Posts Tagged ‘f8’
Facebook is no stranger to the complaints of privacy activists. First, it was the site’s News Feed feature back in 2006. Most recently, the company’s Beacon service drew widespread criticism. This blog post will outline yet another major privacy issue, in which Facebook recklessly exposes user data.
Facebook launched its widely popular application developer program back in May 2007. As of press time, there were more than 14,000 applications. Some, including most of the popular apps, are made by companies, while a few of the popular apps, and a significant number of the long tail of the less popular applications are made by individual developers.
But a new study suggests there may be a bigger problem with the applications. Many are given access to far more personal data than they need to in order to run, including data on users who never even signed up for the application. Not only does Facebook enable this, but it does little to warn users that it is even happening, and of the risk that a rogue application developer can pose.
Privacy problems for the user
In order to install an application, a Facebook user must first agree to “allow this application to…know who I am and access my information.” Users not willing to permit the application access to all kinds of data from their profile cannot install it onto their Facebook page.
Screenshot of adding an application
What kind of information does Facebook give the application developer access to? Practically everything. According to the Application Terms of Service,
“Facebook may…provide developers access to…your name, your profile picture, your gender, your birthday, your hometown location…your current location…your political view, your activities, your interests…your relationship status, your dating interests, your relationship interests, your summer plans, your Facebook user network affiliations, your education history, your work history,…copies of photos in your Facebook Site photo albums…a list of user IDs mapped to your Facebook friends.”
The applications don’t actually run on Facebook’s servers, but on servers owned and operated by the application developers. Whenever a Facebook user’s profile is displayed, the application servers contact Facebook, request the user’s private data, process it, and send back whatever content will be displayed to the user. As part of its terms of service, Facebook makes the developers promise to throw away any data they received from Facebook after the application content has been sent back for display to the user.
Researchers blast Facebook
Some applications may make use of all this data, but as researchers from the University of Virginia have detailed in a recent report, Facebook provides applications with access to far more private user information than they need to function. Adrienne Felt, a student and lead researcher on the project, told me that of the top 150 applications they examined in October 2007, “8.7 percent didn’t need any information; 82 percent used public data (name, network, list of friends); and only 9.3 percent needed private information (e.g., birthday). Since all of the applications are given full access to private data, this means that 90.7 percent of applications are being given more privileges than they need.”
Felt condemned this practice, and said that it violated the the idea of least authority, an important security design principle that states that an actor should only be given the privileges needed to perform a job. In other words, she said, an application that doesn’t need private information shouldn’t be given any.
“Regardless of the click-through disclaimer that Facebook makes users accept, I don’t think people understand what’s happening to their data behind the scenes. If applications don’t appear to use private data–but then they all have this same standard click-through screen–how can users differentiate between applications that really need access to data and all the rest?”
More than your own data–selling out your friends
Facebook’s Web site and lengthy application terms of service curiously fail to mention something rather important. In addition to providing the application developer access to most of your private profile data, you also agree to allow the developer to see private data on all of your friends too.
Many Facebook users set their profiles to private, which stops anyone but their friends from seeing their profile details. This is a great privacy feature that can protect users from cyberstalkers and is completely gutted by the application system. To restate things–if you set your profile to private, and one of your friends adds an application, most of your profile information that is visible to your friend is also available to the application developer–even if you yourself have not installed the application.
The good news is that Facebook lets you configure the amount of your own private data that your friend’s applications can see. The bad news is that it’s hidden away, requiring several clicks through menus to find a page listing specific privacy settings (Privacy -> Applications -> Other Applications). Furthermore, the default values are extremely lax, such that a user who has yet to discover the preference page is essentially sharing her entire profile by default.
This friend data-sharing “feature,” and the ability to protect against it, isn’t mentioned anywhere else on Facebook’s site, nor are users informed about it when they install an application.
On Tuesday, I had the opportunity to briefly chat with Chris Kelly, Facebook’s chief privacy officer. During our conversation, he dismissed claims that Facebook does nothing to inform users that applications have access to data on user’s friends, stating that “we have made things very clear to users, and they understand it very well.” However, by press time, he had yet to send me a link to anywhere on the site where this information was “clearly” explained.
