What are Facebook / Twitter Worth?

There have been a lot of rumours flying around over the last couple of weeks about Twitter having a valuation of around $10 billion.  That’s quite a lot of cash for a company that supposedly lost around $40 million last year, and is forecast to do about $150 million in advertising revenue in 2011 according to emarketer.  Its a similar story over at Facebook, where a valuation of around $50 billion has been placed on the company.  That’s about a quarter of Google, despite only having revenue of about $1.8 billion last year.  Since costs for Facebook in 2009 were around $500 million, the company is definitely profitable – although how profitable is a big question.

Eric Schmidt, outgoing CEO at Google has suggested that this is evidence of a new dotcom bubble in progress, and if you look at a graph of Facebook’s valuation according to investment over the past few years, there is a bit of an upward trend:

value of Facebook based on investment in the company
value of Facebook based on investment in the company

Why so much?

Facebook currently has almost 600 million users, and they capture an awful lot of information about each of them.  this is data that is fabulously valuable from a marketing perspective.  Although Facebook only earns about $3 per user per year at the moment, there is enormous scope for increasing this.  Their advertising is still in its infancy, and although it is highly targeted, it is not that successful at driving volume of clicks – although they do convert really well.

Facebook also has more products under development and going live.  Their deals offering is attractive for businesses, and could potentially be a huge market with great revenue opportunities.  Facebook also have an opportunity to start to offer some kind of off site advertising model similar to Google AdSense, which based on the increasing value of behavioural targeting display advertising, and AdSense, could become a bigger revenue generator than on site advertising.  Another big opportunity for Facebook is their mobile apps and website.  Right now neither of these run the advertising, and a significant volume of interaction with the site is done on mobile – about 150-200 million people primarily interact with the site on their mobile phones rather than via the normal web interface.

Is a value of $100 per user good value for Facebook?  Maybe.  Although they are earning around $4 per user at the moment, this will grow quickly as more businesses enter the auction for traffic, and Facebook get better at converting views into clicks.

The other thing to remember about the current valuation of Facebook at around the $50 billion mark is largely fuelled by the Goldman Sachs investment at the end of last year.  The value of that investment of $385 million or so was mainly strategic to put the bank into pole position for managing the IPO of Facebook which is likely to happen in 2012, and would earn the bank several billions in commission for running the process.

So What about Twitter?

For Twitter the picture is not so clear.  Sure they have a fast growing user base, but they don’t capture anywhere near as much data about members as Facebook, and this will always limit how accurate their in stream advertising can be.  Promoted trends and tweets are a reasonable driver of revenue for Twitter, but they lack control over some of the other advertising that goes on the site.  Kim Kardashian is rumoured to earn about $60K every time she promotes a link to her 6 million followers.  She might well be worth it too, based on the traffic that one of her bit.ly links gets:

Clicks on a Kim Kardashian Twitter Link
Clicks on a Kim Kardashian Twitter Link

Twitter have experimented with a lot of different revenue earning models, and things are getting better for them.  Apparently although they still lost money in 2010, each user was reaching a several dollar value, and with about 150 million actual users, they have potential to earn more.

The real value of Twitter is probably not confined to the individual users it has, but the aggregated data that they provide.  Beyond trend data and hot items, Twitter sentiment provides huge insight into the shape of markets, and properly tamed, and with strong analysis could be used for predicting more than popular movies.

Are they worth it?

It would be easy to say that no, Facebook and Twitter are in no way worth the kind of valuations that are being thrown around about them, but that really overlooks the value that Data has in an information economy.

When you consider that the cost of the last UK census was about £250 million – about £10 per household, and acquired far less demographic information than Facebook captures in a single day, the true value of Facebook becomes apparent.

Ultimately, having  real time population data that incorporates relationships, employment, product preferences and state of mind for 600 million people could be worth far more than $50 billion, it just depends on what you are able to do with it.

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