Is Facebook cheap at $50 billion? Lots of people with money think it is.Loaded Goldman Sachs clients are lining up to invest at that valuation.
Other investors are even buying the stock at $90 billion and $124 billion valuations on secondary markets.
Are they nuts? Maybe. (The latter folks certainly are. Either that or brain dead.)
But Facebook has a plan that could make Goldman’s clients look sane – and very, very rich.
It all starts with Zynga and Groupon.
Zynga, the maker of games like CityVille and Farmville, is now valued at $5.5 billion on secondary markets. That’s more than video game industry giant Electronic Arts.
Kleiner Perkins partner John Doerr says “Zynga is the largest, most rapidly growing, most profitable company, with the most happy customers that Kleiner’s ever invested in over its life.”
Groupon just raised $950 million at a $6.4 billion valuation – only weeks after turning down a $6 billion buyout offer from Google. It has been called the fastest growing company in the history of business.
And all that’s really impressive.
But what’s really amazing is that Facebook makes loads of money from both of these companies and their competitors.
Groupon and all its clones buy lots of Facebook ads – about a third of all the ads Facebook sells, in fact, a source at a Facebook-ad buying firm tells us. Zynga and the other social games publishers buy another third. These gamesmakers also pay a 30% tax to Facebook for use of its credits system. Facebook revenues from the games business was around $400 million in 2010, we recently heard.
So, what does this tell us about Facebook?
It tells us that Facebook is not really in the advertising business. It’s also not really in the virtual currency business.
Facebook’s business is taxing other businesses that figure out ways to make money off of social networking.
This is Facebook CEO Mark Zuckerberg’s plan for the company.
He said as much at the Web 2.0 conference in Silicon Valley last Fall:
“Over the next five years, most industries are going to get rethought to be social and designed around people…A social version of anything can almost always be much more engaging and out-perform a non-social version.
There are going to be some really good businesses built.
Our view is that we should play a role in helping to re-form and re-think all those industries, and we’ll get value proportional to what we put in. In gaming, we get some percentage of the value of those companies through ads and credits. But that’s all because we’re helping them.
If we’re helpful to other industries in building out what would be a good solution then there will be some way we get value from that. “
You can watch him say these words here:
So how does “the Facebook tax” make $50 billion seem cheap?
If Facebook is “cheap” at $50 billion, it is going to have to become bigger than Google, which is a ~$200 billion company after 10 years.
That sounds like an impossible task.
But, even with its explosive first 10 years, Google has always had a weakness.
It’s a one-trick pony. It makes almost all of its money from one business, search. For years, Google has tried to pick up a second growth engine the way Microsoft found Office after Windows growth stalled in the 1990s. We’re still waiting.
Unlike Google or Microsoft, Facebook won’t have to figure out how to diversify its revenue. It just has to sit back and wait for the next Zynga or Groupon, design a way to tax that business (the way it suddenly sprouted Facebook Credits when Zynga got huge), and profit from the tax.
That’s what has to happen to make a $50 billion valuation look cheap right now.
Can it? Our guess is as good as yours.
In any event, here are some industries where new companies might soon find themselves paying taxes to Facebook:
- Film industry. People watch movies together. We can imagine a business where a $2 movie rental gets cheaper and cheaper as more friends sign up to watch it (and pay a little each.)
- Book publishing. Book clubs are huge, so we know book reading is social. A Kindle book costs $9.99. Maybe if a book club of 5 agrees to buy 5 copies, it can cost them $4 each.
- Ecommerce. You’re already siging into this site with your Facebook ID and paying for your FarmVille seeds with Facebook credits. You don’t think you’ll be using your Facebook ID to buy stuff from online stores in a couple years?
- Online dating. There’s no hotter public company right now than Facebook dating app, Are You Interested? The one-time penny stock is up 1000% in recent weeks. Where do you think it spends its marketing budget?