Don’t Judge a Social Network by it’s Book Price

Far be it for me to defend Facebook…I think Google+ is a far superior tool for discussion and community and even Twitter is unmatched for certain types of interaction, as the Olympics showed clearly.

However, news of the impending death of Facebook because their share price is falling, are greatly exaggerated and miss the point.

Facebook does still have 1 billion users, and they’re active. Most of the people who use Facebook now are not early adopters or particularly savy with technology. They go to Facebook because all their friends and family are there. They aren’t going to leave even if something better comes along because there’s no reason to. You don’t go Facebook because it’s the Social Network you like best, you go to it because it’s Facebook. So Facebook isn’t going to go away like GroupOn or MySpace anytime soon. (Even these supposedly ‘dead’ sites still have loads of users in fact.)

So this idea that since the share price of Facebook has dropped like a rock that the company is in trouble or that they are switching to ‘survival’ mode, seems ridiculous to me. Maybe Facebook isn’t a great investment right now, but that’s not because no one uses it. It’s a bad investment because it was insanely overvalued at the start.

NPR’s _Planet Money_ show had a great discussion about Facebook’s IPO the week after it happened (listen to it here: http://www.npr.org/blogs/money/2012/05/22/153300390/facebook-now-what).

They had one bit of analysis that went something like this, I’m paraphrasing: ‘In order for the initial IPO price of Facebook to be an accurate valuation of the company’s future profit Facebook would need to take over 90% of the advertising industry, not web advertising, ALL advertising worldwide including magazines, tv, newspapers, billboards.’

That’s simply ridiculous.

The initial price they were putting forward was ten times what you would expect from a reasonable web advertising play assuming you could squeeze as much money out of your stream as Google. That means the people at Facebook thought they could do ten times better than Google at making users click on ads. It’s fine for them to believe that, go ahead, shoot for it, maybe Facebook can really invent a new concept of advertising that unlocks new, untapped money.

But the problem is investors and pundits like the writer of this Globe article seem to think that initial price must have been a somewhat reasonable extension of current methods, but it wasn’t. So to their minds, if the price goes down by 50% from the initial price then it’s all over for the company. But 50% is still an overvaluation.

A decline in the stock price of Facebook to $10 or less does not mean they are dead. You know why? Because 1 billion people will still be using the site and clicking on some ads. And those people won’t want to switch to another network even if it is better. However, it does mean eventually Facebook is going to need to either find a way to make more money or accept a more modest chunk of the worldwide advertising pie.