Dead 3.0

Not too long ago, Facebook posted some interesting graphs on its blog. Ashkan at HipMojo posted an interesting valuation of Craigslist that got me thinking about Facebook’s value. Ashkan derived advertising revenue by multiplying pageviews by click through rate (CTR) by cost per click (CPC). Although Facebook is nothing like Craigslist, a quick, back-of-the-napkin look at Facebook through a similar lens is interesting. View the Google Spreadsheet I put together.

The first sheet (PAGEVIEWS) is based on the aforementioned graphs. Pageviews and registered accounts are growing 18.9% and 13.9% per month, respectively. Note the December drop in pageviews, but not registered accounts. Is this due to students being on winter break? I wonder if the site experiences a similar drop during the summer months?

The second sheet (CPC-VALUATION) is based on February pageviews (other assumptions are noted). CTRs among the Facebook demographic are likely below average. According to ValleyWag, one advertiser pegged the CTR at 0.04%. There’s a column for 0.04%, but I’ve highlighted the CPC range $1.00 to $1.50 and CTR range 1.00% to 1.50%. Why? These are the same numbers HipMojo assumes for Craigslist and I think they are achievable. As a (very) active Facebook user, I do not think they are fully utilizing their advertising platform. CTR could be raised by increasing the value and relevancy of the advertisements–more on that later.

I don’t think Facebook is worth as much as the highlighted cells show. A 35% profit margin and a 30 P/E is logical and relatively conservative though. HipMojo values the company at a little over $2B based on a social networking market size of $2.15B. I’m inclined to think this is much closer to the truth.

The third sheet (FB-REVENUE) is based on a ValleyWag-obtained screenshot of a company forecast. According to ValleyWag, rumor says Facebook is on-track to make $150M in FY07, a little below estimated. Of the estimated $172M in revenue, we see $139 derived from advertisements. We can back into this number using eCPM and impressions generated (eCPM/1000*impressions = 139M). MSNBC quotes a lower number of $100M.

Now my opinion: Facebook is a more powerful platform than MySpace. It’s because the Facebook community is really a thousand smaller walled-in communities (versus the chaotic MySpace). I remember using Facebook when it was still a group of elite schools. Not much has changed since then. Facebook has been careful to not commercialize the site and alienate loyal users. They’ve taken steps to solicit user feedback. They’ve implemented privacy controls and strict divisions between local networks that have fostered a greater sense of community.

While Facebook’s decision to outsource banner and search advertising to Microsoft guarantees them $200M through 2008, there’s an opportunity cost. Facebook recently (via PaidContent) extended the contract till 2011, a smart move if they’re thinking about pursuing an IPO, as HipMojo suggests. Yet there are two factors that make Facebook a powerful ad platform: (1) user data and (2) local communities.

First, Facebook users have willingly provided billions of data points to the company. Everything from Greek affiliation to favorite movies to interests and activities. So far, Facebook has not extensively leveraged this data to target advertisements. They are making moves to increase the amount of content though. New “sharing” features reveal Facebook’s plan (Andy Kessler, WSJ interview with Zuckerberg) to take advantage of user-generated content.

Second, Facebook needs to start thinking like college students. Local communities are based on local information-there are a thousand possibilities. Why not coupons from local restaurants? “Click here right now and get $1 off your pizza!” There are already some local advertisers posting flyers on the site, but Facebook hasn’t reached out to this segment of marketers yet. When it’s all said and done, Facebook’s users are worth more than MySpace users, in my opinion.

Sooner or later, investors such as Greylock, Accel and Peter Thiel are going to push for a harvest of their investment. Whether Zuckerburg and the VCs opt for an IPO or a big acquisition is an open question. At the same time, there’s no question Facebook represents an attractive target for companies looking to secure a well-established toehold in the social networking market–despite Facebook’s penchant for turning down buyout offers.

Check out my post on the newly launched StreetAdvisor over at VentureBeat.

Quick off-topic opinion post… You can’t turn on any of the news networks without hearing constantly about Legislative v. Executive. Regardless of your political orientation or personal opinion of George W. Bush and his administration, he has remained continuous on one point. Throughout his tenure, Bush has always attempted to assume the moral high ground. Yesterday, I was surprised to hear the restrictions being placed on White House personnel testifying before Congress. The no-transcript requirement seems somewhat logical to me. But the no-oath requirement flies in the face of Bush’s previous behavior. As a man of faith and character, George Bush is honor bound to tell the truth. Without an oath, he seems to be endorsing or at least allowing his administration to lie–it seems to me that Bush is folding is last card, the moral one.

