All Things Digital

The ability to control how much information is available to the public has long been one of Facebook’s core principles. It was this very feature, for example, that Facebook used to distinguish itself from other social networks back when it first launched.

Of course, the ensuing years proved that protecting the privacy of its users was not exactly Facebook’s strong suit–especially when it came to digging up the advertising revenues necessary to justify its fantastical $15 billion valuation. There have been privacy issues with Facebook’s news-feed service, with its controversial Beacon advertising system, and with its terms of service, which granted popular applications access to far more personal user data than is necessary.

And now there’s another. A bug in permission restrictions in Facebook Groups allows members to upload content without first receiving permission from a Group admin. I know this firsthand, because over the past few days videos, photos and blog posts have been appearing on the All Things Digital Facebook Group, and neither Walt, Kara nor I–the only three people with admin privileges to the group–put them there (see screen below). Worse, while I was able to delete the photos and blog posts, I was unable to pull the videos off the page. There was no mechanism to remove them.

Worse still, the bug that makes this possible is not specific to the All Things Digital Facebook Group alone. It affects all Facebook Groups, site-wide.

We alerted Facebook to the issue and the company quickly identified the bug. Said spokesperson Brandee Barker: “Engineering has pushed out a fix that should go site wide shortly.”

UPDATE: Facebook engineers fixed the permissions bug, and we were able to remove the rogue videos from our page.

Digg has decided to get out while the getting is still good. The social news site is said to be the prize in a bidding war that includes potential purchasers Google and Microsoft, along with two unnamed media companies. (Gee I wonder who those are?)

Anyway … Digg has reportedly hired New York investment bank Allen & Co. to help it find a buyer and has tempered its hopes for a $300-million sale price to a more realistic $200 million to $225 million. Microsoft, it’s worth noting, is said to be mulling a price even lower than that, which makes perfect sense since the software behemonth is already the exclusive provider of display and contextual advertising on the site. Course, Microsoft had a similar deal with Facebook, and that didn’t stop the company from taking a $240 million stake in it that valued Mark Zuckerberg’s little Harvard project at $15 billion.

UPDATE: According to Digg, this rumor is–like others that have gone before it–utter nonsense. In a post on the Digg blog, CEO Jay Adelson writes, “Normally our policy is to not comment about things like this, but this morning’s rumors about a bidding war involving Google and Microsoft have created such a stir we feel compelled to tell you all directly that they are completely inaccurate. Sorry to burst any drama theories, but they aren’t true. We remain focused on improving Digg and rolling out great features.”

No surprises here. The incredulity with which the industry views the $15 billion valuation given Facebook after Microsoft’s investment in the site does not extend to the offices of Microsoft Chief Financial Officer Chris Liddell. And why would it, when the consequences of not toeing the party line at Microsoft are likely being hanged from it by the neck until dead?

So in an interview with the Seattle Post Intelligencer, Liddell spent a fair bit of time defending Microsoft’s investment in Facebook and the company’s metastasizing valuation, though he surely knows as well as anyone that to be worth $15 billion, Facebook would have to generate about $2.5 billion in revenue in three years.

Obviously, I feel comfortable with the transaction we’ve done, and I was involved in it. I think you have to look at the investment not only in the context of the dollar investment but the commercial transaction. I think there’s a great example of finance taking a role in that and thinking about the holistic aspect of what we’re trying to do in the online services, how Facebook fits into it, and how a dual investment-commercial transaction is a very powerful way of creating a partnership.

“So I’m really comfortable with the overall transaction. The $15 billion number is a big number. But can I see realistic scenarios where the company could be worth more than that? Yes, I could. It’s a big call, but it’s a very good one strategically. … It’s a great example of where some of the creative thinking of the business and finance people collectively came to a result which was very good.”

About what you’d expect him to say, right? Except for that one bit about scenarios in which Facebook might be worth more than $15 billion, which is a little, you know, frightening.

