Wall Street and Facebook, "You Just Don't Get It, Do You?" - brnd.ws
Facebook is Wall Street’s new favorite punching bag, and by extension Silicon Valley gets its share of punches. The latest addition to “Facebookmageddon” is authored by Craig Timberg from the Washington Post, and he doesn’t hesitate to question the entire display ad business. There are so many wrong assertions in the article that I don’t even know where to start. I’ll start with what’s wrong, and then I’ll make my case for why Facebook is undervalued because, Wall Street, you just don’t get it.
Let’s start with the title. Neither Facebook nor Silicon Valley invented the “give-it-away-free approach”. It’s at least as old as Mass Media (remember this?) and it’s been working pretty well. You build content that I like, and in exchange I accept the ads that may or may not interest me (with the former being increasingly less common online). It’s a 200 Billion Dollar business in the US. Not bad!
Timberg says “ads are an intrusion on the user experience”, which is not correct. It surely is for some users, but not for all of them and that’s why it is a business. Google has been testing the “Skip Ad” option on Youtube and 15 to 45 percent of users (weirdly wide rage) do NOT skip the ads. I’ll repeat this; 15% to 45% of users voluntarily spends 30 seconds of their time watching an ad they could skip without losing anything. This is why display ads still work, and if anything they can be much more effectively measured online than on print or TV. Plus, Facebook will only get better at targeting, which will drive revenue because people click on ads when they’re relevant.
“The advertising broadcast model is dead wrong for this medium. . . . It can never work.” says Donna Hoffman quoted in the article. She doesn’t say why, or Timberg didn’t bother to ask, but he does say “alternatives are just a click away”. Wait, what? Alternatives? To Facebook?!? What other social networks does Craig Timberg use that are competitive? And just how easy is it to switch social networks? Facebook’s stickiness is one of their best values, and the barriers to switching are enormous. Just ask Google+.
Then John Morton says “information is valuable, and it has to be paid for“, and “whoever coined the phrase ‘information wants to be free’ was blowing smoke”. Maybe John Moron hasn’t been blowing smoke but he certainly has been distracted. The very newspaper publishing his quote distributes all their information free! Of course, the NY Times subscription model could not be missing in the article, as they recently announced almost half-million paid users. That’s some impressive ~100 million dollars yearly, which is about 10 times what Facebook makes… in a day.
And the often repeated argument of the Price to Earnings ratio (P/E) couldn’t be missing either. I’m not going into much detail about how to use the P/E ratio – you can learn here – but here are a few tips. We don’t compare P/E ratios of companies in different industries or different stages. Comparing Facebook’s P/E with that of Apple or, even worse, GM is just wrong. We can maybe compare Facebook and Linkedin, a company that Timberg presents as an example to follow, and while Facebook trades at 60x its earnings, Linkedin trades at 850x. This whole conversation about P/E is just useless given how early stage these companies are.
Why do I think Facebook is deeply undervalued? It goes way beyond advertising. Facebook increasingly owns my online identity, which is increasingly my identity. Why do blogs require Facebook login for me to comment? Because it holds me accountable, because I don’t want to screw up my Facebook identity. This is only going to grow, and it’s useful for advertisers, publishers, and developers alike. On the advertising front, ads will keep shifting from print and TV to online, because it’s more effective, easier to measure, and has a bigger audience. Facebook will be one of the best, if not The best outlet for advertisers. Facebook will get better at targeting, and users will get smarter at identifying and using the ads, just like they are on Google. Wall Street doesn’t understand this, the same way they didn’t understand Google in the early days, so anytime someone says something intelligent-sounding, everyone rushes to repeat it. At least it’s good news for those who haven’t bought $fb stock yet.