Via the Facebook Blog, a “Sneak Preview” group has been setup to introduce upcoming design changes and features. Personally, the new design changes look great to me. The redesigned navigation sports an Inbox, replacing messages and shares. Messages now more closely mirror emails with the capability to have multiple recipients and threaded conversations. Individual pages have been overhauled and each network now has a central page with demographics and trends among other information.

In light of the backlash from the News Feed changes, TechCrunch’s Arrington comments that the Sneak Preview group will help to “build consensus and dissolve criticism” around changes. He also makes the (somewhat unsupported) assertion that if Facebook were to sell it would go for more than YouTube. More coverage at VentureBeat as well.

The real power in Facebook is the user data they have aggregated. Users volunteer information about their favorite books, music, movies and more. Although advertisements are somewhat personalized, I think that Facebook could be doing a good deal more to tailor advertisements to user preferences. For example, if I indicated I was a fan of The Departed, it would be valuable to see an announcement when the DVD came out–maybe with a $5 off coupon. Targeted advertisements of this nature are very similar to what Google does with search, it seems a logical extension.

On a side note, Signal vs. Noise called Facebook’s privacy settings “overkill.” As a Facebook user, I’d tend to disagree that the icons serve no value. Being able to have granular control over your privacy is a necessary feature in this case. Not to mention, I like the icons.

Earlier, I covered the Highrise launch. TechCrunch just covered the launch as well. I mentioned that I thought 37 Signals was missing an opportunity to create a truly valuable platform for small businesses. Their services receive a lot of hype and have, up to now, been pretty successful. Yet they haven’t integrated their applications cohesively. Sure you can use Writeboards and Campfire in Basecamp, but it seems to me that Highrise fits right into Basecamp. 37 Signals’ Getting Real development methodology advocates launching fast but I’m somewhat confused. As I understand it, they’re a pretty small team. Their products are pretty simple and they’re raking in the cash. The extra investment to integrate the products seems trivial to the benefit to end users.

The small business SAAS space is starting to heat up quickly. This morning, WeBreakStuff launched GoPlan, a direct competitor to Basecamp by 37 Signals. Right on the heels of GoPlan comes the announcement at Signal vs. Noise that 37 Signals is launching their hyped contact management application, Highrise.

GoPlan has many of the same features as Basecamp including task management and real-time chat. GoPlan adds bug tracking and blogging to the project management mix. TechCrunch has a rundown on the launch and 5ThirtyOne has an in-depth comparison (between Basecamp, GoPlan and open source competitor ActiveCollab).

Highrise, at first glance, is a CRM application with a simple featureset. In typical 37 Signals fashion, the features are intentionally limited to reduce the learning curve and promote collaboration. 37 Signals designs great products but their business acumen is somewhat lacking in my opinion. If they were to come up with a comprehensive integration plan, they could easily bundle their services based on exact user requirements. The whole is greater than the sum of the parts… a segmentation strategy like this would allow users to extract more value and 37 Signals to generate more revenue.

The small business SAAS market is ripe for the picking. Who’s going to step up to the plate?

Google formed partnerships with the Rwandan Ministry of Infrastructure and the Kenya Education Network to provide roughly 70,000 students with access to Google Apps. While Africa remains an unprofitable proposition for many Western businesses, Google seems to recognize the long term benefits of partnerships with educational institutions. The partnerships are win-win for everyone involved–universities get enterprise-grade applications at a low cost, students get free access to better applications (than most in-house solutions) and Google locks in users at a young and crucial stage.

As a student at the University of Virginia, I constantly check my email. Using Google services for four (or more) years means these students are likely to become brand ambassadors for Google. You can bet they won’t be searching at Windows Live. In the long-term, partnerships with educational institutions allow Google to attract and retain a valuable demographic at a very low cost.

Checking out the featured list of Google’s educational customers, you can see the diversity they are creating. From Arizona State University to Thailand’s K-12 Prem Tinsulanonda International School, Google is locking in young people and planning for its future success.

