Original URL: http://www.theregister.co.uk/2010/11/03/how_much_is_facebook_worth/

How much is Facebook worth?

What's on your mind? I've just realised who the mark is...

By Tim Worstall

Posted in Financial News, 3rd November 2010 12:08 GMT

Comment How much is Facebook worth? Hundreds of billions or spit? The answer to that question depends upon who you're asking: and indeed how you're doing the asking.

“At what price would you buy Facebook stock?” will get you a very different answer than observing how many people are willing to dig into their wallets at that price.

The artist Damien Hirst isn't troubled by the fact that the market determines the value of art. “I’m one of the few people in the world who can say, ‘I know what everything is worth'," he declares. "Everything in the whole world is worth what anyone else is prepared to pay for it. And that’s it. Simple.”

It's as good a method as any other: in a market economy something is worth what people are willing to pay for it in that market. Thus Facebook is worth around that mid $70bns level that its stock is changing hands at on the private market where it trades. (That it's a private market is a side effect of the rules under which it incorporated and sought initial investment. Until it IPOs onto Nasdaq or similar, it is limited to 500 shareholders at any one time.)

Then again, we've seen that such market valuations are - how shall we put this - variable. One day the mortgage bonds of America were worth one amount, seemingly the next day $7trn less.

So how might we go about trying to value the company from the fundamentals? It claims 500 million users, if it gets their advertising truly sorted out, how much do we think it can get per 1000 page views? What's the average number of page views per user per year? $1 per thousand is easy enough, can be done with Google Ads (your blog or mine can manage that). There are sites out there that get $10 per 1,000 (and sell all their inventory) and those that claim rates of $30 and up (but very rarely seem to sell them all).

Of those users, how many see how many pages? We all know of those who seem to live their entire lives on the site: then there's people like me. I was sufficiently bored one day to claim my name and haven't been sufficiently bored as yet to either revisit or work out how to delete my account (something which isn't easy and which might boost those account numbers just a tad).

Our problem with this measurement by fundamentals is that much of the information we need isn't publicly released: it's released only to those fewer than 500 insiders and so the best proxy we have for them is... what those insiders are valuing the company at.

Yet another method would be to look at what the most popular internet sites of their day were worth and are worth now. From Geocities to Yahoo via AOL, that's not an encouraging picture for immediate valuations lasting into the long term. Perhaps social media has more stickiness, more ability to keep the punters? There is, after all, a network effect; once you've linked up with all your buddies, moving has a cost.

But then Bebo, Myspace and Friends Reunited don't seem to have shown that to be true. It's almost as if social media works like the stock market does: by the time everyone's talking about shares, you should be selling. By the time everyone's on a site then all the cool kids will leave: like a nightclub, in fact?

Who else is at the table?

Of the companies which are pure internet plays (ie not simply using it to do something like sell books or have tchotchke auctions in a new manner) only Google seems to have broken through into those sunlit uplands, and that's on the basis of controlling the advertising for everyone else rather than the specific service it offers as a search engine.

We could even get all Hegelian here, thesis and antithesis: the very success of any online adventure sparks up enough dissatisfaction with the way it's being done that it creates its own competition. Maybe Diaspora will actually work - or something like it. The aim being that the individual decides what to share and with whom, not some central company like Facebook. (Perhaps server/client is a better description, the client deciding what to release to which of many servers, rather than the centralised Facebook model.)

The answer to what Facebook is actually worth, then, doesn't seem to have any hard and fast answers. There is no “true” value of anything: St Thomas Aquinas and Karl Marx were both wrong. The only value of any relevance is the sometimes arbitrary, always subjective value that we human beings put on things. Which is very nice but not really all that useful when we're trying to decide among different methods of calculating that subjective value.

The best answer we can really come up with is that Facebook is worth what people with more knowledge than we have are currently willing to pay for a piece of it - that mid $70s billions valuation. Even then it's best understood as an options price: there's a big downside in that it may be worth nothing as someone comes up with some new and different social media, as Facebook similarly shat on its predecessors.

And there's a big upside, that it becomes a part of the standard media package of the individual: the mobile phone, the email box and the Facebook account. Then it would be worth hundreds of billions as it simply becomes part of the standard infrastructure of life.

I wouldn't buy stock if I could and I wouldn't short it if that were possible. For there's one more thing about stock valuations to keep in mind: they're like poker. There's a mark at every table and if you don't know who the mark is, it's you.

Realising this is the best way to avoid losing at poker by leaving the table: with Facebook, everyone else in the market gets to read the accounts and we don't. Here, we're all marks. ®