The following is the first half of an analysis of Facebook’s revenue potential by Jason Calacanis at LAUNCH.While the chattering class wonders if there’s an upper limit to Facebook’s valuation (and throws around that “bubble” word again) our LAUNCH analysis suggests the company is holding back on the throttle.
We believe they may actually be under-monetizing by a factor of three or more.
If so Facebook’s true 2011 revenue could potentially blow away the ~$4B figure that’s been widely leaked by as much as 3x — for a truly staggering $12B.
Carrying forward to 2012, $6B in revenue could actually be closer to $18B. That would put the then 8-year-old company at nearly half of Google’s 2012 projected $40B. Assuming a 35% margin, this would imply net earnings of $4.5B in 2011 and $6 billion plus in 2012.
Combine that with a 20x forward-looking EBIDTA multiple, as appropriate for such a fast-growing company — and Facebook cruises neatly to a $120B valuation.
And that’s just next year, 2012.
Suddenly the question of why Goldman’s a buyer despite the $50B valuation (not to mention rich civilians paying even more on the secondary market) may make a little more sense.
Now, it’s common for pre-IPO companies to sandbag their performance and use the old “UPOD” approach to save some bullets for a rainy day, but Facebook’s under-monetization may be unprecedented. We’ve drilled down into eight units we’ve identified to demonstrate just how.
(that stands for underpromise and overdeliver in case you’re wondering)
Responsible for this conservative strategy is none other than the motherly business genius that is Sheryl Sandberg. It’s the same approach she employed cannily for Google which — come to think of it — has missed earnings expectations just four times in 27 quarters and has always grown, even in a down market.
Mark Zuckerberg famously doesn’t love playing the expectations game, but when you’re a public company, earnings are essential to keeping stock prices up — and employee stock options from going underwater. Just ask Google, which recently thumbed its nose at Wall Street with a disastrous result.
Here are eight ways Facebook could grow revenue by three times almost instantly.
We took a little time to have these features mocked up by a designer friend of ours who really didn’t appreciate us slamming him with short-notice work. But he did a killer job anyways — thanks Gene!
(hmmm… if only we had a designer to do these more often, in exchange for a link — hint, hint)
We’re hoping this little brainstorm gets product geniuses like Kevin Rose and Excel nerds like Henry Blodget to expand (and correct) our assumptions.
Jason + the LAUNCH team
1. FacebookSense Attached to Every Facebook Like Button
Over 2.5M sites have “integrated” with Facebook’s platform (Facebook Connect, Like buttons), and an average of 10,000 sites come on board each day. LAUNCH believes Like buttons are a Trojan horse for Facebook to launch an advertising network for publishers.
rumours about this network have floated for a long time, and our sources say it will launch shortly before or after its IPO. This service would challenge Google’s AdSense business for publishers, which accounted for 30% of Google’s revenue in 2010 (or $8.8B).
In the screen shot below we show the familiar Facebook Like box on the New York Times showing your friends who have also liked the New York Times. Also included in the box is a video advertisement for the second season of The Walking Dead. You’ve been shown this targeted advertisement because you are reading an article about TV and because you’ve liked one of 20 dramas that correlate with folks who already like The Walking Dead.
Depending on how aggressive Zuckerberg feels at the moment, Facebook could make these ads default or even mandatory. Remember, Zuck is the product designer who thought it was fine to post your movie ticket purchases on your wall without asking, let you be tagged in photos without your permission and allow you to be added to groups you didn’t actually join (by way of your mischievous friends).
In fairness, Zuck’s aggressive product nature leans toward human interaction and viral momentum at all costs — not revenue. All of Google’s serious publishers would experiment with FacebookSense, and if they captured just 10% of the market that would be $880M a year.
Total FBSense revenue potential: $3.9B/year
2. In-stream Advertising
Currently, Facebook limits advertising to the right hand column of its pages. Twitter, Google and every other Internet advertising player at scale places units in the main column as well.
Side advertisements on Facebook typically have a CTR (click-through rate) of 0.051% (down from 0.063 in 2009).
Main column advertisements perform at least double that, with a CTR of around 0.1% in 2009 (2010 data not yet released). If users were willing to see just one advertisement every every other page on in the main column of Facebook — as opposed to the three out of four you typically see on Google searches — Facebook would double its advertising base.
The maths is simple on this: doubling the CTR half of the time means the main column would earn roughly the same as the right-hand column (less a slight drop in right-hand clicks due to left hand clicks on 25% of the pages). If 75% of Facebook’s revenue comes from these ads, and it’s on track to make $4B in 2011, that’s an additional $3B.
The mockup below shows a typical news feed with an advertising unit for a Groupon targeted to the user’s city, relationship status and likes.
Total Facebook in-stream advertising revenue potential: $3B/year
3. Marquee Video Ad Units
If you’ve been to YouTube, the New York Times or the Wall Street Journal this year, you’ve seen “marquee” style ads. These enormous ads run the width of the page (typically ~1,000 pixels) and contain an autoplaying video. The CPM for these units is extraordinary, with top properties charging averages of $10-$15, while a recent rate card listing for WSJ.com put a pre-roll video ad at $75 CPM.
If Facebook were to show one marquee per week to 500 of its 700 million members at a $20-$35 CPM, the firm would net $10M-$17.5M a week — or $520M-$910M a year.
Based on YouTube’s continuing massive growth, we think users would be willing to see two or three of these per week provided they were quality advertising. Every other day, 182 days a year, at $10M a day, would push Facebook to up to almost $2B in additional revenue.
The emergence of this advertising unit would, in fact, rock the advertising world. We can’t find another 250M+ user/$10M+ a day ad unit. YouTube reportedly costs $375K a day, and a Yahoo homepage takeover is $1M day.
Are there advertisers who could even afford to spend $5M-$10M in a single show with Facebook? If the sold-out Superbowl is any indication, car companies, blockbuster movies and CPG companies should line up for a chance to have one of the 182 “market to the entire world” Facebook take overs. (Note: We made up that tag line “market to the entire world,” and yes we know it’s obnoxious and incorrect, but we’re channeling an overzealous sales manager looking for a $100K commission.)
In the image below, we see a marquee unit on Facebook neatly fitted below the top userbar.
Total Facebook Marquee revenue potential: $520M-$2B/year
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