Didier Bizimungu at SEO News Blog comments “I would have never thought that a big company like Google would invest in my home country.” Why not? It makes long term sense to make low cost investments in developing economies. Rwanda is a perfect example. Scott Chacon at JoinTheConversation agrees, noting that investments like this lead to direct economic benefits–such as outsourcing and call center ventures. I’m glad to see that Rwanda is taking the necessary steps to combat the genocide which wiped out an entire generation of young people.

Raise Capital is a new site looking to connect entrepreneurs and investors. This is a paradigm-changing idea if it’s executed and positioned properly. Right now, users are able to sign up for three different plans. The plans are differentiated based on the content your provide about your venture–the silver package is just text, the gold package adds photos and the platinum package adds video.

I think this the wrong approach to pricing/segmentation. The packages are priced from $30 to $50/month. Besides marketing (to entrepreneurs and investors) and possibly wages, the main expense is data center costs. It makes more sense to me to let everyone upload photos and video–bandwidth is incredibly cheap these days. This would drastically increase the value to users. Also, what does “text description of your venture” mean? I don’t want some meaningless blurb, I want my business plan out there for qualified investors to research the viability, attractiveness and fit of my venture.

If I were running the site, I’d make it one flat monthly fee. Then I’d bundle value-added services. For example, Raise Capital could hand-deliver a (vetted and legitimate) business plan to VCs that fit for $1,000. A lot of entrepreneurs have a general idea of the type of investor they’re looking for–why doesn’t Raise Capital play match-maker? They could charge top dollar too–the lifeblood of startups is cash and $1,000 or so is pocket change compared to securing a Series A round of financing (or even the experience that comes with trying to make your case to an interested investor). This is just off the top of my head, I’m sure there are hundreds of other services the budding entrepreneurs could use.

Matt at VentureBeat raises an important concern about pride. I said earlier the idea had to be positioned properly. Credibility is key, especially from the perspective of the investor. VCs, angels and other investors would be lax to automatically trust what is essentially an unproven marketplace for ideas. If Raise Capital is able to secure quality entrepreneurs and business plans, investors will recognize the marketplace’s inherent value as a source of investment opportunities. Matt refers to it as a “public meat-market” and that is on point–but it’s a meat-market with the potential to break down funding barriers and reduce friction in a very tight-knit community.

The Funded is a web application designed to provide entrepreneurs with information about venture capitalists. VC is an interesting space because incomplete information is the norm. Generally, VCs prefer their privacy and The Funded is looking to add some transparency to the process. Members are allowed to leave feedback about venture capitalists and aggregate statistics are generated from this feedback. As of the time of this writing there are only 42 members listed. The process of becoming a member is more rigorous than an email address–you’re required to list not only your company’s URL but also the URL of your bio. The idea is to keep out trollers intent on destroying reputations and I think the manual screening process will go a long way toward maintaining the site’s integrity. TechCrunch had a couple complaints and I was pleased to see comments from The Funded stating they’d already corrected the oversight–impressive quick move. Give the site another couple months to pick up steam and see how useful it really is.

I was reading a funny post earlier (Ten Things I Hate About You, Web 2.0) that got me thinking. I’m no fan of the Web 2.0 buzz, but I do like sound business models. Over at Webware, I saw an exciting preview of new Trillian Astra Web Client. Basically, it uses Flash (not the new Apollo) to launch an application independent of the web browser. According to Webware, “the new client has access to the PC’s system tray, the file system, and more.” That’s exciting.

There’s a lot of talk about the WebOS and lots of companies in the space, but I think they’re missing the point. The browser is too limited to support truly rich applications. Desktop applications and web applications each have their strong points–how can we get the best of both worlds? There’s a huge opportunity for someone to create the next Windows/Java/Flash.

Imagine using technology similar to the Trillian Astra Web Client. But instead of building an application, build a lightweight platform. Then open it up to developers to create applications that bridge the browser and the desktop. The distribution model would be unbeatable. A catalog of applications–both free and paid–which users could instantly launch from their browser. Let developers develop the applications and the “WebOS” could handle user accounts, preferences, and applications. The local file system and online storage companies could exists side-by-side. And of course the platform would be designed with collaboration in mind. The possibilities are endless, the key is scale.