As for actually getting user permission before using their data in new and creepy ways, Solove said that the company “seem to have a very cavalier attitude to their users consent.”
Ok. So in order to give your friends virtual naughty gifts, play scrabble online, or see your daily horoscope, a user has to hand over all their private profile data to some unknown company or developer. No need to worry though, because Facebook has safeguards in place, right?
“Before providing any information to any Developer through the Facebook Platform, Facebook requires each Developer to enter into an agreement…which…strictly limits their collection, use, and storage of Facebook Site Information.” (Facebook application terms of service)
Ah, good. Facebook requires that each developer protect the privacy of the user information and requires that they not store a local copy. I’m sure Facebook enforces this vigorously, audits developers, and throws the book at anyone who violates this rule, right?
“[each application] has not been approved, endorsed, or reviewed in any manner by Facebook…we are not responsible for…the privacy practices or other policies of the Developer. YOU USE SUCH DEVELOPER APPLICATIONS AT YOUR OWN RISK.” (Facebook application terms of service)
I asked Facebook’s Kelly what his company is doing to ensure that application developers do not violate the rules by saving a copy of user data that passes through their servers. He cited “extensive security mechanisms operating behind the scenes,” although, he refused to expand on this, due to “security reasons.” He wasn’t too happy when I accused him of practicing security though obscurity, a concept widely mocked in security circles. He dismissed my charge as a mischaracterization.
Kelly claimed that his company “has a variety of techniques to determine if [developers are saving user data.]” As a PhD student in Information Security, I can quite confidently say that from a technical perspective, this is impossible. Simply put, once the data leaves Facebook’s servers, the company has no way of knowing what happens to it. Thus, giving Mr. Kelly the benefit of the doubt, I can only assume that Facebook has a team of trained psychics on staff who use their mysterious powers to ferret out rogue developers.
Who are the application developers
Kelly said that users can determine a developer’s trustworthiness by looking at their profile page, and that somehow, users can combine to form some kind of intelligent hive mind. “One of the factors is what applications your friends are installing. Untrusted applications don’t get added very often as the collective mind is choosing what is trusted in real time.” He further added that it is “up to your friends to make that determination in real time. If an application is going to give them some utility, they’ll know that the applications have to obey the rules.”
Call me a cynic–but I fail to see how thousands of 18-year-olds can collectively assess the data protection practices of some random developer in a foreign land. Remember, these are the same 18-year-olds who post photos of themselves passed out drunk on their public profile pages.
Would I trust the hive mind of Indiana University students to tell me which bar in town has the cheapest beer? Sure. But to expect them to evaluate a company’s privacy practices? No way.
A public outcry
Unfortunately, as alarming as this issue is to privacy activists, there is a good chance that it may fail to gain the attention of the millions of Facebook users necessary to actually force the company to fix its policies. While both the newsfeeds and Beacon scandals were “in your face,” most users have no way of knowing what, if any, data is being transmitted to application developers by Facebook, and thus are unlikely to be motivated to complain.
Furthermore, even users who are aware of the privacy risks of Facebook applications may still end up installing them. To not do so is to isolate yourself, to cut off communication channels, and in some cases, to cause insult your friends.
In what can only be a great example of life imitating art (see below), I asked security researcher Adrienne Felt which, if any, applications she used. She told me that in spite of the fact that she had spent significant time investigating the privacy risks, she still ended up installing an application because her friends wanted to send her some virtual Christmas presents. Not wanting to offend them, she put aside her privacy concerns, and installed the app. As she told me, due to the peer pressure, “I had a hard time saying no.”
