What If Facebook Can’t Sell Any Ads?

(Update below) There’s a growing counter theory to the snowballing buzz on Facebook. The contrary view is that the company, rather than having a potential value in the billions, might really be worth next to nothing.

Douglas McIntyre, of 24/7 Wall Street, Friday has a post theorizing that the actual value of the company is closer to $0 than the $10 billion that some people are now using.

Thursday, Valleywag’s Nick Denton made a similar point, asserting that the site’s advertising model “is clearly not working.”

I have no idea if these guys are right; we’re right back where we were in 1998, arguing about whether it is enough to have millions of eyeballs, or whether you can build traffic first and figure out the business model later. I will say this: at the Fortune iMeme conference in San Francisco Thursday, the appearance of Facebook’s 23-year-old founder and CEO Mark Zuckerberg on a panel about building Internet “platforms” drew plenty of buzz; and more importantly his ghost showed up on a lot of the other panels, where every discussion eventually turned to the subject of Facebook (Zillow CEO Richard Barton, for instance, mentioned at a panel on “crowdsourcing” that his invitations for new connections on Facebook are running 10-to-1 ahead of his invitations to connect with people on LinkedIn).

I haven’t seen this kind of buzz on the conference circuit since the YouTube boys started making public appearances. And we all know what happened to them: Google (GOOG) bought them and made them incredibly wealthy.

I don’t know if Microsoft (MSFT) is really going to buy Facebook for $6 billion, but I’m a little more optimistic than the above-mentioned skeptics about the company’s potential for a successful exit.

UPDATE: Facebook director Jim Breyer of Accel Partners Friday said the company this year will do more than $100 million in revenue, and will generate a profit and significant cash flows. Which makes me think the skeptics are too skeptical.

Comments

[Yaser Anwar]

Facebook, in % terms, generates a lot more cash flow and revenues than its peers MySpace. Furthermore, it has a higher visitor frequency, and from my personal experience is much better than other social networking platforms.

Its foolhardy to think they are worth less than US$ 1.5 billion. I expect them to go public.

[rob]

One interesting point here is that Nielsen//NetRatings' AdRelevance service, which is a useful tool to be able to see what advertisers are actually running on a given site, doesn't report data for Facebook since all of it is behind a login for the individual user. If it were possible, you'd be able to see the mix of ads that are running.

But given my observations, there are very few ad spaces on the site, they are not very conspicuous (and especially given how much stuff is happening on the average Facebook page... response rates will be even lower) and most of them appear to be (at least the ones I am seeing) of the lower-CPM variety. The quality of the ads is slightly higher than a web-wide average sample, but it is certainly not the caliber of a Yahoo! or MSN portal.

I definitely think that their platform is changing the game in some ways - but in terms of generating ad revenue they have not yet even begun to optimize for that, it's clear it isn't yet that important for them.

[corepitjl90]

I am a regular visitor to Facebook and from what I can see I'm not worried at all about the site's revenue. Firstly, the tall ads on the sides of the pages are recognizeable enough. Secondly, what a lot of older analysts don't see because they are not users themselves is that millions of "gifts" are sold at a cost of $1 each. Eventually thats adds up. Next, I'm sure that Viacom is paying for those Daily Show and Colbert Report applications that tons of people have on their profiles. Its a smart form of advertising.
Basically, the site has alternate forms of revenue and new age advertising- I'm not worried.

[dmc500hats]

Couldn't disagree more with McIntyre... he's missing it completely.

His point that the traffic "can't be organized" is dead wrong, and he obviously doesn't understand how the Facebook News Feed integrates with facebook apps & the social graph information made available by facebook.

For more info on this, read my piece on <b>Marketing Facebook Apps</b>, and also Justin Smith's article on News Feed Optimization (NFO).

People who think the Facebook model isn't working or isn't worth anything are going to look like even bigger fools than people who criticized YouTube before they got bought for $1.5B, and also the same folks who stood on the sidelines when GOOG opened at $85. Just because Henry Blodgett is pimping the MSFT-FB acquisition story -- which i don't think will happen, Zuck won't sell -- doesn't mean that his intuitions are wrong.

to be clear: Facebook really *IS* the Second Coming, and Silicon Valley knows it. It's the first time i've ever seen Googlers doubt whether they're the coolest company in the valley. Every VC &amp; startup entrepreneur is either excited as hell or scared shitless by Facebook, sometimes both at the same time.

People who underestimate what Facebook means to the Web will be wishing they paid more attention as the evidence of their impact becomes more clear.

- dave mcclure
500hats.typepad.com/