The financial event that defines our era is, according to reports, upon us. Maybe its significance is not actually all that – considering other events that have shaped finance in our time – but beyond the obligatory panache of an opening line there is an element of truth to the statement. There are approximately seven billion people on this planet, and more than one of every ten (including newborns and residents of remote unconnected places) are registered on Facebook. When Facebook prepares for its initial public offering, this is almost a redundancy. And while its IPO may not be as consequential as, say, TARP or QE rounds or LTRO, or all the littler happenings that led up to those trillion-dollar items, Facebook is as real a symbol of our era as any bailout; on some level, perhaps, these symbols are anyway intertwined.
The reason for the introductory bombast is more than stylistic, and really quite substantive; it has to do with valuation. As the punditry are already circulating financial metrics and operating assumptions, seeking to benchmark these against an expected $75-100 billion reported value range, I say this already misses the point. Because Facebook is not merely a large business, or merely a dominant product, but rather a global network with its precedent elsewhere. Were Facebook a growing and substantial business alone, were it a utility only, then revenue multiples and such conventional analysis would apply. As a global interconnection of massive scale, however, as a standard of interpersonal communication – like, possibly, the telephone or email before it – conventional analysis is rendered secondary.
Let’s assume for a moment that Facebook’s current revenue model collapses immediately. Let’s assume that advertising goes away. Does this mean that a network of 800 million registered users has lost its value? This would imply that the value of a global network of such scale resides within the confines of foreseeable business prospects, which begs the following question: If email or phone technology were owned by one entity, would its current monetization mechanism really matter or would its existence alone suffice? The rhetorical point being this: A network transcends fleeting business models and products that come and go. A network makes business and products possible, and it can’t be circumvented.
Valuing such a thing, putting a number to it precisely, is no easy feat. If absolutely pressed, I’d be inclined to go with something like a customer lifetime value calculation, but staring into the unknown. I would ask myself: How much, on a present value basis, would the total of all current and future entities in this world pay Facebook to gain access to its average current user? This is overly simplistic, of course, because the user base grows and also churns with time, and a lot depends on which of these outpaces the other. A lot also depends on the cost to maintain the user base and secure the network, whether growing or shrinking, and capital cost plays a circular sort of role in the calculation, as always. It is not an easy trip, like I said, but we should at least start on the proper track, in the correct direction; I don’t believe conventional metrics are appropriate.
In coming months we should expect a great deal of arguing to happen, as is fitting for a financial event that defines our era. When the dust settles and the deal gets priced, the market will have, as always, passed its sage judgment. When this occurs, I would look for Facebook to become the benchmark against which other digital media businesses are valued, rather than the other way around, and I would look for standards to be established on its basis.
February 3 Update:
Facebook has filed its S-1, as expected, to launch its monumental IPO. As is natural, the punditry and analyst community have been vocal, and my partners and I at CoRise have contributed to the dialogue. Please see our overview presentation, seeking to develop the ideas expressed in the preceding commentary and to quantify some of the variables described. This may be accessed through our website or directly here.