Here’s a great post from Lee (Altura ventures, adonomics.com) who runs the Altura fund, the facebook (F8) applications focussed fund. Altura took over appaholic.com(App’s) a facebook analytics website and renamed it to adonomics.com (Ad’s + Apps)
- The Altura Ventures’ Genesis Story — I was not present on May 24th at the launch of the F8 Platform and I only knew a little about Facebook from my sons (one of whom graduated from college two years ago and the other who is a Junior this year). I did not have a Facebook account and had only checked out MySpace briefly after its acquisition by Rupert Murdoch. I was not impressed and tried to delete my account the same day I created it (without much success since they make this virtually impossible). In any case, after leaving SHOP.COM where I worked for 9 years to grow the site from 0 to 500,000 users and while working on a new software startup, I read the iLike story of how they launched their facebook app and added 600,000 in 8 hours!!! Clearly, there was something new under the sun in software. After studying Facebook from mid June on, I decided to reposition Altura Ventures as the first facebook-only VC.From that point on, I began to use Facebook itself as a way of building my own personal brand as a thought leader in the Facebook space. I created the “Official Altura Ventures and AppFactory Facebook Investment Fund” group and made officers in the group of about 100 of the top 300 Facebook App developers, key Facebook employees and key Microsoft employees. My strategy was based on the fact that since I couldn’t own any of Facebook’s Social Operating System, the next best thing would be to own a portion of Facebook’s Application Space. I also acquired Adonomics.com and began to use it as a site to convince developers that their Facebook apps were going to be worth a lot in the future and to not sell them too soon for too little money (e.g., like Favorite Peeps did when they sold an app with 1.5 million users to Slide for only $60,000).I also began to write about the comparison between Facebook’s Social Operating System and Microsoft’s Graphical Operating System. This comparison along with Facebook’s exponential growth in users and applications led me to conclude that they were worth $100 billion and I started to blog about this and attend Facebook conferences where I would explain why I thought this way.
- $100 Billion!!! Are You Drunk? — At Dave McClure’s Graphing Social Patterns conference, I mentioned my belief about Facebook being worth $100 billion and this led to a series of reactions from the panel that followed mine in which I was accused of being drunk, an idiot and/or crazy enough to be escorted out of the building. While not true, these accusations were made by the likes of Jason Calcanis, Robert Scoble and Michael Arrington and indicated that calculating a valuation for a privately held company that is growing as fast as Facebook is something that is not well understood. It is my goal in this talk to explain how I arrive at the $100 billion figure, convince you that this number is right, show that Facebook has multiple paths to arriving at this number and failing all of that, demonstrate that I not drunk, on crack or crazy.
- WATER FIGHT! and Birthday Calendar and Stanford Facebook Class — Before beginning, I should also mention that Facebook continues to be the fastest and cheapest way for any company to create an app that can gain 1 to 2 million users in an extremely short period of time. Altura Ventures demonstrated this with two apps WATER FIGHT! and Birthday Calendar that reached 1 million users in only 60 and 15 days, respectively. In addition, 5 of 25 apps from BJ Fogg and Dave McClure’s Stanford Facebook Class reached 1 million users in less than 30 days. This unbelievable growth was accomplished AFTER Facebook had eliminated the Ultra-Viral, Unlimited Invite System that was in place at the time of iLike.
- Why Facebook Can’t Be Worth $100 Billion
- Facebook’s Growth and Current Business
- Graphical Operating System vs. Social Operating System
- Value of a Registered Web User vs. a Facebook App User
- Warren Buffett’s Views On Valuation
- How Should We Determine Facebook’s Worth?
- Valuation Time Machine
- Getting To $100 Billion in 3 Easy Steps
- $2.4 Billion Per Year from $1 Per User Per Month from 200 million Users
- $2.4 Billion Per Year from 10+ Partners Paying $20 Million Per Month
- $2.4 Billion Per Year from 100+ Major Merchandise Categories Paying $2 million Per Month
1. Why Facebook Can’t Be Worth $100 billion?
In addition to explaining at http://blog.adonomics.com why Facebook is worth $100 billion, let me also mention the reasons from A to Z why I’ve been told Facebook can’t possibly be worth $100 billion and briefly refute each of them.
a. It only has $100 million in 2007 Revenues — Google only had $86 million in 2001 revenues before co-opting Overture’s Bid-Based, Cost Per Click advertising system as the perfect monetization vehicle for a search engine site whose goal is to get you to leave the site. Now, Google has a market valuation of $218 billion. The same thing will happen for Facebook when it co-opts a Cost Per Customer Acquired transaction system as its perfect monetization vehicle which is for a site whose goal is to get you to stay on the site.
