$240 Million! Think of All the Beer We Can Buy!
There can’t be any more deep technology in Facebook than what dozens of people could write in a couple of years. I think these things are going to have some legs, and yet there’s a … faddish nature about anything that appeals to younger people.”
“So how’s that Facebook deal working out for you?” Web 2.0 Summit conference program chair John Battelle asked Microsoft CEO Steve Ballmer last week. “Are you making money?”
“Rumor has it that we’re not,” Ballmer replied, adding “Mark [Zuckerberg, Facebook CEO] says we’re happy with it, so I guess we’re happy with it.”
Or, rather, happy enough. Because Microsoft has beaten Google out for an ownership stake in Facebook in a just-announced deal (see below).
Horrifyingly to those who are scrutinizing it, the deal puts Facebook’s valuation at around $15 billion.
UPDATE:
According to the release that just landed in my inbox, Microsoft is taking a $240 million equity stake in Facebook.
Facebook and Microsoft Expand Strategic Alliance
Microsoft to take equity stake in Facebook; companies expand advertising deal to cover international markets.
“Palo Alto, Calif., and Redmond, Wash.–Oct. 24–Facebook and Microsoft Corp. today announced that Microsoft will take a $240 million equity stake in Facebook’s next round of financing at a $15 billion valuation, and the companies will expand their existing advertising partnership. Under the expanded strategic alliance, Microsoft will be the exclusive third-party advertising platform partner for Facebook, and will begin to sell advertising for Facebook internationally in addition to the United States. Financial terms were not disclosed.
“ ‘We are pleased to take our Microsoft partnership to the next level,’ said Owen Van Natta, vice president of operations and chief revenue officer at Facebook. ‘We think this expanded relationship will allow Facebook to continue to innovate and grow as a technology leader and major player in social computing, as well as bring relevant advertising to the more than 49 million active users of Facebook.’
“ ‘Making this investment and expanding this partnership will position Microsoft and Facebook to better take advantage of advertising opportunities around the world, and is a great win for not only our two companies, but also our collective users and advertisers,’ said Kevin Johnson, president of the Platforms and Services Division at Microsoft. ‘We have partnered well over the past year and look forward to doing some exciting things together in the future. The opportunity to further collaborate as advertising partners is a big reason we have decided to take an equity stake, and is a strong statement of our confidence in the long-term economics of this partnership.’ ”
Comments
As I explained to Michael Arrington at the Graphing Social Patterns conference, “valuation” is what a willing buyer and a willing seller agree it is. So, Mark and Steve have agreed that 1.6% of Facebook is worth $240 million implying an overall valuation for Facebook of $15 billion. However, I’m still confident that Mark, as I do, values all of Facebook around $100 billion.
For those, like Michael, who say $100 billion is “crazy” or “bubble talk” or “call security time”, I would point out the following thought experiment, let’s assume”
1. Facebook grows to 200 million by Dec. 2008 — this seems highly likely given that facebook already has 47 million users and is doubling every six months. In addition, Facebook is just now starting to grow in the US business world and internationally (even without a localized site). This assumption ignores the accelerated growth that could occur with a little help from the 600+ million users of Microsoft Windows and Office which Steve Ballmer’s team could coax into having facebook accounts by simply updating how new versions of Microsoft’s key software products are installed.
2. Facebook cuts one deal with a major search player to power their web search — given the time spent by facebook users inside of facebook and given that a search box lives in the left-hand nav of every facebook page, it seems possible that the half of all facebook user who come to the site every day might do at least one web search. So for 2009, this works out to 200 million * 0.5 * 365 days = 36 billion web searches per year. Google handles about 64 billion US web searches per year and monetizes these searches at around $0.26 per search == $16 billion. Assuming Facebook’s search engine partner only monetizes these at $0.13 per search due to their relative lack of Cost Per Click search inventory and facebook users’ dislike of leaving facebook, this still works out to $4.6 Billion in search revenue for 2009 (with their search partner taking 20% leaving $3.68 billion for facebook). The 2008 web search revenue numbers would probably come in at around 25% of the 2009 numbers.
3. Facebook opens an online shopping mall in facebook for the top 1000 cataloger, e-tailers and retailers — assuming each store’s base mall rent was $1 million per year to be a part of the new facebook universal shopping cart and each store agreed to incremental ovreage rent of 5% of gross sales within the facebook mall, this works out to a minimum of $1 billion per year in base mall rent for facebook in 2008 and even more in 2009 as the user base in facebook grows (justifying higher base rent) and the overage rent kicks in 2009 once more folks are trained to actually buy products inside of facebook.
So, with these simple assumptions, facebook would have revenue of $2 billion in 2008 and $4+ billion in 2009. Almost all of this revenue will fall straight to facebook’s bottom line because contextual, demographically targetted banner ads can probably cover their burn rate of $100 million (assuming 1,000 employees by the 2008 - 2009 time period).
Under this model, a $100 billion IPO valuation would only be 50 x 2008 earnings and 25 x 2009 earnings.
(For more details, see http://blog.adonomics.com)
Thanks,
Lee Lorenzen
CEO, Altura Ventures LLC — the first facebook-only VC
(c) 2007 Altura Ventures LLC.
Posted by Lee Lorenzen at October 24th, 2007 at 5:32 pm