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A justification of Facebook’s $33bn price tag

A couple of weeks ago I blogged some thoughts on the $33bn valuation at which Facebook shares are changing hands.  In that post I wrote that I think Facebook is a great company, but that the small number of shares traded at this price most likely over stated the value of the company.

Over the weekend Silicon Valley veteran Adam Rifkin wrote a guest post on Techcrunch which argues that the $33bn is justified and sets out where the revenues will come from.  I don’t want to get into whether the $33bn is right after all (although for the record I still think it is toppy) but I do think Adam’s ideas on where the revenues will come from are interesting.

Facebook’s revenues have grown from an alleged $275m in 2008, through $635m last year to a rumoured $2bn this year.  Adam thinks that could grow to greater than Google’s current revenues of $28bn within five years with the following revenue lines:

  • Advertising on Facebook – $10bn+ – Adam’s argument here is that the social element of Facebook will bring brand advertisers onto the web in a way Google never has, and the $10bn will come from TV advertising budgets ($60bn pa in the US)
  • Local advertising – Adam calls it Groupon/Pages + Places – $10bn by taking a 30% cut of what companies like Groupon will push through Facebook pages
  • Games – $3bn (the Facebook 30% cut of what Zynga, EA, Disney and others will make)
  • eCommerce – $12bn – Amazon have partnered with Facebook already and together they might create a social commerce powerhouse that other etailers flock to copy.  Facebook credits will be a key enabler.
  • Subscription services for premium inbox, photos – $2bn

These are some pretty big numbers on their own, and added together they come to $37bn – but the point is more the direction than the amount. 

And what Adam is saying directionally is that huge businesses will be built in the areas above, or at least the first four of them, and a number of them will be startups.  Games is perhaps the most advanced segment and that has already spawned two large venture backed exits (Playfish and Playdom) and one large private company on an IPO track (Zynga), and if Adam’s hypothesis is directionally correct, which I think it is, then we can expect equivalent opportunities in the other areas.

Finally – Facebook credits are an important enabler of all the business lines above, and Adam captures their potential well:

if you give Facebook users a few free Credits with the block of Credits they buy (at Target, online, and soon anywhere), they will spend all of those Credits and then want to purchase more. Rather than a straightforward discount, the new math of Facebook Credits means that consumers will never quite be sure if they’re getting a discount or cash back or more for less. Kind of like frequent flier miles where we’re never quite sure what the conversion rate is. Or eBay auctions where we “win” the ability to spend money.

Facebook Credits are poised to be this generation’s American Express: an “affordable luxury” lifestyle brand and credit card with reward programs, frequent flier miles, and other incentives built right in so that the more you use it, the more you earn.

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