b. It only has $30 million in 2007 profits — Google only had $6 million in 2001 earnings before learning how to monetize search. Google has 2007 earnings of $4+ billion. Facebook’s cost structure is already paid for with its current, ill-fitting, link-off advertising model and so all almost all future revenue will drop straight to the bottom line.
c. It is yet another flash-in-the-pan social network that will fade like Friendster and Orkut — Yahoo thought the same thing about Google (i.e., search is a commodity feature and not a business and will be replaced by something else). They were wrong and Google has surpassed Yahoo’s value because it became difficult to buy or build a faster, better, easier or cheaper than Google and the Google brand “stuck” in consumer’s minds. Facebook will be the social operating system brand that sticks in consumers’ minds and it will be very difficult to build a faster, better, easier or cheaper social networking experience than Facebook.
d. MySpace is still bigger — yes but about half of their users are either identity/advertising bots or fantasy identities. However, these millions of fake, exhibitionistic avatars are not, in the long run, that interesting to maintain nor fun to interact with when compared to Facebook’s users who are real people with real friends with their real names, faces, birthdates, likes and dislikes showing.
e. Google will crush it — Google’s brand power has only extended into GMail (which is still far behind Yahoo Mail and Microsoft HotMail) and they have failed miserably in video (so they bought YouTube), in VOIP (so they bid for Skype but lost out to eBay), and in hundreds of other Google Lab apps that haven’t broken out to mass market audiences.
f. Open Social will crush it — herding 18 to 50 cats to build a social operating system will inevitably lead to a lowest common denominator set of features, a committee-designed UI and variably extended API that will not be compelling for end users. Imagine if the MP3 player industry tried to standardize on their own version of iTunes and an iPod — it would never be as clean as Apple’s. In addition, the advent of Facebook licensing their Social Networking API to Bebo and others means that every wanna-be social network can now get the secret formula to “the Real Thing” vs. Google’s imitation brand.
g. Users will hate it when they understand the privacy issues — in reality, Facebook users understand that what they put on Facebook can be seen by their 300 to 500 friends and this doesn’t particularly bother them. This “transparent lifestyle” works because it brings benefits to those who practice it that outweigh any real or perceived negatives. In addition, for those who want more privacy than Facebook’s defaults, all of the necessary privacy settings are there to achieve any level of control as to who sees what about you and your profile. Those who don’t trust these controls can simply not join. However, this represents a tiny minority of the people in the countries where Facebook has been launched.
h. E-mail / Search / Groups / etc. Suck on Facebook — although the Facebook apps mentioned have limits in comparison to their Web 1.0 counterparts, in most cases they also have HUGE benefits. For example, e-mail is limited by the lack of Forwarding, Sorting, Searching and CC’ing, however it benefits from being completely free of SPAM due to Facebook’s role as sherrif enforcing Terms of Service that punish those who would abuse their right to e-mail others. This is an also an example of how having simple, single function apps where every feature is used almost every day is better than having complex, kitchen sink apps that need to find an antidote for their feature bloat.
i. Facebook Apps are Toys for Toddlers — although some people of a certain age and relationship status (e.g., a certain all things digital columnist) don’t need or understand many of the flirtation and courtship apps that are popular on Facebook, they do serve a purpose for millions of Facebook users. In addition, apps like Birthday Calendar and Top Friends have real utility in managing your personal and business relationships with a level of connectedness that was typically reserved for very ambitious sales people and CEO’s who took it upon themselves to learn their customers and competitors’ spouses’ names, childrens’ names, pets’ names and birthdays.
j. People won’t click on ads — the low click-thru on Facebook CPC ads that take the user off of the site is really a testament to the stickiness of Facebook itself. If and when Facebook offers web search (in addition to people, event, group and app search), then click-thru rates will probably approach Google’s for that aspect of the site. In additon, when clicks stay within the site or are made to look like the Facebook newsfeed feature, they enjoy higher click-thru rates than Google’s sponsored links.
