Here's the Number That Matters in Facebook's IPO Filing

To justify the kind of valuation it is seeking, Facebook is going to need to make a lot more money per user.


After waiting for so long to see the numbers inside Facebook's success, it's easy to be overwhelmed by all the new data we have about the social network and company. But there is one number that matters more than all the others:

In particular, I want to explain why this number matters so much to you as a user of Facebook, not just for Facebook at a corporate level.

To justify the kind of valuation that Facebook is seeking, the company is going to have to generate a lot more revenue that they currently do. Some of that revenue growth could come from getting more users onto the service. But Facebook has snapped up a lot of the easy users -- that is to say, people with the Internet who live outside of China. User growth will continue outside the western countries for a few more years.

However, even if Facebook gets to 3 billion users, if it doesn't increase its revenue per user, the company will only generate $13 billion in revenue per year, as analyst Trip Chowdry has pointed out. That's not going to justify a market capitalization of $100 billion. Google, for example, generated $38 billion in revenue -- nearly three times Facebook's hypothetical three-billion-user hypothetical -- and has a market cap of $190 billion.

So, if tripling the size of the social network to 3,000,000,000 users is not going to be enough to justify its valuation with its current revenue per user, there is only one strategic direction for Facebook to go. It needs to generate more revenue per user. A lot more.

Facebook's current model is working well, obviously, but how can they double the amount of money they squeeze out of each user? Two things are likely to happen:

1) A lot more advertising. There's just no way around it. Facebook's main products are the eyeballs of the people on the site, which they sell to advertisers in tiny slices. More display advertising will head to Facebook. We'll probably see different types of advertising, too. Remember that Mark Zuckerberg's vision is the "frictionless sharing" of everything, so I expect to see something like the ill-fated "Beacon" plan resurrected. It'll be more subtle this time, but Facebook will get better at showing you products that you and your friends like. You'll be frictionlessly sharing all your tastes with your friends ... and advertisers.

2) More Facebook Payments. Already, Facebook generates 15 percent of its revenue from other companies selling credits to purchase virtual items, primarily in games produced by companies like Zynga. It seems to me that Facebook has to bend a lot more people into using Facebook Payments. If they can manage to become the default payment method for virtual goods purchased across the Internet, they should have no problem meeting the revenue targets they must have to justify their current valuation.

Point to all this being, when Facebook was merely trying to grow its user base, the incentives between Facebook and you, as a user, were pretty tightly coupled. Now, particularly in the United States, user growth is slowing and getting more money for each user is necessary. My guess is that Facebook's need to monetize at higher levels and users' desires will come into conflict more often the higher its revenue per user climbs.

* Bloomberg's Mark Gimein argues that the revenue-per-user number should actually be $5.02 based on Facebook's mid-year 2011 user numbers, which also seems like a fair way to compute this statistic. Either way, as he told me in an email, "the bottom line is still the same."

Image: Reuters.
Revenue per monthly active user: $4.39*