A Layman's Look at Facebook

 | Feb 02, 2012 | 7:30 AM EST  | Comments
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We are all well aware of the Facebook metrics by now. About 845 million total users, 350 million accessing their Facebook pages from mobile platforms, and a stock valuation projected to be some 40x more expensive than the average large IPO of the past four decades.

Facebook is the epitome of social media, and no doubt it I am over simplifying things with that explanation. To those who view Facebook as a fad and the IPO as comparable to the tulip-bulb mania, allow me to offer this dose of cold water:

  • Facebook has built an extremely strong brand.
  • Small businesses that don't have the financial resources of the behemoths could create a Facebook page and be their own largest fan and product promoter.
  • Productivity is a key feature -- businesses can interact with clients in China, for example, with the very simple chat function.
  • Facebook has caused a major upheaval in corporate marketing departments (coolest job around is to be director of social media).
  • Companies such as Zynga (ZNGA) and Electronic Arts (EA) are billion-dollar businesses that basically live on Facebook (Zynga draws its life from Facebook; Electronic Arts draws its next life from Facebook, having paid exorbitant multiples to buy social media game makers).

By noon yesterday, I stepped away from the Facebook madness on television to see whether the lunacy had spread to Google's news feeds. I was not disappointed. The first page of the Google search yielded close to 3,500 articles on every conceivable angle on Facebook (except mine, of course!) -- mostly centered on whether to buy the stock on IPO day or avoid it like the plague.

But I wanted to look at things a bit differently.

So in a layman's exercise, I visited some of the Facebook homepages of major financial news sites and then spied my own trusty page of fun information. Then I went and visited the actual homepages of TheStreet, CNBC, etc. The difference is the ads, baby! I just don't see the ad dollars flowing to Facebook yet; this is critical, as according to the filing last night, 85% of revenues are derived from ad spending.

If you think I am wrong, ask yourself if Facebook could generate enough ad dollars to grow into a 20x forward revenue multiple -- user base is huge, but will it generate enough revenue per brand account to satisfy the make-a-quarter mindset of Wall Street?

Going a bit deeper, major retailers love Facebook because they are using it to drive sales and profits by tailoring product to customer preferences, and not paying to do so. Ford (F) had a home run commercial on its Facebook page late in 2011, a total different financial ballgame in terms of ROI than placing an ad on CBS. Facebook has to change that discussion. It sure does have leverage, but don't underestimate global brands having leverage, too.

WMT on FB

I leave on this note: Where are the ads along the sides of the Wal-Mart (WMT) Facebook page? Should there eventually be ads for other brands, does that risk damaging the unwritten promise of Facebook to be a social destination not a real-time billboard?

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