The Value of Facebook: A Time Capsule

How much should Facebook be worth?

According to a recent poll, two-thirds of active investors think Facebook will be overvalued when it goes public today, while half of all Americans think a $100 billion valuation is too high.

This skepticism about Facebook’s value is nothing new. In fact, back in 2008, Big Think posed the same question to Andrew Ross Sorkin, the chief mergers and acquisitions reporter for The New York Times. 

At the time, there was speculation that Facebook might be worth $15 billion, so Sorkin’s answer, in that context, is obviously outdated. And yet, the questions that Sorkin raised about Facebook’s value prove to be remarkably prescient, as investors are asking essentially the same questions four years later. 

For instance, Sorkin asked whether the “tribes of people who’ve been living and breathing and dying on Facebook” would continue that level of behavior on the site. 

There are nearly a billion of them, and they are as addicted as ever. They spend one-fifth of their time online on Facebook and upload 300 million photos per day. Yet on the other hand, users are growing more distrustful of the company and are described in a recent poll as “apathetic about ads.” (57 percent of Facebook users polled “never click on advertisements or any other sponsored content on the site.”)

That leads to Sorkin’s second question: could Facebook prove that it is actually a business capable of generating significant advertising revenue? 

It has. Sort of.

The company was able to generate $9.51 in advertising revenue per user in the U.S. and Canada last year, and is on track to hit $5 billion in 2012. But the growth rate may have peaked, and no one has figured out a way yet to effectively monetize mobile users.  

This week General Motors, one of the largest advertisers in the world, announced it would no longer advertise on Facebook. And here’s an additional catch: according to Reuters, GM spends about $40 million on its Facebook presence, “but only about $10 million of that is paid to Facebook for advertising.” In other words, GM will continue to support its free page on Facebook and engage its 378,000 fans there. Facebook won’t see a dime of revenue from it.

GM is not alone in its approach to advertising on Facebook. Martin Sorrell, the chief executive of the advertising giant WPP recently told The New York Times that Facebook is “one of the most powerful branding mechanisms in the world, but it’s not an advertising mechanism.”

While the Madison Avenue jury is still out, it appears that the exact nature of the skepticism about Facebook has changed over the years, as Facebook, and its users, have matured. For instance, Sorkin observed in 2008 that advertisers were nervous and anxious about “putting their ad next to a video of a kid from college throwing up after a long night.”

Now that just about everyone (and their boss) is on Facebook, there are probably on the whole many more baby pictures than drunk pictures on the site today. Furthermore, the privacy concerns of users have replaced the content concerns of advertisers. For instance, are users comfortable with Facebook selling data about their sexual preferences to advertisers? What if a targeted ad outs a gay teenager? While Facebook has fought back hard against these charges, the debate over privacy is not going away any time soon. 

Nevertheless, the $100 billion question continues to revolve around the fact that Facebook has many millions of users and mountains of data, but does not appear to have a fully formed business model. So how much has really changed in the last four years?

Watch this Andrew Ross Sorkin time capsule video here:

Image courtesy of Shutterstock

Follow Daniel Honan on Twitter @Daniel Honan