k. It’s all college students who won’t buy anything — in every country but the US the demographics of the users matches those of the online population. It is only in the US, where thanks to its 80% to 90% penetration of colleges that the demographics of the users skews to the 18 to 24 year old group. Even this is changing quickly and will continue to grow as the parents, aunts and uncles of high school and college age students begin to understand how useful Facebook is.
l. Business users will stay on LinkedIn — the instant that Facebook finishes their feature for grouping friends by their various types (e.g., school, social, church, business, family, etc.), sites such as LinkedIn will begin to see a mass exodus to Facebook. This may even be accelerated by LinkedIn’s support of OpenSocial which will allow “Exodus Apps” to be written that copy out a user’s profile and connections and migrates them over to Facebook. The reason for this is that Facebook is a site that is visited daily for news and updates whereas LinkedIn is only checked periodically when seeking a new job or business connection.
m. Older people won’t go on Facebook — those older people who loved AOL (and may still be on it) because it is a way of using the web that is shielded from some of its more offensive areas will also love Facebook when they are exposed to it. In addition, older people have children and grandchildren on Facebook that they wish to connect to and Facebook makes this easier than any other system available to them.
n. It hasn’t been localized — this is being fixed but even with its english-only user interface some of the fastest growing countries are places like Turkey and Egypt. This shows the power of Facebook is not the technology or interface but the people that are on the site and once a country tips toward a social network like Facebook, it will be almost as hard to get them to switch as getting the country to change their native language.
o. It has embarrassing photos from my college days — these are easily removed and will soon be easily segregated into areas that will be hard for business collegues and prospective bosses to find. In addition, many in the coming generation are more willing to have who they are be seen by not only their peers but also those who are older (e.g., witness the prevalence of tatoos and piercings in such business settings as high end restaurants, expensive stores and even banks).
p. The Social Graph is a silly term — every revolution needs its buzz word and this one does a fairly good job of describing the fact every person on the planet is connected to one another by a social fabric of friendships and relationships that can be mapped (or graphed) as a series of nodes and lines. Facebook’s goal is to have the most accurate online picture of this social graph and to leverage it by watching the actions of its users and alerting these users’ friends of what they are doing.
q. The management team is full of amateurs — although young, Facebook’s key managers have been parts of major companies before such as AOL, Amazon, etc. and their board includes the founder of PayPal (i.e., Peter Theil who beat an incumbent giant as they tried to launch a competitive payment system, executed an IPO for an initial liquidity event and then grew so threatening they forced eBay to purchase them at a post IPO premium). To date, the Facebook team has grown the company from 3 users to 60 million and from a $10 million valuation to $15+ billion valuation. All in all, not bad for a “bunch of amateurs.” Matt Cohler, Dustin Moskovitz, Adam D’Angelo, Chamath Palihapitiya,Owen Van Atta, Gideon Yu, Dave Morin, Ami Vora, Dave Fetterman have the right stuff and it shows as their their rocket ship has not only achieved escape velocity but is also more than half way to infinity and beyond.
r. Mark Zuckerberg is too young/arrogant/stupid/nervous on stage/insensitive — the same thing was said in just about every first press article about Bill Gates — the other Harvard drop-out that started an OS company with his former roommate. Mark has actually retained a level of humility that is admirable for someone so young with so much early success. I credit this to his parents and to him having his sister in the company to remind him and others about exactly how he was as an awkward youngster.
s. Facebook doesn’t care about their users — it is clear that Facebook is willing to push the envelope WRT features such as the newsfeed and beacon that its users either don’t initially understand or fully appreciate. However, Facebook is also fanatical about creating a safe platform where people are who they say they are (unlike MySpace) and which is family-friendly and where SPAM and phishing scams and data scraping efforts are essentially impossible.
t. The web should be open — As Dave McClure says, “open is not better, better is better.” The advantage of a walled garden with a strictly enforced Terms of Service is that those who would abuse the trust built into the system can be kicked out. This makes it better for those who choose to participate in an environment that works well for them. Most of those crying for Facebook to open up their bag of crown jewels are competitors who would never think of doing the same thing with their most highly prized assets.
