It has been one week since Facebook went public, and in those short seven days much has been made about the stock price of Facebook.
Started at $38, went to $45, fell back down to $38. In the second day of trading it immediately fell 12%, rebounded a little, and ended the week around $32 – right where Status Update host Jared Weseman predicted it would end.
What does this all mean? Quite simply, people are struggling to value Facebook. How do you value a company that is predicated completely on user data. Essentially you are putting a value on each user’s information. In other words, how much does Facebook value each user. Studies have been done that attempt to answer this question, and the consensus seems to be about $3 per user. However, at Facebook’s current valuation, $68 billion, each user is worth about $75.
That is a lot of money for a single user. Sure, Facebook knows a lot about you, but they have only managed to make $3.80 off each user. How can we value them at 19 times that?
Of course, Facebook’s value, and ultimately their income, will depend completely on their ability to monetize each user. Their current model is advertising, but that will certainly have to expand and diversify if they want to stick around for longer than 20 years.
Which brings up and interesting question. How long will Facebook survive? Many are confident the social network is a fad, just waiting to die when influential users either find a new service, or decide they no longer want to engage with people online. In which case Facebook’s value is no where near $68 billion.
However, because it is so difficult to put a dollar value on Facebook, let’s take a step back and look at the service’s contributions to society as a whole. Think of a scenario where Facebook didn’t exist. I don’t want you to forget the things Facebook has given you, quite the opposite, I want you to compare a life with Facebook and a life without Facebook. Which would you prefer? Or better yet, how disrupted would you life be without Facebook?
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Jacob and Jared discussed Facebook’s IPO drama and how we should value Facebook on the latest episode of Status Update – check out the video segment below.
Gasp! I could no longer share a photo with someone! Sure you could, use Instagram, or heck use an email. Or what about a text message? I’m not saying envision a world with no technology or social networks, simply envision a world with no Facebook. We cannot value Facebook based on the contributions it has made to the social space as a whole, because if the company dissolves tomorrow those networks will still be around.
With no Facebook your life would certainly be disrupted, because for most, Facebook has become a routine. We wake up and we no longer check the morning newspaper, we check Facebook – that is our morning newspaper. We see the news and items that are relevant to us and to our closest friends. We click on news stories because our friends clicked on news stories, not because they look particularly interesting.
However, routine aside, how important is Facebook to your life? Would your world drastically change without Facebook? Probably not. And if you answered yes, you might want to readjust your world view.
Now let’s examine some other tech companies. How would your life change if we took away Google. Your email is gone, calendar is now on paper again – or you could use Outlook. The best search engine is gone, you might have to find a new place to host your music. It also looks like you’re getting a new phone. And so much for that self driving car.
It is likely that Google has more touch points in your life than Facebook. There’s a good chance you are using a Google browser right now. Even better chance you found this article on Google. And if you are really nice you’ll email this article to someone through Gmail. Google is an incredibly important company that provides many services, for free, that we rely on everyday. And more importantly those services are probably services we value more than Facebook.
Let’s take a hardware angle on this question. We get rid of Apple. They are no longer in existence. What does your life look like? Probably pretty dim. You’ll need a new computer, tablet, and phone.
This exercise is to show the value of Facebook. Sure, it is a profitable company with much potential. But do they provide a vital service? This is a test to measure the value of any company. If a company provides a vital service that would be difficult to live without, they should be valued higher.
Keep that in mind as we try to navigate the value of Facebook.
–jb
