Is Facebook Worth $1bn?

I guess it depends on who is buying it.

I am a shareholder of Yahoo! and I wouldn’t be upset to see them pay $1bn for Facebook. They need a strong social networking platform and 360 isn’t going to cut it.

News Corp paid half that price for MySpace and time has shown that to have been a smart purchase.

Clearly Facebook doesn’t have the same traffic that MySpace has.

According to Comscore Media Metrix, MySpace had 55mm unique visitors last month and Facebook had about 15mm. So MySpace is almost 4x bigger than Facebook.

And Facebook isn’t growing that fast. Here’s a Comscore Media Metrix chart of Facebook’s growth in page views over the past year.

In fact that chart shows another of Facebook’s challenges. They have a seasonal business. When their students are on summer break, traffic goes down. So it’s not surprising that they made the decision this summer to open the service up to everyone.

I asked Jessica, who is a Facebook fan (she switched from MySpace when she got to high school) about the possibility of Yahoo! buying Facebook. She was fine with it, as long as "they don’t change it". She’s not happy about the opening up of Facebook to everyone. She liked it because it was exclusive. Not everyone could be a member.

When I told her I had a Facebook profile last month, she was shocked. That shouldn’t happen in her view of Facebook. She says that MySpace has "sketchy old men" on it and Facebook doesn’t. She’s worried that Facebook is going to become another MySpace and if it does, she’ll move on.

So Facebook and Yahoo! or any other buyer faces a difficult choice. Open up Facebook and let it compete on a level playing field for UVs and PVs with MySpace or keep it closed and limit the upside.

The $1bn price tag that has been floating around makes this choice even more difficult. I am going to need some help from all of you so please chime in on all these assumptions in the comments.

Let’s say that you think Facebook will get to 10bn page views a month shortly. Let’s give each page an effective CPM of $1. Then that’s $10mm per month in revenue. I am not sure if I should add the Microsoft deal to that number or not. I’ll hedge and say that they can be a $150mm/year revenue company near term staying fairly closed.

But if they open it up and get to MySpace numbers (~35bn page views a month), they could be a $500mm/year revenue company near term.

The latter approach could easily justify a $1bn number from Yahoo! But it also would require them to really open up Facebook and that could sow the seeds of its eventual decline.

The other issue is how much margin is in the business. At face value, it seems like a fairly low cost business to operate. They don’t produce content, their users do that. They develop and improve the service and operate servers and buy bandwidth. It wouldn’t surprise me if Facebook could produce $50mm of EBITDA on $150mm of revenues. So $1bn would be 20x cash flow on a theoretical near term revenue number. Again, please chime in on all these numbers, this post is a rumination more than anything else.

Doesn’t sound too bad to get a premier social networking platform with some unique properties. I think Yahoo! shold pull the trigger on the deal and commit to keeping Facebook a lot more protected than the wide open MySpace. I think that strategy should work for them.

Here’s Michael Parekh’s take on the deal. He likens it to a return to Broadcast.com and Geocities days. Sure, there are some similarities, both the billions on the end of the price tag and the kinds of services they represent (video and community). But this time around, the price tags have some relationship to earnings and cash flow. We may be in a bubble of sorts, but it’s a different kind of bubble for sure.