Vinny Lingham's Blog

In a CNet News post today, Google VP Marissa Mayer finally vindicated the model that Clicks2Customers uses in order to manage paid search campaigns. For a bunch of smart people, it’s certainly taken a while for this announcement. Clicks2Customers was founded on the belief that CPA/Rev Share marketing is the future, and to that end, we have even had interns compile sound economic analysis of why performance based marketing is the future of Paid Search.

SAN JOSE, Calif.–On the morning of day three here at Search Engine Strategies (“SES”) San Jose, Marissa Mayer, Google’s vice president of search product and user experience, gave her keynote presentation. She said a lot of interesting things, but of particular note to me was that she deemed cost-per-action (CPA) “the Holy Grail.”

According to Marissa, Google is making moves towards cost-per-action as a more ideal auction-based pricing model, but she also pointed out that it’s a long way away.

As quoted, Marissa Mayer states that the model is a long way away, as per my prior analysis on CPA posted last year (and also this one).

What Google realises, but often overlooks, is that affiliates have been successfully arbitraging CPC to CPA for longer than Google even begain doing paid search. We started Clicks2Customers in 2003 and that business quickly grew on the back of the fact there was considerably margin between CPC & CPA – and even today, there are still a number of affiliates out there that still do this very successfully. Clicks2Customers have since evolved the business to a CPA / Performance Marketing Agency, and are working more closely with clients than the traditional affiliate marketers. Our technology was built on the back of ROI creation from marketing campaigns based on CPC costs and therefore is far better aligned to what Google is trying to do, than many of our competitors.

If Google wants to accelerate their move to CPA, they really should focus on who the super affiliates are, and learn from them. Kris Jones put together a decent piece on how Linkshare acquired on of their top affiliates earlier this year. If Google is this serious about CPA – then Valueclick/Linkshare and the other affiliate networks become targets, if Google cracks what the affiliates have been doing all these years.

Saying that it’s a long way off is only true if in fact Google does not acquire the internal skills to do this. It’s very difficult for Google to justify the cost of hiring a top affiliate, as the top guys are pushing out $1m/year paychecks from CPC/CPA arbitrage and typically have their own businesses. There are at least a dozen world class CPC/CPA guys out there – so let’s see if Google makes the move and does an acquisition!

Last month, I made the “way out” prediction that Facebook would be sold for $10bn, probably to Microsoft. A couple of my readers asked for justification, and I basically gave the “this is war” approach – since then, I’ve given it further thought.

In this post, I will attempt to give a business perspective (as if I were running Facebook and trying to justify a value to buyers) on how to get to a $10bn valuation. Remember that Facebook has nearly 40m registered users who share their most intimate details with Facebook (in a structured format), in contrast to Google’s 124m users (which it knows nearly nothing about in general – as many are casual searchers) & Yahoo’s 127m users, many of which Yahoo has some data about – however disparate.

Facebook currently earns around $150m/year in revenue with a reported $30m in profits. On a 1% yield (100 PE), given that it’s a fast growing business, one could argue that it’s worth $3bn, based on it’s existing website advertising & gift revenues.

Now, how do we ramp up the other $7bn? Value add to the acquirer, of course – in my opinion, either Google or MSN (but let’s not discount Yahoo, just yet). Let me just touch on Google/MSN/Yahoo very quickly to put things in perspective.

Google currently earns around $5bn/annum in AdSense (3rd party advertising revenues). As a percentage of total revenues, it’s roughly a third – so one could argue that the AdSense side of the business is worth an estimated $50bn on valuation (as a % of Google’s total market cap). I’m not sure what Google’s market share for online advertising in the contextual space is, but it’s probably something crazy like 50%+, globally (if someone knows, please comment). What makes Google so powerful? It’s large distribution network of publishers, and specifically it’s global advertiser base.

MSN’s Content Ads is similar to Google’s Adwords/Adsense, except that Microsoft have gone after the ability to “boost” bid prices for audiences, based on demographic target, in addition to the contextual nature of the advertising. Google does not offer this functionality, as such, just yet.