u. Facebook is just AOL warmed-over — AOL was well-liked (even loved) by many users for what it offered with 10’s of millions paying a monthly fee just for the right to use it (even after the web became free) and unlike AOL which tried to keep their users from discovering the real web, Facebook’s users know all about the real web and are choosing to spend more and more time inside of Facebook because this is where their friends are. Just like that bar in Boston, Facebook is the place “where everybody knows your name and they’re always glad you came.”
v. Everyone in Brazil uses Orkut and everyone in the Phillipines uses Friendster — this just shows the stickiness of even a less than fully capable social network when an entire country standardizes on it. This loyalty and tipping-point style of dominance is what Facebook is enjoying in almost all of the countries where there are large economies. As I’ve said, getting a country to change its dominant social network is like convincing it to change its native language — it just won’t happen because everyone has to change on the same day to make it work.
w. Google / Yahoo can simply turn their e-mail systems into social networks — no they can’t because they don’t have their users’ permission to do so. In Facebook, if I add a friend I know that my whole network of friends will see this. However, if I add a GMail address, this can’t be shared with the rest of my address book and it is not even clear how one member in my address book, known only via an e-mail, would be recognized by someone else (e.g., “DM2007@aol.com just became friends with NiceGirl05@gmail.com” is much less useful than “Danna Lorenzen just married Kevin Holmes”).
x. Google owns web search forever — while the term Google currently equals Search in most users’ minds, the Facebook Search box is a wedge in this tight coupling the desire to search for something and going to the Google.com home page. The thin end of Facebook’s search wedge comes from the People/Event/Group Searches that are now performed more efficiently at Facebook. When users fully adopt Facebook as their gateway to the web, and Facebook offers web search (powered by Microsoft), then many users will opt for the most convenient Search box which will be inside of Facebook.
y. Microsoft’s investment doesn’t matter — given all of the software wars that Microsoft has won (e.g., Character OS, Graphical OS, Development Environment, Word Processing, SpreadSheet, Presentation, Database, Browser, Server, etc.), it is a mistake to dismiss them when they pick an ally in the Social Operating Systems war. Steve Ballmer likes to win and he has a 30 year track record as a winner — don’t underestimate the 3D chess match he and Bill are playing to beat Google using Facebook.
z. It can’t be worth $100 billion because it is actually worth more than $100 billion
2. Facebook’s Growth and Current Business
2004 Feb – 3 users – Mark, Dustin and Chris
2004 Dec – 1 million users (college only members via .edu e-mail verification)
2005 Dec – 5.5 million users (adds high school members)
2006 Dec – 12 million users (opens up to any member)
2007 Apr – 20 million users
2007 May 24 – Platform Launched
2007 Dec – 60 million users
450 employees è -$45 million (headcount)
50 million users è -$25 million (infrastructure)
Page Views è 2.1 billion page views per day
Microsoft Ad Deal è $100 million (approx. $0.13 CPM rate)
Profit è $30 million
900 employees è -$90 million (headcount)
200 million users è -$100 million (infrastructure)
Page Views è 8.4 billion page views per day
Microsoft Ad Deal è $400 million (approx. $0.13 CPM rate)
Profit è $210 million
3. Graphical OS vs. Social OS
Graphical Operating System
Social Operating System
Harvard drop-out and his former roommate
Harvard drop-out and his former roommate
Critical Mass Achieved
Digital Research’s GEM, IBM’s OS/2 Presentation Manager, VisiCorp’s VisiON, Sun xWindows, Apple’s Mac
MySpace, LinkedIn, Orkut, Friendster, OpenSocial
Windows SDK à Developers / Developers / Developers!!!
4+ million 3rd party developers
F8 Platform à Developers / Developers / Developers!!!
