As Facebook thunders toward its IPO, the 33 banks tasked with underwriting the offering have been desperately trying to determine how much the social networking website is actually worth. While it is closing in on 900 million users, its rate of growth has slowed and its current advertising model seems to be hitting a snag. Ultimately, the question arises: is Facebook overpriced — or is it undervalued?
At the IPO price of $38 that was announced Thursday evening, Facebook is priced at the top of the $34-$38 range announced at its filing. That pegs the company’s total value at an opening-day record of $104 billion — and it will have roughly $16 billion more in its coffers come Friday morning. Put another way, Facebook CEO Mark Zuckerberg now has enough cash on hand to buy 16 more Instagrams.
But How Much Is It Really Worth?
Even before the stock went on the market, most experts agreed that Facebook was overvalued: As ABC News recently reported, in a survey of 124 portfolio managers and analysts, only 8% said that the stock’s value would increase over the next six months.
At the heart of the stellar valuation lie questions about Facebook’s actual ability to make money, an issue that was brought into sharp focus earlier this week when General Motors announced plans to withdraw its $10 million advertising buy from the site. While badly timed for the Facebook crew, this decision wasn’t that surprising. As numerous experts — including our own — have noted, the click-through rate on Facebook ads averages a dismal 0.051%, or roughly one click per 2,000 viewers. In other words, as dozens of other websites have already discovered, customers respond poorly to online advertising, and prefer to shop via sites they find on their own.
What many observers seem to have missed, however, is that even as it was pulling its Facebook ads, GM was redoubling its use of Facebook itself. Between its various brands, factories, distributorships and dealerships, the company has hundreds, if not thousands, of Facebook fan pages. And, as the automaker announced on Wednesday, it has no intention of abandoning Facebook:
Just wanted to let our millions of Facebook fans know, we’re still here, and we ‘like’ you back! We may not be advertising on Facebook at the moment but we’ll still be talking with you all daily. If anything, we will be providing more content across our many GM Facebook pages – including Chevrolet, Buick, GMC and Cadillac – to keep the dialogue going.
For critics of Facebook’s current ad strategy, it’s worth noting — as some analysts have argued — that there is nothing keeping the company from charging corporations to establish pages on the site. At this point, a Facebook presence is a cornerstone of almost any social media strategy, and any company, local business, movie, or band that hopes to reach consumers is pretty much required to create a fan page.
Moving Beyond Ads to a Real Business Model
Charging for corporate pages, while unusual, wouldn’t be unprecedented — in many ways, the strategy would be an online equivalent of the model employed by the phone company. Just as the yellow pages are free to customers but subsidized by paid ads, Facebook would be free to individual users but subsidized by businesses. Indeed, as some Internet marketers have noted, creating engaging and eye-catching Facebook pages is already a lucrative business.
The phone company metaphor also fits in comfortably with Mark Zuckerberg’s statements about Facebook. As the founder noted in his IPO prospectus letter, “Facebook was not originally created to be a company … We don’t build services to make money; we make money to build better services.” Or, as NYU professor and Microsoft researcher Danah Boyd succinctly put it, “From day one, Mark Zuckerberg wanted Facebook to become a social utility. He succeeded. Facebook is now a utility for many.” Perhaps the model for Facebook’s valuation shouldn’t be Yelp or Groupon, but rather AT&T or Con Edison.
Although Facebook hasn’t announced any plans to charge for its fan pages, it is in a unique position to monetize social media. If — when — it chooses to charge for access to its hundreds of millions of users, questions about the site’s financial position will be rendered completely moot.