We really need to move the thinking about the social graph. This exists out in the world, and has always existed. We didn’t invent it. How can we ‘own’ it? We’re just trying to map it out. We have a model of the social graph that we’re constructing.”
–Facebook CEO Mark Zuckerberg

We have address books, and the sum of the address books is the social graph.”
–Google CEO Eric Schmidt

Turns out that the “social graph” about which Facebook CEO Mark Zuckerberg so often speaks these days isn’t just a decades-old computer science term, it’s the basis for the monetization platform that will someday justify Facebook’s $15 billion valuation. Or so the theory goes.

On Nov. 6, Facebook will make a major announcement at the ad:tech conference in New York. And ad-industry executives familiar with the company’s plans say it will revolve around an advertising network reportedly called SocialAds. As described in Facebook’s Sept. 24 trademark filing of the term, SocialAds are “advertising and information distribution services, namely, providing advertising space via the global computer network; promoting the goods and services of others over the Internet.”

But–again according to those faceless ad-industry executives–the SocialAds network may be quite a bit more than that. It might use permission-based demographic targeting to deliver ads to users on Facebook–and off, says Altura Ventures’ Lee Lorenzen, who offers this hypothetical breakdown of the service:

• Facebook (with Microsoft’s help) will offer a competitive solution to Google AdSense for non-Facebook Web sites.
• You can think of this service as an open-source AdSense solution where Google can provide ads into it (if they document what the Web site owner will earn) but Google (and any other ad providers) will have to compete with ads that Microsoft can provide that are Facebook-enhanced.
• The innovation here is that Microsoft’s ads will be able to pick up the user’s Facebook cookie (for the 50-million-growing-to- 200-million users who already have a cookied-Facebook account).
• This means advertisers in Microsoft’s adCenter can offer a much higher CPC or CPM payment to the Web publisher because they will know that the user viewing the Web page is actually a Facebook user that, for example, happens to be an 18-year-old male with a birthday in three weeks who mentioned Xbox on his profile page.

If Lorenzen’s right, SocialAds might easily justify Microsoft’s $240 million investment in Facebook.

MySpace is worth $65 billion in the same way that Facebook is worth $15 billion–hypothetically.

This according to RBC Capital Markets, whose media specialist David Bank (analyst of News Corp., which owns MySpace along with this site) applied Facebook’s $357 per-user valuation to MySpace’s 185 million registered users to determine the social network’s “Facebook value” (Zuckerberg Quotient?)

Not that Bank believes either company is worth that kind of money. Especially Facebook. After all, the company is expected to generate just $150 million in revenue in 2007. Apply that to Facebook’s $15 billion valuation and you get a price-to-sales ratio that is, let’s face it here, insane. Is $1 worth of Facebook’s sales really worth 7.1 times more than $1 worth of Google’s (price-to-sales ratio: 14 to 1) or 17.5 times $1 worth of Microsoft’s (price-to-sales ratio: 5 to 7)? To Mark Zuckerberg, maybe.

“Facebook’s true value isn’t $15 billion,” Bank said. “The deal with Microsoft isn’t the same as buying something for $15 billion.”

As Microsoft announced that it would invest $240 million for a 1.6% stake in Facebook, valuing Mark Zuckerberg’s little Harvard project at $15 billion, Google CEO Eric Schmidt and company co-founder Sergey Brin were onstage at Google’s analyst day in Mountain View, Calif..

Coincidence? Not likely. How satisfying it must have been for Redmond to block Google’s entrée to Facebook at such a time. Didn’t seem to faze Google much though–as unaccustomed to playing the role of a runner-up as it might be. Perhaps that’s because Microsoft’s deal doesn’t appear to include search-based advertising, which could present Google with a significant opportunity in the future.

Perhaps it’s because Google feels Microsoft overpaid. Said Schmidt, “Some competitors are clearly willing to spend larger amounts of money beyond their ability to monetize.”

