This Forbes article gets the discussion rolling on Facebook’s valuation and seems to be supportive of the notion that Facebook is breaking new ground, driving the evolution of the internet forward, and is worthy of its $80-100 billion valuation. I’d like to offer a more skeptical view of its valuation and make a broader statement about how some firms deploy capital.
In terms of the valuation issue, let me go on record as saying that if someone from Morgan Stanley (the lead underwriter of the offering) showed up and offered me shares of FB during the IPO at today’s valuation, I’d tell him or her to take a hike. At the risk of being criticized for not “getting” the whole social media revolution thing, I think it’s far more prudent to proceed cautiously with regard to the impact the social media movement will have on the sale of goods and services.
Don’t get me wrong, I think Facebook is revolutionizing communication and information transfer, and a certain portion of that will benefit sales and marketing. But I also think that a good portion of the advertising dollars beating down Mr. Zuckerberg’s door is unlikely to have the desired effect of moving more product or selling more services. According to the aforementioned article, the value of Facebook is its platform’s ability for users to reach out to others about something they like or don’t like. While I wholeheartedly agree with that observation, that kind of grass roots advertising is very different from the kind of advertising a company can control and might actually pay for. Grassroots advertising happens when the quality and utility of a good or service is so great (or poor) that people are moved to tell others about it. So why then are these companies spending their resources on Facebook advertising instead of efforts to improve the goods and services they offer?
Were firms to shift their Facebook advertising budget to R&D, or anywhere else that improves the quality and delivery of their goods and services, not only would they likely get more mileage out of the Facebook platform, but perhaps we would see positive changes on a broader scale. Doing so might increase the availability of high quality jobs we’re looking for in this country (and elsewhere), it might improve the quality, availability, and choice of goods and services broadly, and it might actually add value to the global economy in a measurable way. Of course, such a view means Facebook’s valuation should be far lower than its current estimates, but I think Mr. Zuckerberg and others will get along just fine.