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Posts Tagged ‘platform

The Apple Digital Media Platform has been one of the runaway hits of this decade and driven a 400% gain in Apple’s share price over the last three years. Yesterday, Steve Jobs announced the entry into the movie rental business and a new version of the Apple TV Set Top Box. The bigger story which went unmentioned is that business model underlying the platform is showing real signs of strain and the players are showing signs of restlessness.

Apple (AAPL), Google (GOOG) and Microsoft (MSFT) Three Year Share Performance

Apple (AAPL), Google (GOOG) and Microsoft (MSFT) Three Year Share Performance

The Apple Digital Media Platform is a classic example of a multi-sided business model. As the user base increases, the more appealling and less risky it becomes to develop new hardware devices. As more hardware devices are sold, the more appealing it becomes for people to develop accessories. As the user base grows, content owners realise that it becomes an interesting distribution channel to sell content. As more content becomes available then more users are driven to the platform. As volumes increase then margins paid or royalties received from third parties can be increased.

In other words the Apple Digital Media Platform exhibits a high degree of positive network externalities or displays a virtuous circle .

Apple Digital Media Platform The multi-sided Apple Digital Media Platform

The software platform itself has evolved from the inital release of Quicktime in 1991 on the Mac and in 1994 on Windows. It has always been available for free to users. The interesting strategic decision was to make Quicktime available for Windows from very early on, even when no revenues were being earnt.

The probable reason for this decision is that the Mac has a very small market share compared to Windows and Apple needed to have the broadest possible market available to make it appealing for content creators to make their content available on the Apple Digital Media platform. In these early days, the QuickTime platform was only of value in so much as it created extra sales of Mac hardware.

This changed in 2001 when Apple launched the ipod device and itunes software. This software allowed the synchronisation of music content between the Mac or PC and the ipod. Apple was now generating revenue from having Quicktime and the itunes software available on the PC as it now had a much larger addressable market. Effectively at this stage, Apple was effectively adopting a highly unusual give away the blades (software) and sell the razors (hardware) strategy.

This strategy should be compared and contrasted to the Games Console platform players who have adopted a strategy of discounting the hardware (consoles) and charging a premium for content (games).

It should be noted that at this time illegal file sharing had just kicked into gear with Napster reaching its peak popularity in 2001 and despite its closure it spawned many other yet more creative ways for the music lovers of the world to break the law.

It is therefore hardly surprising that in 2003 when the iTunes online store was launched it was welcomed with open arms from the record companies especially considering that tracks were to be charged at 99 cents with DRM and Apple wasn’t trying to make any profits from the download service.

The only internet infrastructure company making any sort of money from the iTunes stores was Akamai who Apple had chosen to build the Content Delivery Network and assure that tracks reached their destination in a timely manner. This relationship exists to this day and to my knowledge no ISP has ever directly profited for the Apple Media Platform.

As the iPod grew in popularity it began to attract the trivial (eg protective casing) and not so trivial (eg external loudspeakers) accessory providers. Apple designed a standard interface across all the ipod range to make life easier for the accessory makers. Apple apparently charge accessory providers a royalty for using the “Made for iPod” seal. The royalty rate is not in the public domain, but is estimated to be as high as $4/device.

This accessory market has grew to an over $1bn market. Accessories are also important for iPod independent retailers as they tend to have higher margins than the iPod itself. It is estimated that for every $3 spent on iPods $1 is spent on accessories. It also helps the independent retailers to differentiate against the Apple owned retail stores who don’t tend to stock all the accessories. Apple estimated that in FY2007, direct sales were a huge 57%.

The iPod has scaled huge heights with 52m sold in FY2007 compared to just 7m Macs or $8.3bn in ipod revenues compared to $10.3bn Mac revenues. Another example of the positive network externalities is that the iPod is creating positive momentum to Mac sales with a full 50% of Mac sales in FY2007 being new to the Mac. Undoubtedly a large proportion of these new users are attracted to the Mac because of the style and panache the ipod has added to the general Apple brand.

Apple launched in 2006 the hugely anticipated iPhone and has managed to sell 4m of these in the first 200 days. Apple claims this is equivalent to a 20% share of the US smartphone market in 3Q2007. The iphone adds a new twist to the model in that Apple have decided to grant exclusive rights to a single network operator in each country. This has enabled Apple to get a share of all voice and data revenues from the service. This share is estimated to be around 30%.

One of the few recent failures was the initial launch of Apple TV set top box. This has been redesigned and relaunched along with the addition of a movie rental business. Video capability was added to QucikTime back in 1999 and recent iPods have feature small screens for viewing content. 125m TV Shows and 7m Movies have so far been downloaded from the iTunes store.

Apple has recently broken through the 4bn music tracks downloaded level and now accounts for an estimated 70% of the worldwide digital download market with 85% share in the crucial US market.

Sales of Offline and Online Music 1H2007

Sales of Offline and Online Music 1H2007

It is hardly surprising therefore that tensions are starting to emerge with the record companies who are having rather a hard time of making money with the overall market declining in both revenues and volumes. The record companies seem to be fighting hard against the Apple DRM lock-in which currently allows Apple to tightly integrate both hardware and software and keep non-approved third parties out of the chain – there is very little interoperability.

All of the four major labels are allowing Amazon to distribute non-DRMed tracks at variable pricing. In fact Amazon has arranged a huge promotion with Pepsi to try and kick-start the platform attracting users by giving away up to 1bn tracks. This is similar to some of the earlier iTune promotions. We think for record companies although this reduces the dependence on Apple, it does not alter the fundamental deficiences of a “per track” business model.

