Social networking phenomenon Facebook has been valued at $104bn as it makes its debut on the stock market today, catapulting it into the ranks of the top 25 US public companies.
But is it really worth so much? And does that valuation present a danger that Facebook could skew the value of the tech industry as a whole and create the kind of bubble that led to the dot-com crash of 2000?
The Drum put those questions to a collection of technology and digital experts. Here's what they said.
Keith Hunt, managing partner of Results International
For something to be worth over $100bn and still be in a reasonably early stage in its development, you’d want to be confident that there’s some massive growth opportunities. I think the opportunity for it to grow at $150bn or $200bn is seriously limited.
Personally I think there’s a real danger that Facebook is starting to peak. Its most recent quarterly revenues were down on the previous period. There’s also various comments around about how the revenue comes from advertising but the advertising doesn’t really work when Facebook is used in mobile devices, which is increasingly where internet usage is coming from.
So if I was investing in it I would wait for it to go up 10 to 20 percent and then take the profit and not hang on for the longer-term.
I think there is a real danger of another bubble around this. Not a dot-com bubble of the nature we saw in 2000-2001, because dot com’s here to stay and will continue to grow, but within that companies can get overhyped. For me it was a massive danger signal when they paid a billion dollars for Instagram.
They were a bit too willing to spend $100bn to fix a problem when $100m might’ve done it. When they see their own business valued at $100bn it’s easy to think nothing of spending $1bn on something else.
Ben Hatton, managing director of Rippleffect
It’s a high valuation but the pressure will come beyond today. There’s going to be a lot of pressure on Facebook to maintain that valuation and, more so, to grow beyond that valuation. Shareholders as of today will want to see growth beyond that valuation and that’s where the pressure comes.
When you talk about things like a dot-com bubble, I think we’re a million miles from that. Facebook makes a lot of money. It’s a fantastic business and product. But trends do change. We only know what we know today.
All you can say is that it is a high number, there’s no two ways about it. That’s the stake in the ground. Where does it go from there? What does that say to staff and what will it do to the morale of the people who work within Facebook who are trying to keep it to that level? It will be tough.
Robin Grant, global managing director, We Are Social
Fair's probably not the right word, but I do think Facebook is a good long-term bet, even at that price. This is less to do with their current business model and revenues, and more to do with where Zuckerberg's proven leadership can take the company in the future with their ever dominant global postion and un-paralleled numbers of users spending more and more of their time on their site. Whether that be effectively monetising their mobile users, launching their own ad network, their app store challenging Apple and Amazon's or Facebook Credits becoming a currency of choice for a whole variety of transaction enabled by the site.
For Facebook, it's a case of the higher the better, meaning they'll fill their coffers with more money to use for product development or acquisitions with no extra share dilution. For the rest of us, even within the marketing and advertising industry, it doesn't really matter what Facebook's share price is (unless you're buying the stock as a private investor). The dot-com bubble was much broader based, and dot.coms were spending large amounts of money with agencies everywhere - so when that bubble bust, it really hurt the industry. It's not the same in this case.
Steve Richards, managing director of Yomego
As with all these types of flotation, this value is a bet on future action by the company. But unlike many valuations, Facebook’s business model is like nothing we’ve ever seen before – and it all comes down to the potential value of the data it holds.
At the moment, Facebook is still figuring out ways to make money from that data. One of the ways it will become valuable is by linking it with real-world actions and other information – integrating it with other systems, such as company CRM databases. But the legal issues haven’t yet been figured out around this, though it is being discussed – and there’s always the risk of a backlash as levels of awareness about data freedom increase in the general population.
If they get it right – and the law comes down on their side, $104bn could look like a bargain. Otherwise, in five years’ time, I’ll be talking to you about whether anyone could have foreseen Facebook’s demise.
Investors like quick returns. However, the long-game is all important for a market-leader like Facebook. The ‘editorial’ – not the commercial – imperative must remain paramount. Tumblr’s long-held aversion to ads has been eroded by commercial pressures but Facebook will need to tread carefully and U-turns in policy (like the privacy setting one) can be embarrassing and erode the confidence and enjoyment of users.
The IPO will, of course, give Facebook an envied war-chest for innovation, enhancement, diversification, marketing and more acquisitions. Prices soar when a rich potential suitor enters the room (just ask Roman Abramovich) so the IPO could be good news for innovative, clever tech developers. This will help to stimulate growth, with investors prepared to take a gamble or two.
The only thing likely to hold this back is the depth of talent in the marketplace. Inflated prices will inevitably give rise to fears of another bubble, but with the rest of the world economy seemingly on its knees, it’s encouraging to note there’s still money around if the proposition’s right.
Garry Byrne, managing director of Reading Room
It's a tough one - on the one hand, they have direct access to the thing that's going to be worth most in the near future - data. Specifically, they know what you like, who you like it with and when you like it. They know the clothes you wear, the events you attend and the style of humour you have. And that's all if you only use facebook for it's most basic of functions and forego gaming and such.
Data is doing to be the dominant force in an increasingly digital, targeted world, and they have the best handle on that. So whilst $104bn is a lot for a company with little more tangible assets than it's desks and chairs, they hold access to a potential goldmine. it's this that's driving the valuation, and given that we've always paid a premium for high quality, relevant and marketable information, it's probably not fair off.
The danger of another bubble is very real, not really because facebook has been valued so highly but because it naturally invokes the 'me too' mindset - that where the assumption is that every big new thing should be similarly worth a ton of cash. As much as it has no real assets or product, it benefits from a huge audience base and a lot of information from that audience, as well as the assurance that such a huge interconnected group brings - many of us tried Google Plus, but ultimately didn't stay there because our friends and family were still on facebook. There's very few services or networks that can bring that level of assurance - groupon, for example, were valued very highly but are completely dependent on an audience who can disappear to another discount voucher site at any time - they don't have to stick with groupon as there's no reason to beyond the voucher.
So, the very real risk is that people will - as we did in 2000 - assume that online, social and other such 'wow' services are worth a mass of money when in actual fact, few have the stability and assurance that facebook do.
Paul Fabretti, digital director at Brazen
I'm not a VC or financial bod by any means and I certainly have no experience in valuing multi-national businesses. That said, the numbers are truly astounding and I'd be genuinely amazed if the share price held at this level for any length of time. Investors have to consider where their returns are gong to come from. As large as the Facebook audience is, as clever as their ads are, and as much as they drive significant revenues, the company is constantly looking to evolve its revenue streams. It is one thing to introduce new features, but the metrics upon which value is derived (for the brands investing in Facebook ads) are in a constant state of flux. Fan-number-driven objectives are now with timeline, being replaced with PTAT (engagement). What other industries with sky high company valuations are still trying to find their feet when it comes to measuring the effectiveness of the product in which they are investing.
And in some way, as the GM announcement came this week, the entire platform has yet to prove itself. So, factoring in the fact that the share price includes advertising growth forecasts - if Facebook can't manage to make their ad formats (and new formats) work consistently and effectively then the share price can only go one way...
On the flip side, consider this potential - according to webtrends, if Facebook DID roll out the in-stream ads they publicised this week and of the 500m active monthly users (of the 900m members) 1 person, per day bought one ad for 365 days - they would be serving 182.5bn ads per year. At a $20cpm cost per ad they would stand to make $3.6bn.
Advertising model issues-aside, the other major concern for revenues must be privacy. As frictionless sharing kicks in to many different platforms (other than spotify and news articles), the potential risk for invasions of privacy - and revulsions against it risk bringing the whole house of cards down.