Yahoo has a similar system to Google, with their Yahoo! Publisher Network. So, in short, Yahoo, Google & MSN have advertisers, and primarily contextual based advertising systems (contextual means that the advertising served to readers is based upon what they’re reading, not who they are – except for MSN).

Facebook has the data around users that MSN, specifically, needs to improve the ability for advertisers to target reader, regardless of which web pages they are reading. What is this worth to them? If we assume that if Facebook goes the direct route, and competes with Google/MSN/Yahoo for the contextual market, what would they have to do?:

1. Build a contextual advertising system (or partner)
2. Recruit web publishers & advertisers (or acquire someone like AdBrite, etc)
3. Create a more targeted version of AdSense/Content Ads/YPN – and serve more relevant advertising and compete with the big 3.

If they executed the above, would it be fair to say, that within 3 years, it is possible to assume that Facebook could acquire a 10% market share of the contextual advertising market. The question is, what is that market worth? Well, from the earlier points above, probably an estimated $10bn in revenues, and with revenue multiples of 10x, and if we’re probably looking at Facebook generating at least $1bn from Contextual Advertising, then the future value (looking forward 3 years), would be about $13bn ($10bn + $3bn of on site revenue).

Yes, ladies and gentlemen – I’m saying that Facebook probably has a net present value of $10bn, based upon the fact that it could become a credible competitor to Google, Yahoo & MSN in the contextual advertising market. In fact, it’s probably worth more if the titans got into a bidding war for it. Remember, if they get acquired, specifically by MSN, the 3 year period to build a user targeted advertising system would be significantly shorter and would put pressure on Google Adsense & Yahoo Publisher Network with respect to product offering to web publishers.

My $10bn Facebook valuation is based upon 2 things – A) Future value still to be unlocked & B) Strategic value to MSN/Google/Yahoo

Time will tell…

Update (Sep 2):  Mark Cuban released some thoughts on this topic – I hadn’t thought of the fact that FaceBook could license out the data – mainly due to the privacy issues of ensuring that the 3rd party companies do not subvert them in any way, however, if Facebook did walk this path – potentially $10bn is the floor valuation…

When Facebook announced their API Platform, and told developers to keep any revenue earned from it, I’m pretty sure they didn’t consult with MSN, specifically relating to their MSN AdCenter deal. Developers are trying to monetize their apps by running Google Ads within them and earning revenues, which effectively means that Google is providing advertising via AdSense within Facebook. How is that for a modern day Trojan Horse!? How will MSN respond? Probably with a $10bn check

Did you know that you can now send emails to people from within Facebook?! Pretty cool, I thought…then I did some testing.

If you send an email to someone who already is a Facebook user, even if you type the email address in, they receive the mail in their Facebook inbox. If they’re not a Facebook user, then they have to become one to retrieve the message… sheer brilliance! The catch is that you are not told this upfront, as you may be led to to believe that the user is receiving a normal email, but in actual fact, you’re helping Facebook acquire new users!

How much faster can Facebook grow? A lot, by the looks of things!

In keeping with Synthasite’s explosive Alpha launch, we decided to coincide the launch of our Beta with Guy Fawkes Day (5th of November)! Since the Alpha launch, we’ve been inundated with both end user & partner enquiries, and we thank everyone for all their feedback and support! We signed up over 6,000 users in less than 2 months and we’re now moving into a very exciting growth phase of the business, and we will be focused on a number of things in the Beta, including achieving some measure of scalability, as well as what you’ve all been waiting for…

So, what are the top 3 major features that will be released in the Beta?

1) The ability to publish your Synthasite created website on a subdomain of Synthasite.com (xyz.synthasite.com) with free hosting
2) You will be able to download your website, and host it on your own domain and server (and edit the PHP code if you so choose)
3) Multiple website templates for use in publishing

What’s after Beta?

We have a great roadmap ahead, but our focus is to release the Beta, which is a major milestone, with the core architecture that will allow us to quickly add new features in the weeks and months that follow! Thanks again to everyone for their support!