180,000 3rd party developers
OEM PC companies bundled Windows; Developers’ apps and API knowledge; Consumer investment in apps, file system and user interface
Consumer investment in Profile Data, Notes, Photos, e-Mail history, Groups, Apps, and Friend Network; developers’ apps and API knowledge
Word, Excel, Powerpoint, Access, Outlook, Browser
Calendar, Dining, Travel, Gifting, Shopping, Turn-based Games, Super Groups
4. The Value of a Web User vs. a Facebook App User
Web site Registration
Facebook App Install
User Actions Required to Accomplish Registration
Select Registration Button, Enter E-mail, Enter & Re-Enter Password, Enter other app related profile data
Select Add Application, Select Continue
Source of New Users
Cost Per Click Advertising (typically $0.25 to $1.00 to get a visitor), Cost Per Impression Advertising, Search Engine Optimization, PR, Offline Advertising, Blogs,
Friend Invites, Friend Newsfeeds
Cost of Registered Users
Assuming 2% conversion rate, $12.50 to $50.00
$0.00 via viral flow, $0.50 for Cost Per Install
Post Registration Marketing Methods
e-mail, newsfeed, profile page, friends’ interactions
50% to 75%
Hurdles to Re-using Site/App
Find app/icon on Profile Page and Click
a. Facebook is “Addictive”
b. Facebook is “So, Distracting, Companies Must Ban It”
c. Facebook is “God’s Gift to Developers”
d. Facebook is “Nirvana for Direct Marketers”
e. Facebook is the first “Word of Mouse” Engine
f. Facebook is “Bloomberg Terminal for Your Life”
g. Facebook is the ”Lowest Cost Customer Acquisition Vehicle on the Planet”
5. Warren Buffett’s Views on Valuation
Warren Buffett’s Definition of Value
The value of any business today is determined by the cash inflows and outflows – discounted at an appropriate interest rate – that can be expected to occur during the remaining life of the asset.”
Owner’s Earnings is the amount all future cash that the investor could take out of the business without hurting the business’s long term competitive position.
Stock Market’s Definition of Value:
Valuation is any amount that a willing seller and buyer agree to
For public stocks, Mr. Market values every business each and every day
And, Warren’s fortune is based on buying stocks whose future earnings
are being undervalued by the marketplace
Valuation is not based on past or current earnings but on future earnings
6. How Should We Determine Facebook’s Worth?
Facebook’s Investment History
June 2004 à 5% sold, implied valuation à$10 million
May 2005 à 12.5% sold, implied valuation à $100 million
Apr 2006 à 5% sold, implied valuation à $500 million
Oct 2007 à 1.6% sold, implied valuation à $15 billion
Facebook’s Valuation Should NOT BE BASED ON:
Yesterday’s Small % Investors
Today’s Monetization Methods
Today’s Strategic Partners
My Estimate of Facebook’s Valuation Is BASED ON:
Today’s Growth Rate
Today’s Developer Platform
Today’s User Experience
Tomorrow’s Monetization Methods
Tomorrow’s Strategic Partners
Sum Total of All Future Earnings
So, what is Facebook worth today?
Lee’s Answer à $100 billion
- The Valuation Time Machine
What was Alaska worth in 1867?
1867 – Seward’s Folly:
586,000 square miles for $7.2 million (1.9 cents per acre)
$182 million in today’s dollars
1867 – 1958 à $40 billion in Fur, Gold, Copper, Salmon
1959 – 2006 à $375 billion in Oil, especially after the pipeline
2007 – Today’s valuation = ???
What was Microsoft worth in 1984?
1986 – Post IPO valuation à $750 million
1986 – 2006 à $126 billion in Net Income from OS Licenses, Office Suite Apps
2007 – Today’s Stock Market Valuation = $310 billion
What was Google worth in Dec. 2001?
2001 – AdWords CPM = 2001è $86 million revenue
2002 – AdWords CPM & CPC = 2002 à $347 million revenue
2003 – AdWords CPC only + AdSense = 2003 à $961 million revenue
2004 – Post IPO valuation à $31 billion
2001 – 2006 à $20 billion in Net Income from CPC Search
2007 – Today’s Stock Market Valuation = $218 billion
What was Facebook worth in May 2004?
2004 – $10 million???
Growth of non-college, non-US members
Signing Microsoft advertising deal
Opening of the platform for developers
Accepting Microsoft investment
2007 – Today’s Private Investor Valuation = $15 billion
8. Getting to $100 Billion in 3 Easy Steps
a. What will Facebook’s P/E Ratio Be?
