Facebook's Value: What's the Price of a Billion People Watching Each Other?

Will Facebook's business model be more like Google, the New York Times, or TV? To be worth $100+ billion, it will have to be something much more.

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Is Facebook's IPO the next chapter in the greatest company of our time, or are Friday's buyers total suckers?

The only intelligent, honest, and true thing to say about this inevitable question is that nobody has any clue. In 1992, a company called America Online had a $70 million valuation after its IPO. A decade later, it was worth $150 billion. A decade after that peak, it is now worth only $1 billion. Online fortunes are built on hyper-active tectonic plates. Mountains of wealth accumulate from flat nothingness, rumble, push up toward the sky, and with alarming frequency, blow themselves up. The Internet is a super-seismic place.

The AOL of the 1990s and the Facebook of today are both penumbral Internet companies. Both permeated our lives in intimate ways. Both changed the way we interact with friends, receive information, and spend our time. Whereas AOL lived off subscriptions, and was vulnerable to competitors who offered Internet access for free, Facebook's currency is simply attention. Its competitors are, essentially, any company that can distract us more effectively.

Facebook's greatest asset is its immense capacity to distract us. The best social media companies manage to get 10% of their users to come back each day, according to Foursquare/Tumblr/Twitter/Zynga investor Fred Wilson. Ten percent isn't cool, Facebook contends. You know what's cool? Fifty percent. "The majority of Facebook users stay active and their daily active user numbers are more than half their monthly numbers," Jonah Peretti says, "meaning the majority of people login each day. It is freakin' crazy."

It is freakin' crazy. If Facebook were merely the widest social network by number of users, dayenu. If it were the deepest social network by the quality of engagement and the quantity of personal detail, dayenu. But it's the widest and the deepest! That sort of thing has to be worth $100 billion, right?

Right?

THE CASE AGAINST FACEBOOK

In 1995, two students launched a website called TheGlobe.com from their Cornell dorm rooms. It resembled a proto-Facebook, letting users create personal pages with a place for pictures and writing. It had members (2 million) and a business plan (sell ads).  The day of its IPO, TheGlobe.com's stock price sextupled -- a record pop for its time -- and approached $100. Where is it today? Exactly.

This calls for some context. TheGlobe.com's population was nearly the size of New Mexico and couldn't make money. Facebook's is nearly the size of India and it just made a billion dollars. Still, the New Yorker's John Cassidy calls Facebook "the ultimate dot-com," and he doesn't mean it as a compliment. To him, Mark Zuckerberg's juggernaut is TheGlobe.com on gorilla steroids. It has members (125 billion "friends"), engagement (300 million daily photo uploads), and a business plan (sell ads). But for a $100 billion valuation to make sense, Cassidy calculates that Facebook would have to make somewhere between $5 billion and $10 billion within a few years. Last year, Google made just shy of $10 billion.

Warning signs are twinkling. Between early 2011 and 2012,  Facebook's costs grew at twice the pace of their revenue -- 95% to 45%. Its ad revenue declined in the first quarter of this year. This week, GM, the third-largest advertiser on Facebook, announced they have decided to remove all ads from the site. "It's not an advertising mechanism," said Martin Sorrell, chief executive of ad giant WPP.

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Derek Thompson is a senior editor at The Atlantic, where he writes about economics, labor markets, and the entertainment business.

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