Facebook's IPO could be worth $100 billion?

From C-Net

On August 19, 2004, Google went public, selling $1.9 billion of stock, which placed the value of the company at $23 billion when trading started. (It's $187B currently.) Today, in 2012, we're talking about an imminent Facebook IPO, in which, it's predicted, Facebook will offer 10 percent of the company for $10 billion, placing the value of that enterprise at $100 billion.

Is Facebook really worth this much?

The economic answer is: if people buy the stock, then it is. But what will people be paying for? There are three big reasons that Facebook's IPO could be worth so much, and so much more than Google's initially was. Facebook really is that different. (This story is not a financial analysis--we'll have that when Facebook files its IPO paperwork.)

In Facebook's unique combination, these three pillars make this company arguably more valuable that any other Internet company has ever been.

1. Reach
At IPO time, Facebook will have over 800 million users. It should cross the billion mark in August. That's one-seventh of the world's entire population. Moreover, Facebook claims that these are "active" users, and that over half of them use Facebook "in any given day." That doesn't mean that the majority of Facebook's users are online every day, but it is a portrait of a large and engaged user base. Moreover, the average user is highly connected to other users and entities. The average friend count: 130.

Google (not Google+) crossed the billion-user mark in 2011, but people use it very differently. They may rely on it, but they're not as engaged. Google is a way station, a site you transit getting from query to destination. Compare that to Facebook's Big Reason #2:

2. Dwell
This is where Facebook really kills it. The average U.S. user spends seven hours and 45 minutes on Facebook a month (Just ask the Nielsen folks). Even YouTube doesn't come close, with under two hours a month. (Google overall is also under two hours a month.)
That is a lot of attention. A lot of branding. A lot of games being played. A lot of information about user behavior, connections, and preferences being gathered.

There is one downside to running a site where people go to in order to connect with each other, and not raw information, as on Google: they click less frequently on ads. But since they're on the site for so much longer than on a search engine, the raw traffic being fed through to advertisers could, theoretically, balance out.

But the key point is this: Facebook works as a destination. More people go there than to almost any other site. And without question, they stay there.

3. Lock-in
Given the performance of social networks that have come before Facebook, like Friendster and MySpace, one might well expect that at this point, eight years after launch as a Harvard dorm room project, that most users would be experiencing Facebook fatigue, and logging off in droves, as they have done on other networks that got huge. 

But they're not. In fact, Facebook is expanding its demographic reach. While growth among young users has slowed (but not gone negative), perhaps due to saturation, growth among adults over 50 is growing rapidly. (So says the Pew American Life Project.) Families are getting connected.

Facebook is becoming part of the fabric of modern life. Disconnecting from this network is not as easy as just moving to a different social platform (like Google+), because if you move over, you're moving, for the most part, alone. And that's not what social networks are about. The more people (real connections) you are linked to on Facebook, the more difficult it is to leave. That's why Facebook tries so hard (and succeeds) at getting people to connect with other users. Each friend is one more barb on the fish hook.

No other site has this tripod of strengths: massive reach, incredibly robust usage, and fish-hooked switching costs. Other popular sites have weakness in one or more of these areas that keep them out of Facebook's rare air, even if they're otherwise strong businesses. Look at Groupon's low switching costs, for example. Or Twitter's much shorter dwell times. Or LinkedIn's smaller network.

This tripod is what Facebook is resting on, and what it should be able to build on. It's why the company is so valuable today.

But what about tomorrow?

It's not a sure thing the company will stay in this position forever, and it certainly won't if Zuckerberg's team lets its guard down after IPO. Threats to Facebook's dominance include:
Advertiser support. People don't go to Facebook to see ads, and advertisers know it (compare to a search engine, where ads can be not just relevant, but desired). Ad performance is improving, which is extremely important to the company, since that is Facebook's main revenue stream.

The Zynga dance. We'll see when the Facebook IPO filing appears, but it's expected to be revealed that a large proportion of Facebook's revenues come from Zynga. Zynga's control-freak CEO, Mark Pincus, must want to free the company from Facebook's control, and likewise Facebook is far too reliant on this single game platform for so much revenue. The alliance may not be sustainable.

Mobile support. Facebook has mobile apps, but they are not nearly as compelling as the Web service (on the iPhone and Android at least; the Windows Mobile app is different and better). There are better solutions for connecting with friends in specific circumstance on mobile devices (check-in apps, mobile reviews apps, and so on). No one app has either the general functionality or the reach of Facebook, but if any user trend could interrupt Facebook's growth, it has to be the move of the modern society to mobile online communications.

The Google. Google will not give up on Google+, not after fumbling with Buzz, Wave, and Orkut, and not with Google knowing how valuable it is to own a database of people. Google can, and is, putting Google+ in front of nearly everyone. For that reason the company is able to claim 90 million users. Engagement is not nearly at Facebook levels, and may never be, but Google has the resources, and the battle knowledge, to lay in a prolonged campaign against Facebook.

Privacy flaps. Just kidding! No matter how many and how much journalists, politicians, and a tiny fraction of users complain, Facebook's privacy flubs will not amount to much, as long as the company keeps changing its policies so frequently that nobody can keep up with what Facebook is actually sending to other users and advertisers. At least in the U.S., that is. In other countries, especially EU countries with tougher privacy laws, Facebook could, possibly, get slowed down over privacy issues. But with Facebook's resources, I'd put that as having only a small likelihood of derailing Facebook's progress.

Stay tuned to see how the market perceives Facebook's initial offering. The company is expected to file its S-1 paperwork to go public this week. The actual offering won't be until a few months after that. 

Found this pretty interesting from Forbes Magazine:

http://www.forbes.com/sites/petercohan/2012/01/30/four-reasons-why-facebooks-ipo-is-irrelevant/ 

So why is one of history's biggest IPOs a non-event? Here are four reasons:

It's grossly over-valued. On a price/sales basis, Facebook would trade at 19.7 — that's 497% higher than Apple (APPL) at 3.3 and 294% above Google's (GOOG) P/S of 5. And assuming Facebook shares Google's net margin of 26%, Facebook's P/E of 80 is far higher than Google's 19 or Apple's 12.7. This means that Facebook's stock might not hold up after the first-day IPO pop — the same fate that greeted most of 2011′s tech IPOs.
It won't unleash corporate capital spending. In 1995, Netscape's IPO spurred a wave of corporate capital spending. That's because the web browser made the Internet easier for people to use than it had been before. A wave of supporting industries ranging from web consultants to makers of Web infrastructure – that got their fingers into the corporate Internet investment pie, as I described in my 1998 book, Net Profit. Facebook is not doing that — its revenues represent a mere 1% of the world's $507 billion in total ad spending and its IPO would not lead to a major change in the trajectory of corporate spend.
It doesn't change much for Facebook insiders. Facebook's investors and employees were able – until last week when trading there was halted – to sell their shares for cash on SharesPost, a secondary market. On January 26th, Facebook was valued at $73.4 billion there — a few billion below the estimated IPO range. Sure, an IPO required by topping 500 shareholders will add to Facebook the cost of running a public company — but beyond that, things there should not change much.
It won't boost the overall venture financing market. If a Facebook IPO created a fever to invest in tech start-ups, it might be good for the venture capital industry. But since the IPO does not change much for Facebook investors, does not spur the growth of a range of related industries, does not unleash corporate investment, and might not even help out the IPO market, the after-effect of Facebook's IPO could be modest.