Businessweek: Why Facebook Is Worth $10 Billion

Introduction: The website of Business Week published an analytical article today, according to a source of information, Microsoft is negotiating with the social networking site Facebook in the hope of acquiring 5% of its shares at a price ranging from $300 million to $500 million. According to Microsoft's offer, the total value of Facebook will reach around $10 billion. As a social networking site established for only three and a half years, why can the value of Facebook soar to $10 billion within such a short period of time?

Facebook founder Mark Zuckerberg has never been an easily satisfied person. When Zuckerberg rejected Yahoo's acquisition offer of $1 billion, many industry insiders questioned his judgment. He actually thought that a website for students to post pictures and express emotions was worth more than one-third of the New York Times, wasn't it too capricious or childish? Time proved the correctness of Zuckerberg. According to Microsoft's offer, the total value of Facebook will reach $10 billion, equivalent to twice as much as the New York Times.

So far, Zuckerberg has not expressed his attitude, and the Facebook he leads has not commented on the rumor of Microsoft's share acquisition. However, a source of information from Facebook confirmed that this social networking site is indeed seeking investment, on the premise that the overall pricing of the company reaches at least $10 billion. Facebook was founded three and a half years ago and has received nearly $41 million in investments from venture capital companies and other private investors.

Hungry Advertisers

This is not the first time Microsoft has expressed interest in Facebook. According to sources, Microsoft had planned to acquire Facebook for $1.3 billion earlier this year. According to previous agreements, Microsoft has already started providing online advertising services for Facebook in the United States, and this agreement will expire in 2011. Sources revealed that Microsoft and Facebook are considering expanding their existing cooperation agreement to extend its scope to other regions of the world. Since Facebook is currently seeking investments between $50 million and $250 million, Microsoft naturally won't miss this opportunity.

Other technology companies may not let Microsoft monopolize all the glory; Yahoo and Google have strong interests in Facebook. Why does Facebook receive consistent optimism from the industry? First, Facebook is widely welcomed in the United States. Facebook already has more than 40 million users, each user spends more than three hours per month on Facebook on average. In addition, many social networking sites experience a sharp decline in popularity after becoming mainstream. Facebook is completely different; as the scale of the site expands and the operating time increases, the appeal of the site continues to grow.

Since Facebook's popularity is guaranteed, manufacturers naturally wouldn't miss out on this excellent advertising platform. Analysts expect that Facebook's advertising revenue this year will reach between $150 million and $300 million. Paul Kedrosky, partner of Ventures West Venture Capital Company, said that if annual advertising revenue reaches $300 million, Facebook's valuation at the time of its initial public offering will reach $11 billion. He said, "The number of Facebook users has been growing rapidly, and the user retention time remains high. User retention time and traffic constitute an excellent advertising platform."

The First Social Operating System

David Sze, partner of Greylock Partners Venture Capital Company and observer of Facebook's board of directors, said that Facebook's profitability is better than MySpace, the largest social networking site in the United States. In 2005, News Corporation acquired MySpace for $580 million. In the last fiscal year ended June 30, the revenue of MySpace's parent company, Fox Interactive Media, was $550 million, with net profit of $10 million. Rupert Murdoch, CEO of News Corporation, said that Fox Interactive Media's sales this year are expected to reach $1 billion, of which $800 million comes from Myspace. Sze said that even if MySpace achieves the above financial goals, its profitability still cannot match Facebook.

The reason Facebook can be valued at $10 billion is more importantly due to the enormous growth potential of this website. In May, Facebook began allowing third parties to develop applications for it. Many industry insiders predict that Facebook may eventually become an operating system, providing users with a wide range of tools, such as search applications. So far, Facebook already has more than 4000 applications. Lance Tokuda, CEO of social network application provider RockYou!, said, "After adding more third-party applications, the user experience of Facebook will be greatly enhanced."

Third-party applications make Facebook stronger, at least more attractive. In this aspect, desktop software running under the Microsoft Windows platform cannot compare with it. With the rapid spread of the Internet, users spend more and more time online. Many young users spend a lot of time on social networks, including sharing pictures, chatting with friends, and posting information about themselves. Tokuda said that if Facebook becomes an operating system integrating all functions, it will occupy most of users' online time in the future. Thus, Facebook can control time and control advertising expenditure.

A bidding war is imminent

If Microsoft fails to successfully acquire Facebook's shares, Yahoo and Google will have greater opportunities, at least their capital to compete against Microsoft will be enhanced. In this case, Microsoft will lose Facebook, this profitable advertising platform, while letting competitors Yahoo and Google take up more online advertising market share. More importantly, if competitors acquire Facebook shares and exert influence, Facebook may more actively expand into the network commercial application market, challenging Microsoft strongly in the commercial software field.

Can Microsoft win the bidding war? This question is difficult to answer, because two years ago, Microsoft and Google fiercely competed over the acquisition of AOL shares, and Google ultimately emerged victorious. Google acquired 5% of AOL's shares for $1 billion and became AOL's exclusive advertising service provider. Of course, if Microsoft locks onto a certain deal, it will also unhesitatingly pay a higher premium. For example, Microsoft acquired ad network operator aQuantive for $6 billion this year.

Some analysts believe that Facebook's true value exceeds $10 billion. Lee Lorenzen, CEO of Altura Ventures Venture Capital Company, predicted that Facebook will soon have 200 million users. Since these users are mostly willing to recommend products and services to friends, advertisers will highly value Facebook's advertising value. Based on this reason, Facebook can set a relatively high price for its own advertising services, higher than search ads and other forms of ads. He said, "The concept of a social operating system is as important as a graphical operating system, and Facebook will become the first social operating system."