Economics, Social Networks, Web 2.0
Jun 6, 2008
Steve Petersen
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Why is Facebook Worth So Much?

Last October Microsoft announced a $240 million advertising investment in Facebook, which put the valuation of the social media company at about $15 billion.

While it is shockingly common to see businesses throw around dollar sums with seemingly little attention to the number of digits left of the decimal point, big business has goofed up before.  I'll cite the current mortgage and credit crises as evidence of this.

That is why I'm wondering why companies value Facebook at such a high amount.  Granted, it and other social networks are currently business darlings with their rapid growth, loyal customer base that can have targeted advertising directed at, and great ability to furtively extract valuable demographic information from people through those pesky applications while playing hard-to-get since it is hard enough to monetize them to make the pursuit interesting enough.  However, while I'm an avid Facebook user now, I highly doubt that the site will do well in its current form in several years.  Social networking seems like a fad to me.

So, why are companies so eager to spend billions on a short term fad?  I don't know.  For awhile, I thought that the value of the sites is not what they are but what they will evolve into.  Will Facebook soon become the site that people use for e-mail, instant messaging, calendaring, photo sharing, networking, news reading, etc.?

If that's the case, I can see the value as a site can horde and maintain a loyal user base in which it can target advertising to while its users do a variety of activities.  But then I thought about the World Wide Web of the mid-1990s when portal services like AOL and Compuserve (remember that?) reigned.  They aimed to provide their users — who likely used them for Internet access — with everything that they needed (news, weather, reference material, e-mail, entertainment, etc.) on their portal sites in an attempt to keep people there.  In a sense they tried to act as if the whole purpose that the computer was invented was for you to visit and stay on their portal sites.

Well, what's happened to this business model?  It no longer works.  Granted, social networks like Facebook can gradually introduce more services to their users, but companies like AOL and Compuserve had more or less captive audiences, too.

After that thought process, that brings me back to my original question: Why are social networks like Facebook worth billions of dollars?

  • Paul Lambert

    Valid question. My answer would be no.

    Just wanted to make one remark regarding CompuServe and AOL (I spent nearly 30 years with CompuServe):

    The CompuServe Information Service wasn’t created to provide internet access or to be a portal. When we started the Information Service in the early 1980s (and had been in the business of commercial timesharing for a decade before then), there was no Internet and there was no such thing as a portal. Before folks like CompuServe, Prodigy and AOL, there was no such thing as Chat, Forums or consumer email. We pioneered all those services.

    But indeed the Internet did come along and change the landscape of the online world. The CompuServe Information Service was purchased by AOL (and the rest of CompuServe – notably the Network Services group) was acquired by Worldcom.

    It was a pretty cool ride…

    PL

  • Paul Lambert

    Valid question. My answer would be no.

    Just wanted to make one remark regarding CompuServe and AOL (I spent nearly 30 years with CompuServe):

    The CompuServe Information Service wasn’t created to provide internet access or to be a portal. When we started the Information Service in the early 1980s (and had been in the business of commercial timesharing for a decade before then), there was no Internet and there was no such thing as a portal. Before folks like CompuServe, Prodigy and AOL, there was no such thing as Chat, Forums or consumer email. We pioneered all those services.

    But indeed the Internet did come along and change the landscape of the online world. The CompuServe Information Service was purchased by AOL (and the rest of CompuServe – notably the Network Services group) was acquired by Worldcom.

    It was a pretty cool ride…

    PL

  • http://www.punitpandey.com Punit Pandey

    The reach is the primary factor behind the valuation. This is true not only for the FaceBook but for the other websites you mentioned.

  • http://www.punitpandey.com Punit Pandey

    The reach is the primary factor behind the valuation. This is true not only for the FaceBook but for the other websites you mentioned.

  • Joel Balzano

    I just read this article. It is now 2010. Wow your opinion was wrong!

  • Steve Petersen

    LOL! Predictions are never easy, Joel…

    However, while the app (ie Facebook) is growing strong on the Internet, not everyone feels that this trend will continue infinitely. For instance, check out the “The Web Is Dead?” (http://www.wired.com/magazine/.....ip_debate/) debate between Tim O’Reilly, John Battelle, and Chris Anderson in the September 2010 issue of Wired. This story is not over yet.

  • http://www.bivingsreport.com/2011/should-i-vote-for-a-friend-while-divulging-my-personal-information/ Should I vote for a friend while divulging my personal information? | The Bivings Report

    [...] the past, I have indicated that Facebook app developers can access demographic information; that is what helps make these apps and social networks so valuable.  However, is it worth [...]

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