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facebook strategy – ads or platforms?

I get Google. A billion people use the website, stick advertising on it. Amazon and Walmart destroy the competition with economies of scale. Facebook’s strategy is a little more opaque to me. Right now, it’s going gangbusters on ad dollars. Is that the main strategy?  Envelope calculation: $100bn in market cap/a claimed 800m active users = $125. Does that sound right? Does that average user generate at least $125 of income for Facebook’s advertisers as a whole?

I suspect Facebook’s strategy is mixed. It’s obviously ads because young people (=discretionary income) love Facebook. But I suspect that Facebook is gearing up to be a major platform, an all purpose social space where people can do things. That leads us into the world of apps and income sharing from apps. Developer Steve Yegge made this distinction in a much hailed rant on Google+. Yegge pointed out that Amazon had built an amazing library of APIs that allowed third parties to collaborate with Amazon and mine its databases. I suspect Facebook is committed to this direction. Ads create enough revenue, but the goal is to create an appapalooza on par with Apple’s App Store. It’ll be interesting to see if that’s worth $125 a user.

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Written by fabiorojas

May 25, 2012 at 12:01 am

Posted in fabio, strategy

6 Responses

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  1. hi fabio – i’m not an expert on this, but, i’ll do my best to explain what i see the $100 billion valuation to be composed of.

    i think if you picture the $125 per person valuation as something like the expected value of earnings for each person into the indefinite future, than it might seem a bit more reasonable. so, grossly simplistically speaking (i’m not even going to bother to bust out a calculator), we could imagine a 25 year time horizon, with a discounted cash flow at whatever percentage, such that perhaps next year’s per person earnings is like ten or fifteen dollars, and at the end of 25 years that earnings is closer to zero… that might make the valuation seem more reasonable.

    but even then, it’s not really all about the income to the company that generates the whole valuation. the valuation would be the expected gains passed on to the shareholders, along with alternatives available to those investors with capital to invest; of course, that has something to do with how much income each user is expected to generate, but that means that income is not the only thing. capital does, in a capitalistic system, need somewhere to go, and thus, valuation of a company will also be dependent on perception of risk in the marketplace held by the capital holders as a whole. capital holders as a rule are looking to maximize their return on capital; but, i take it as that can also mean that if in a certain economic climate the best that capital can do is zero or negative return, then capital is still trying to maximize gains, albiet in such condition that might mean minimizing loss.

    anyway, curious to hear your further thoughts on the matter if you have the chance.

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    pm

    May 25, 2012 at 5:09 am

  2. also, we would have to consider the gains or losses from the option to sell the stock given all other available investments at the current moment; this, of course, ties back with capital’s inertia to maintain or expand itself. this option to sell with be another component of the valuation (as well as the capital stock itself relative to all other investment opportunities).

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    pm

    May 25, 2012 at 5:13 am

  3. I’ll compose a longer response later, but the time horizon has its problems because high tech is a field with a huge amount of turnover. But yes, perhaps maybe each connection is worth maybe $10 a year for a few years.

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    fabiorojas

    May 25, 2012 at 5:14 am

  4. […] however, has a different take: Facebook’s strategy is a little more opaque to me. Right now, it’s going […]

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  5. […] however, has a different take: Facebook’s strategy is a little more opaque to me. Right now, it’s going […]

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  6. […] but far short of the all encompassing vision of some. Probably the time to dig deep into that “platform” strategy we were talking […]

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