This will really turn Facebook into a far more viable tool for managing social network contacts, IMHO.

For those of you who weren’t following the Facebook beacon fiasco – it’s become quite a nightmare for Facebook and they have already capitulated. Facebook needs to hire some seriously top notch Internet Marketers – and not make old school mistakes like this – I wasn’t impressed with the invasion of privacy either.

The $15bn valuation only holds true if they can crack Google Adsense (IMHO) – with moves like this, it doesn’t look good at all!

Two important points to note: Yahoo & MySpace are not participating in the war on Facebook – and I do mean it’s a war, as just about everyone else is pushing for open standards (which I totally support!!).

Now the question is: Google & friends vs Facebook – who wins? It’s like the big question of Alien vs Predator in a way . I’m going to stick my neck out here, and say that I think Facebook has met it’s match and Open Social will eventually force them to comply with more open standards.

Who knows, maybe the big loser here is actually Microsoft with their $15bn valuation on Facebook!

Allow me to quote my favourite comedian, Russell Peters : “Somebody is going to get a hurt real bad!”

I’ve been reading up elsewhere, and it seems that Facebook is the #4 accessed site in the world – I’m anxiously looking forward to hearing about their advertising platform plans – if they can crack the demographic targeting it will become interesting.

On another note, it seems that Google may have outsmarted Microsoft, according to this article and backed up by reports on TechCrunch today that Google is planning to launch their own social network. If so, it was a smart moving on Google’s part by being a shill bidder at an auction with Microsoft holding the buyer’s remorse cap!
Steve Ballmer has said that 25% of Microsoft’s revenue will eventually come from advertising – that would be an impressive turnaround to see – given that the current number is 5% – the Facebook deal is obviously just the first step on that path.

I really like what Google is apparently planning on doing with their open API’s – and given Google’s background in pageview monetization, Facebook have an uphill battle on their hands to actually make money and justify their valuations.

Are we in a bubble? No. Are valuations high? Yes – but only because the paradigm of small domestic markets is dead – the Internet is a global marketplace of goods & services with over 1bn participants actively contributing to the growth in some way. The startups of today are justifying valuations on the back of solid business plans and proven revenue models and they are no longer limited to their own geographies.

Web 2.0 is turning out the way Web 1.0 was supposed to go, but wasn’t ready for it…

When I wrote about my justification on why Facebook was worth $10bn a month ago, I had a lot of skeptics who thought that I was smoking some really good stuff. In fact, I saw quite a few visitors on my blog from Redmond – heck, maybe I even helped the deal go through

At the end of the day, valuations are really about willing buyer, willing seller, and perceived value to the buyer (based on the value that they can extract from the deal). I’ve always said that Microsoft is the most likely buyer here, and I don’t think that Google will get this deal in the bag – in fact, it looks as if Google is going to use Orkut to compete globally.

Facebook holds the biggest opportunity to provide demographic targeted data to advertisers, and the valuation sounds about right, based on that rationale, and all the other metrics combined. Google is not going to take this standing down – watch out for an Orkut retaliation.

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…

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!

I think this is the first mention of it anywhere, and the official launch is actually only next week, but the reason I’m blowing the lid on it, is that I’ve written a nice piece on my section regarding FaceBook & Politics, which I wanted to link to from this blog – I promised that my readers won’t crash the server!

Congrats to Matt & Vincent over at M&G and best wishes on this new offering!