Or perhaps it’s because of Facebook’s “faddish nature,” which Microsoft CEO Steve Ballmer was pointing out just a few weeks back. After all, Zuckerburbia ain’t the only social-networking game in town. “There are plenty of companies using the notion of social community,” said Schmidt. “It is pretty obvious people will be members of multiple networks; which is why our world won’t collapse with any one network.”

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.”

–Microsoft CEO Steve Ballmer, Oct. 2

“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.’ ”

Well what do you know: the media buzz around Facebook doesn’t quite correlate with the site’s usage metrics. According to September comScore data, Zuckerburbia suffered a noticeable decline in unique visitors and page views both. Uniques are down 9.3%, page views 3.8%–this during a back-to-school month in which we should have seen both numbers spike.

What’s going on here? Who knows. But it might be time for the company to stop reading its press and start thinking seriously about taking some of the cash being flashed its way.

“Facebook has an enormous opportunity, and if the company doesn’t blow it, it could be worth every bit of $15 billion,” writes Silicon Alley Insider’s Henry Blodget. “Part of not blowing it, however, means playing the odds, and when investors are literally begging you to take their cash (as they appear to be), the odds almost always favor taking some of it. Why? Because the economy might weaken tomorrow, taking Internet advertising spending down with it. Because a competitor might develop an interesting solution that [CEO Mark] Zuckerberg might want to buy. Because the stock market might crash, converting Facebook’s $15 billion valuation into $5 billion (or less). Because Zuckerberg might do something stupid (sorry–this has to be considered a possibility). Because in all of these cases and more, it would be nice to have $500 million in the bank.”

Sanford C. Bernstein analyst Jeffrey Lindsay appears to have finished Yahoo CEO Jerry Yang’s 100-day strategic review of the company for him. In a research report issued today, Lindsay suggested Yahoo divide itself into three businesses–display advertising, Web search and subscriptions–to bolster its valuation.

Split up in such a way, Yahoo would be worth nearly $39 a share, or about 44% more than its current price–theoretically, anyway. “It appears that Yahoo will not take bold measures to right the ship,” Lindsay wrote. “We believe that Yahoo still has a potentially high intrinsic value. We believe, however, that to stop the inevitable slide into irrelevance, the management team must consider more radical actions and strategies.”

More radical than inviting 300 employees holding the title of vice-president or higher to a motivational event with Apple CEO Steve Jobs? Yes–sacred cow-slaughtering radical. Otherwise, you’ll be inviting Jobs back again next year, this time for a crowd of 600 VPs.

“We do not believe that Yahoo will alter its current course,” said Lindsay. “We believe that management is committed to a path of incremental revenue improvements which we believe will lock the company into a lower value trajectory.”

Bear Stearns Internet analyst Robert Peck is apparently taking the same cold medicines former Wall Street analyst Henry Blodget favors, just not in the same massive quantities.

Earlier this week Blodget–who in 2006 was laying out scenarios for a massive contraction in Google’s price–suggested the company’s shares might someday trade at $2,000. “Remember a couple years back when some analyst floated the idea that Google could eventually be worth $2,000 a share–and was ridiculed from coast to coast?” Blodget wrote. “Well, first it’s worth noting that Google is now almost a third of the way there. Second, it’s worth noting that $2,000 a share would mean a market cap of about $750 billion, which–given a reasonable time horizon–just isn’t that far-fetched.”

Well, according to Peck, Google will soon be just $1,300 from that stratospheric valuation. This morning he set a $700 target on Google shares for year-end 2008. “Google remains one of the best operating companies within our coverage universe, with EBITDA and EPS growth estimated at 21% and 20%, respectively, over the next three to five years,” Peck wrote in a research note to investors. “Google continues to gain market in search queries while continuing to face a bevy of competitors. … Further, Google’s efforts in online video, radio and print have added a layer of value that is absent from its competitors’ portfolio of offerings and which has the potential to yield significant financial rewards.”