I felt it was timely to post this lesson with the latest news on FaceBook turning down a $1 Billion dollar offer from Yahoo. To add more color to the story - FaceBook is a website, started by a 22-year old, that is 99% content generated by teenagers. It is essentially our modern-day Teenage Wasteland. However, the "experts" spin it a different way. FaceBook is one of the most visited websites in the Internet with 8 million users a month, and it dominates the 17-25 year old market as #1 website. Whichever analysis you agree with it doesn't matter - the fact is the market has spoken, and it says FaceBook is worth 1B.
So, lets break it down, and really try to understand why Facebook = 1B. First, I assume it has a premium value because of its web traffic (8 Million visitors per month) and it has a lock with a very valuable demographic. So lets start with the obvious question - how does it make money. Well, first lets look at advertising. Facebook currently has ads running on its site, and I am not sure the economics they have negotiated with providers, but I am going to make some basic assumptions and try to project their potential revenue.
First lets just assume they fall in the same "rate range" a Google or Yahoo sells advertising. This would be around $0.10 to $0.50 per click or $.02 per impression.
Lets start with CPM (Cost per Impression). If they have 8 million visitors, then we can assume they have around 200 Million impressions (each visitor goes to around 25 pages). Then lets assume they sell 5 ads per page. So basically their "maximum" ad inventory is 1 Billion impressions (basically they can sell 1B impressions per month to advertisers). Which if they sell at $0.02 per impression, they could sell a maximum of $20,000,000 of ads per month. Which is $240M per year.
Now realize I am taking the high side on all aspects (5 ads - most sites do 1-2), and I assumed every impression was on a page that had ads (which is not going to be the case, for example the homepage gets 30% of those impressions and has no ads).
So best case $20M per month - but more likely $10M per month.
So this can't be the reason they are worth $1B? Perhaps there are other revenue streams (affiliates, cross-sale opportunities, or even subscription based revenue?) I don't know - but what ever they come up with it has a lot of ground to make up.
At the end of the day, the objective of every entrepreneur is to make millions of dollars so they can continue to work on what they love. Do we want to change the world - sure, but banks, investors and shareholders don't really care about it, and to be honest it shouldn't be what drives an entrepreneur - because we live in a world that changes so rapidly - by the time something innovative hits the streets, it is overtaken by something bigger, better and faster. Ideas and Innovation are measured by seconds, not by years anymore - and the only thing that can truly change the world is wealth.
FaceBook.com will not change the world, in fact I would bet that it becomes a novelty within 3-5 years (not because the concept of social networking is a fad, but Facebook like so many other websites will become bloated, lose its focus and it will not be "cool" anymore). I am afraid the only way FaceBook.com could have changed the world, is if Mark (the founder) sold it for 1B, and turned his focus on giving away his wealth to better mankind by funding new projects, donating to charitable organizations and educating the world.