14 – Disney ($62 billion)
17 – GE ($371 billion)
17 – American Express ($67 billion)
22 – Microsoft ($319 billion)
33 – MasterCard ($26 billion)
50 – Yahoo ($34 billion)
54 – Google ($218 billion)
103 – Amazon ($38 billion)
280 – eBay ($45 billion)
b. Earnings Required to Get to $100 Billion Post-IPO Valuation
25 P/E è $4 billion in earnings
42 P/E è $2.4 billion in earnings
50 P/E è $2 billion in earnings
c. Users Required to Get to $100 billion Post-IPO Valuation
2007 à 65 million
2008 à 200 million
2009 à 300 million
2010 à 400 million
d. $100 Billion Post-IPO Valuation è $1 per month per user
P/E ratio = 42
Late 2008 earnings run rate = $2.4 billion
$100 Billion = 42 P/E * $2.4 billion
200 million users$2.4 billion = $200 million per month * 12 months
$200 million per month = $1 per month * 200 million users
9. $2.4 Billion Per Year from $1 Per User Per Month
Add Web Search to Facebook:
28 web searches per user per month
1 in 7 lead to Cost Per Click Sponsored Link click
4 clicks = $1.20 per month per user
(Facebook’s rate: $0.04 per web search)
(Google’s rate: $0.26 per web search)
Create Web-Wide, Open AdSense that is Enhanced with User Data:
Google makes $4.7 billion per year in AdSense Revenue
Facebook could make it 50% better its User Knowledge
Works out to $2.4 billion per year in Facebook’s Share of AdSense Revenue
Offer a Facebook Mall with 35% New Customer Acquisition Fee (otherwise 5% fee)
Average Transaction Size = $30
35% New User Merchant Commission = $10.50
5% Existing User Merchant Commission = $1.50
Purchases Per Year Per User = 2
50% of Purchases are with New Merchants
Commission Fees = $12 on Total of $60 Per User
$12 billion in Mall Sales per year
Works out to $2.4 billion in Customer Acquisition and Commission Fees
Offer a Facebook Wallet (i.e, Web-Wide Auto-Login / One-Click Buy Service)
Prior Wallet’s have failed due to lack of Adoption
Facebook already has massive adoption and complete user data
Facebook already has 6 million credit cards on file
At 1%, this is $2.4 billion for assisting $240 billion in annual purchases
10. $2.4 Billion Per Year from 10+ Partners Paying $20 Million Per Month
License eBay to Power Person to Person Sales
License Amazon to Power Book/Music/Video Sales
License Visa to Power All Credit Card Sales
License Craig’s List to Power Classifieds
License AT&T to Power Yellow Pages
License Expedia to Power Travel
License YouTube to Power Video
License Skype to Power VOIP
License Apple to Power Music Downloads
License eTrade to Power Finance
11. $2.4 Billion Per Year from 100+ Merchandise Categories Paying $2 million Per Month
Gifting – Red Envelope, Gifts.com, Harry & David
Computers – Dell, HP
Gadgets — Sharper Image, Hammacher Schlemmer
Men’s Fashion – Lands End, Big & Tall, Gap
Women’s Fashion – Lane Bryant, Talbots, Gap
Children’s Fashion – Hanna Anderson,
Home Furnishing – IKEA
Discount Selling – Overstock, SmartBargains
Shoes – Zappos, Amazon
Lingerie – Victoria’s Secret
Books – Amazon, Barnes & Noble
Music – Amazon, Virgin
Video – Amazon, NetFlix
a. Facebook is “Addictive”
b. Facebook is “So, Distracting, Companies Must Ban It”
c. Facebook is “God’s Gift to Developers”
d. Facebook is “Nirvana for Direct Marketers”
e. Facebook is the first “Word of Mouse” Engine
f. Facebook is “Bloomberg Terminal for Your Life”
g. Facebook is the ”Lowest Cost Customer Acquisition Vehicle on the Planet”
The GEM System for the Viral Design and Tuning of Apps
Growth – 1 to 2 million users in less than 1 year
Engagement – 5% to 10% active users PER DAY
Monetization — $30K to $60K in Ad Revenue per Million Installs Per Month