More interesting solutions are the subscription services which has allowed digital sales in South Korea to overtake physical sales. All mobile operators have cheap all you eat subscriptions which are very popular with an estimated 1 in 6 subscribers taking out packages. Even the hugely popular online Cyworld game has managed to sell 200m tracks. However not everyone is positive, john Kennedy, the IFPI chairman recently warned “”Is Korean music market a panacea for the digital music market internationally or a case study in the devaluation of music?”.

A simlar story exists in Japan where mobile sales far exceed online sales. In addition Japan was the only region in the world where Apple actually saw falling revenues – drop 11% to US$1bn with only 300k Mac sold.

Universal Music Group is experimenting with subscription offers for the Neuf Cegetel ISP in France with an all-you-can-eat offer and also Vodafone and Telenor are experimenting with subscription offers for all the major record companies with the Omnifone platform. These are real challenges to underlying economics of the Apple platform. It cannot be long before Verizon fights back in States with some sort of innovative offer, especially as arch-rival AT&T has exclusive rights to the iphone.

The Mobile Industry is a classic cheap razors and expensive blades market: handsets are subsidised with expensive calls and ultra-expensive texts. Operators throw off prodigious amounts of cash which can be used to subsidise and market new applications. Apple are trying a model of both expensive razors and blades with limited distribution – we do not believe this strategy will not work for the mass market.

The other big issue for Apple is that long term platform rival Windows is finally starting to gain some traction in the mobile market as the operators are starting to realise that perhaps Microsoft are not as evil as everyone thought at the turn of the century. Certainly some mobile operators are already using Microsoft as a way of challenging the revenue share that they have to pay to Blackberry in the corporate messaging market. The Microsoft platform is extremely open compared to both the Blackberry and Apple platforms and also they don’t (yet) want a share of the ongoing revenues. Microsoft may be historically one step behind Apple in terms of technology, usability and more especially design, but they have always been one step ahead with the business model.

And this is all before, Google really enters the market with its advert funded model. A lot of people, we speak to about both the iphone say the most brilliant application is the maps which was written by Google and uses Google data. There is no way that Google will not port that application to every handset under the sun ultimately financed by some sort of advert funded model. In fact, there is already inferior version available for Windows, PalmOS and Symbian-based handsets.

In other words, Apple faces a lot of pressures from all corners of the platform.

In the short term, most of the platform pricing issues can be overcome with a little bit of tweaking to the model. Apple has larger issues in the medium term as the powerful content owners begin to ensure that there is competition in the digital distribution of their products. We do not believe the movie content owners will allow Apple anywhere near an 85% market share and over time the music companies will bring Apple share of digital downloads down as they strike subscription deals with the ISPs and Mobile companies. In the longer term, device makers will catch up with Apple usability features and we believe Apple will never have more than a niche share in PCs, mobile phones or set top boxes.

However all is not lost for Apple shareholders, the market segment who are attracted to the Apple digital lifestyle will tend to be higher income and prepared to pay a premium for their products which should allow a profitable future but at much slower rates of growth than in past few years.

The main lessons to be learnt from the Apple platform for the Telecoms industry are:

– it is relatively easy to continually innovate and add features to platforms over time; – multi-sided markets can be very profitable growth drivers;
– wholesale intermediaries tend to have increasing returns to scale, thus market concentration; and
– it’s better to enter a new market with a disruptive business model than a disruptive product proposition

One of the themes for Telco 2.0 in 2008 is two-sided markets and their potential impact in the Telecoms industry. We are planning on releasing a research report in March which examines the platform opportunity for operators. And this is, of course, the core focus for our 4th Telco 2.0 Executive Brainstorm on 16-17 April.

http://www.telco2.net/blog/2008/01/apple_digtal_media_platform_sh.html

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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)

Introduction

  1. 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.
  2. $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.
  3. 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.


Overview

  1. Why Facebook Can’t Be Worth $100 Billion
  2. Facebook’s Growth and Current Business
  3. Graphical Operating System vs. Social Operating System
  4. Value of a Registered Web User vs. a Facebook App User
  5. Warren Buffett’s Views On Valuation
  6. How Should We Determine Facebook’s Worth?
  7. Valuation Time Machine
  8. Getting To $100 Billion in 3 Easy Steps
  9. $2.4 Billion Per Year from $1 Per User Per Month from 200 million Users
  10. $2.4 Billion Per Year from 10+ Partners Paying $20 Million Per Month
  11. $2.4 Billion Per Year from 100+ Major Merchandise Categories Paying $2 million Per Month
  12. Conclusion
  13. Commercial


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

2008

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

OS Name

Windows

Facebook

Founder(s)

Harvard drop-out and his former roommate

Harvard drop-out and his former roommate

Initial Launch

1984

2004

Critical Mass Achieved

1995

2007

Competitors

Digital Research’s GEM, IBM’s OS/2 Presentation Manager, VisiCorp’s VisiON, Sun xWindows, Apple’s Mac

MySpace, LinkedIn, Orkut, Friendster, OpenSocial

Focus

Windows SDK à Developers / Developers / Developers!!!

80,000 employees

4+ million 3rd party developers

F8 Platform à Developers / Developers / Developers!!!

450 employees

180,000 3rd party developers

Lock-in

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

Killer Apps

Word, Excel, Powerpoint, Access, Outlook, Browser

Photos, Events, Friends, Newsfeed, Inbox, Groups, Profile Page

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

Site Reminders

Bookmarking (<1%)

Profile page

Post Registration Marketing Methods

e-mail

e-mail, newsfeed, profile page, friends’ interactions

Opt-Out Rate

50% to 75%

< 1%

Hurdles to Re-using Site/App

Remember e-mail/password

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

Yesterday’s Earnings

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


  1. 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

etc.


12. Conclusion

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”

13. Commercial

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