100 or so for actual consumer acquisition for a consumer who may buy many things with you over their lifetime is a very reasonable price. But, remember that $115 is the net present value of 10 years of Facebook’s PROFIT on what it sells you for. It’s not what the advertiser paid for that information and access. It’s Facebook’s profit on what they paid for that information and access.
If Not Me, How Many More of Me? Can Facebook Assume Continued Customer Growth?
The discrepancy between the stock price and the net present value of the profits per user can only be accounted for by assuming that Facebook will continue to grow its number of active users at the current 39% per year rate. This is a point I made in The Customer Revolution, when I discussed the concept of “customer momentum”—the growth in the value of your customer franchise based on referrals and word of mouth. But they already have close to 1 billion customers, and the current population of the globe is only 7 billion.