An article on http://theregister.co.uk reported that Facebook experienced its first drop in monthly viewership since its inception. This got me thinking about Facebook and its proposed $15 billion pricetag.

I, for one, think the valuation of Facebook at anything near $15B is completely ridiculous. It seems this is a repeat of recent history, where clicks/user was a better valuation metric than profit/user. With a valuation of $15B, it would mean that Facebook is worth more than General Motors, Xerox corp, or Starbucks. Stated another way, you could theoretically buy, outright, any of the three companies previously listed. I think this should be a warning sign to any tech investor to STAY AWAY from the company that picks up Facebook, because its gonna be a train wreck.

My case in point is Ebay. As some of you may know, Ebay purchased Skype for ‘only’ $2.6 Billion in 2005. Since then, Ebay hasn’t found a way to make their money back, and ended up writing off $1.4 Billion of that purchase almost exactly a year later. Ebay closed at $46.75 in January ’06, and has been dropping ever since. In the beginning of Feb. ’08, Ebay has been hovering around the $27, which equates to a 42% drop in 2 years. The best part about it is that Skype actually makes money! They have subscribers and a per minute charge for their land line functionality! Facebook has loads of users, but do they pay a subscription? Not a chance.

This brings me to my next point: how do you monetize Facebook? Facebook effectively provides a novelty service. It’s a service that people find interesting, but it’s not something that they need to survive on the internet. When compared against a service like Google’s search, or Gmail, or Google Maps, it starts to look pretty ridiculous. There are probably not many people who would pay a subscription to view Facebook, unless it unlocked hidden profiles or something of that nature. So they are left to use advertising. Advertising works great when you have lots of eyeballs, but you have to think about conversion rates. What percentage of users actually click on a link? My guess is that it is really low.. and although it provides a consistent revenue stream, its hardly the moneymaker that our comparison GM or Starbucks could make.

I find the valuation of Facebook and Myspace intriguing, because it really seems like investors have forgotten about the internet boom. The same exact thing is happening, and investors seem to simply want to jump on the next bandwagon so bad that they don’t stop to think for a moment about where that bandwagon is headed. I think it is safe to say that social networking is an interesting fad, and while it is not going to disappear, it certainly doesn’t seem to have the staying power that justifies a $15 billion price tag. My warning to you investor types is to steer clear of whatever company tries to digest Facebook, because its not going to turn out well in the end.





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