Facebook recently took in a new $200 million investment which puts the value of the company at $10 billion. That is down from a $15 billion valuation based on an investment that Microsoft (MSFT) made in the social network site in the fall of 2007. Most industry estimates are that Facebook will lose money on revenue of $500 million this year. News Corporation’s (NWS) purchase of MySpace and several smaller sites for $580 million in 2005 is still considered a coup, although MySpace revenue is less than $1 billion and it is losing ground to Facebook.
MySpace and Facebook could hardly be considered financial successes. Their values are based on the huge number of people who visit the community sites and keep personal information on them. In April, according to comScore, MySpace had 71 million unique visitors and Facebook had 67.5 million. The valuation assumption for the companies is based on the premise that traffic has inherent value particularly for sites that reach a very large percentage of all Internet visitors. The total number of US visitors to all websites was 193 million in April.
Facebook gets a premium valuation because of its rapid growth. Its visitor base grew 10% from March to April, an astonishing increase given the site’s size. Yahoo! has a market cap of $22 billion and annual revenue of $7 billion. It is penalized because it is no longer growing rapidly.
A review of the value of the largest Web 1.0 sites, most of them launched in the early 1990s and taken public later in the decade shows that Facebook and MySpace may eventually be worth almost nothing if they cannot create ways to make substantial amounts of money. They may even cease to exist as independent operations and their brands could eventually disappear.
In late 1999, AOL, a public company at the time, had a market capitalization of $193 billion, about the same as IBM’s (IBM). Yahoo!’s market cap was $97 billion. These huge numbers were based on their shares of the Internet user base at the time more than they were on revenue. Yahoo!’s market cap was over 80 times its 1999 revenue.
In 1997, before there was much consolidation among the largest internet companies, the dominant websites based on visitors were AOL, Yahoo!, Netscape, Microsoft (MSFT), Geocities, Excite, Infoseek, Webcrawler, Lycos, MSN, Digital.com, Prodigy, ZdNet, Switchboard, and Compuserve. Several of these sites were the equivalent of the current search engine and portal sites. Others were internet service providers. The astonishing fact about this list is that nine of the fifteen companies and their brands are either completely gone or are so small that most people who use the internet would not know them. Excite once has a market cap of $35 billion. Geocities, the Facebook of its day, was sold to Yahoo! for $3.6 billion. Netscape’s value at the end of its first day of trading as a public company was $2.2 billion and at one point that figure reached almost $10 billion. Lycos had a market cap of $6 billion.
The problem encountered with most of the prominent Internet properties in 1997 is that they never brought in any significant revenue or made any money. Netscape had sales of $120 million in the first quarter of 1997 but never did much better than breakeven. Geocities lost $9 million in 1997 and $20 million in 1998 just before it was sold to Yahoo!. The company never generated even $20 million in one year.
The top fifteen sites based on US visitors in April is dominated by mature and profitable companies including Yahoo and Google (GOOG), and successful e-commerce sites including Ebay (EBAY), Amazon (AMZN), and Apple (AAPL), and media company sites including. CBS (CBS), Turner, and Viacom (VIA). With the exception of two non-profit sites which make the cut-off, Craigslist and Wikipedia, the list does not have any sites that are likely to disappear because they cannot find a way to be financial successful. Each is a substantial, viable business.
MySpace, Facebook, and Twitter are not viable businesses, at least not yet. They are web operations with phenomenal growth which may have no prospects of developing business plans that may get their revenues well into the billions of dollars and make them extremely profitable. But, their attempts to create real businesses of any kind may stall.
Yahoo! recently closed Geocities. When the portal company bought the community site, it had more visitors that any web destination except AOL and Yahoo! MySpace and Facebook could still be colossal failures.
Douglas A. McIntyre
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