InfoTech: Facebook's one-third drop in value

Russia's Digital Sky Technologies (DST) has gone global with its USD200 million investment in Facebook. The purchase of 1.96% of the social networking site values it at USD10 milliard. The difference between that deal, and the deal when Microsoft paid USD240 million for 1.5% of the company - valuing it at USD15 milliard is stark.

Where, one might ask, has the value gone since late 2007? In fact, the difference is so stark, that one feels compelled to look up the terms of the Microsoft deal to check if the memory is playing tricks.

After all, one logical result of the recession was always going to be more people at home and, with there being a marginal cost of zero to spending the day using a broadband connection, web-based businesses should actually see an increase.

Discounts, savings in travel and parking, not having to see the neighbours and admit to unemployment are all very good reasons for shopping on the web in times of hardship.

So on-line advertising providers and webshops have, predictably, seen an increase in turnover.

And, simply because of their addictive nature, Web 2.0 sites should be seeing more eyeballs - the equivalent of a shopping mall counting footfall. And, they tell us, they are.

So how can it be, then, that Facebook is worth less now than when the recession started?

The value of Facebook's business is not in its technology which is not particularly clever and it's easily replicated; it's not in the novelty of its model which was broadly an incremental development of Friends United, BeBo and MySpace; it's not its business model which is nothing more than that of billboards next to a busy highway.

Facebook doesn't need money, says it directors. Just last month, CFO Sheryl Sandberg reportedly said that the company had no need of additional finance. And CEO Mark Zuckerberg said after the investment was announced that the money was not for operating expenses but rather as a war chest for further produce development such as localised versions for relatively small markets - French-speaking Canadians, Filipinas and others - and buying up companies. He expects company revenues to rise by 70% this year.

Although Facebook is a private company and has not reached the threshold of 500 shareholders that would mean it has to disclose its results to the SEC, it is known to be operating at loss, according to Peter Thiel who sits on the Facebook board and in November last year said that the company is "slightly cashflow negative."

Facebook's strategy to be a global player is akin to Google's self-appointed mission to "index the world." But Google has a number of hidden revenue streams, in addition to the up-front advertising, that support the free search engine. But Facebook is a long way behind that. And although Facebook has more users than MySpace, its revenue only half that of its more established rival. How did MySpace do that? Answer: it sold its ad space, en bloc, to Google.

Facebook has one primary non-advertising revenue stream: the selling of so-called "digital goods." These are, in effect, tacky pre-formed instant messages. But like mobile-phone ring-tones, people pay real money for virtual silliness. An example: a truly dismal piece of pseudo 1980s clip art representing a bunch of flowers can be sent for USD1. But users cannot invest USD1 - they must buy a pack of 10 tokens that they can then use as they like. So Facebook gets a useful float. Sure, it shows as a debt to users in the accounts until the tokens are used, but there is no obligation to ring-fence that money and so it flows into the operating budget and either reduces interest charges or earns interest. But: that presumes that there is a payment mechanism that will enable users to pay - and credit card companies are wary of transactions originating in many of the company's target markets in developing countries.

But the virtual gift has some more serious revenue generating possibilities - Ben & Jerry's, a US ice cream company, put virtual ice cream cones up for grabs to " create awareness and buzz." They paid for the privilege - and were very satisfied with the number of people that joined in the promotion.

But across the world, in a real not virtual world, police were last year called in to calm a hostile crowd at a McDonald's burger bar in Singapore. The reason? A plastic trinket was being given away with purchases and Singaporeans go mad for anything free - even if it has no intrinsic value or practical purpose. Indeed, the standard form of promotion in Singapore is to give free things instead of reducing prices. Crowds gather around anyone with a loudspeaker if it's a free show and if there are giveaways, a jostling crowd forms a disorderly queue. That, one has to remember, is in one of the world's most ordered societies. One therefore has to question the value to any advertiser of relying on giving away something that isn't even a free sample and claiming to have created a buzz that lasts more than the length of the campaign.

But there is a little known benefit to the link-up with Microsoft: several hundred employees there are dedicated to selling Facebook ads.

DST has a portfolio of investments - including a domain much despised in the West, mail.ru - home (or at least purportedly so) of many of the most virulent email spammers and fraudsters through its free webmail service.

Newsweek reports that there have been other investors willing to invest in Facebook but placing a value of between USD4 milliard and 6 milliard. But DST says it already has social networking sites in other countries which already generate more profit-per-user than Facebook and they see their ability to contribute to Facebook's revenue generation as key to making a decent return on investment.

Whether sites such as Twitter are taking over is a red herring: there are many sites that pretend to the MySpace / Facebook crowns but the claims are buzz and bluster, and largely from airheaded commentators who might as well be writing about hem-lines as websites, for they are technofashionistas rather than technologists or business writers. There are rising stars and shooting stars - and the vast majority of sites that have tried to compete in the social networking arena have fallen to earth with a bump. Even the previously mighty Friends Reunited has changed its business model and technology to become almost a Facebook clone and Friendster - the must-have site for students (and to a lesser extent its more sophisticated similar site Bebo) - have seemingly passed their prime.

So, as Web 2.0 sites mature, the history is that they plateau and are eventually overtaken by younger, more fashionable upstarts. And it's not just Web 2.0. Search engines and portals have faced the same issue. In fact, ironically, the sites that are now coming to dominate e.g. news and current affairs are not the upstarts - but the web versions of long-established publications such as newspapers - not, even,the websites of broadcasters and "new media". They have been on a slow burn whilst Web 2.0 and their forerunners have shot to prominance in a short time.

That plateau seems to be - roughly - five years in.

Now, how old is Facebook?