This article will address:
1. The opportunity Facebook presents and how it could be a game-changer.
2. Why I think Facebook is worth more to certain companies than to investors.
3. Some logical prospective buyers for Facebook.
4. The company that could do the most with Facebook.
5. The company that most needs to buy Facebook.
6. Some companies that could be negatively affected if either Microsoft or Apple were to buy Facebook.
The Rise of Facebook:
Facebook has quickly come from nowhere to be the most visited website in the U.S., surpassing Google, and during the twelve month period March to March had a U.S. traffic growth rate 20 times more than Google. That is an amazing statistic. Facebook reached 100 million members in August 2008 and only two years later had over 500 million registered members worldwide and about 150 million in the U.S. Many of Facebook’s members use Facebook to communicate with friends and business associates and visit Facebook daily. An increasing number of people in their 40’s, 50’s and 60’s belong to Facebook and an increasing number of corporate ads say “Visit us on Facebook”.
I think Facebook has become so strong that it has a broad moat and can’t be replaced - it is used by too many people as a way to communicate and stay connected. If you aren’t that familiar with Facebook, ask your friends and co-workers. I don’t write this because I’m a big Facebook fan - I don’t use Facebook on a daily basis
There are 5 facts that got my interest:
1. In March, 2010, according to Experian Hitwise, Facebook became the most visited website in the U.S., overtaking Google. That is startling, but what is even more startling is that for the week ending March 13, 2010, "The market share of visits to Facebook.com increased 185% last week as compared to the same week in 2009, while visits to Google.com increased 9% during the same time frame." Hitwise says that together Facebook.com and Google.com accounted for 14% of all US Internet visits in that week in March. In the one year period (March 2009 to March 2010), Facebook went from about 2.5% of all internet searches to 7.07%, a staggering increase. (1)
2. About 150 million Americans belong to Facebook.
3. Facebook hit 100 million members in August 2008 and two years later had over 500 million members. It reached a critical mass and has blown away the competition.
4. Major corporations are now simply advertising “Visit us on Facebook” instead of giving a web address. The apparent presumption is that everyone is on Facebook! Going straight to Facebook bypasses search engines, sends traffic directly to Facebook, and increases Facebook’s importance as an internet portal. When I saw this I realized how ubiquitous Facebook has become.
5. Reports indicate that Google sees Facebook as a threat.
Opportunities Facebook Presents:
Facebook’s traffic, traffic growth and position as the entrenched social networking website give it the potential to threaten some major companies. For example:
1. Facebook could become a major search engine and cause a reduction in Google’s market share. According to reports, there were 647 million U.S. searches conducted on Facebook in March, twice as many as the prior March. That is still much lower than the 10.5 billion searches generated on Google during the same month, but it might be the tip of the iceberg.
2. Facebook could become a facilitator of third-party online sales similar to Amazon. It could start as a facilitator who takes a commission and then move into direct sales based on the knowledge it gains as a facilitator and transaction processor. In 2009, it is reported that 30% of Amazon’s sales were third-party sales.
3. Facebook could begin offering an auctioning system like eBay.
The list of online services Facebook could offer is endless. For example, streaming video is one. Facebook reportedly already knows quite a bit about its member’s interests, so product offerings could be targeted based on interests.
The point is that Facebook’s huge membership and traffic create huge opportunities. Think about it - social networking isn’t a commodity like doing a web search where you can choose between Google, Bing, Yahoo or others. There is no viable alternative to Facebook and its massive membership creates a powerful moat. What if you had access to 500 million members and a moat to protect your position? What could you do with that?
Why I Think Facebook is Worth More to Certain Companies than to Investors:
Facebook offers many opportunities, but it will cost a lot of money to achieve them. In spite of the huge traffic, Facebook only achieved positive cash flow in September 2009. 2010 revenues are projected at $1.1B, only a 38% increase from 2009. Facebook has a lot of traffic but investors will be skeptical of its ability to turn that into profits, particularly since its CEO is only 26 years old. On the other hand, what is the potential if Apple or Microsoft owned Facebook? I think the potential synergies make Facebook worth more to Apple or Microsoft.
Some Logical Prospects to Buy Facebook at the Right Price - Who Can Afford It, Who Needs it the Most and Who Could Do the Most With It::
Below is a list of some companies that I think are logical prospects to buy Facebook at the right price. I don’t think all of them can afford Facebook and I doubt that Google would be approved to buy it due to antitrust concerns (antitrust concerns killed the Google -Yahoo search ad deal in 2008):
1. Microsoft - Microsoft needs Facebook more than Apple or Google. Facebook could be a way for Microsoft to seriously compete with Google, Apple, Amazon and eBay and could give Microsoft an advantage in a large number of emerging businesses such as streaming video. Microsoft needs to do something - this could be it. Microsoft is sitting on $36.79B in cash and short-term marketable securities which should be much more than is needed to buy Facebook. I think Facebook might be Microsoft's best bet for the future. Microsoft already owns 1.6% of Facebook and is Facebook’s exclusive partner for banner advertising, so it probably has less of an antitrust problem than Google. Recently, Microsoft's Market Cap was $222.66B
2. Google - The main reason Google should buy Facebook is to prevent Microsoft or Apple from buying it, but it seems unlikely that Google could gain approval due to antitrust concerns. You might ask: Why couldn't Google just develop their own Facebook? The reason that won’t work is because Facebook has become the dominant website of its type and the resulting network effects provide a substantial moat. Google has $30.06B in cash and short-term marketable securities. Recently, Google's Market Cap was $161.37B.
3. Apple - Apple could probably do more with Facebook than any other potential buyer. Is there anything they can’t do? Facebook would give Apple access to 500 million members. It would be a way for them to compete with Google and would allow them to enter and probably dominate a large number of emerging businesses. Does anyone doubt that Apple could build a great search engine? I would try it… wouldn't you? I think Facebook members would be thrilled if Facebook was bought by Apple. Could Facebook take on Google or Amazon by itself? That would be tough, but if Apple owned Facebook, it could. Apple has $24.3 billion in cash and short-term marketable securities and an additional $21.55B in long-term marketable securities. Recently, Apple's Market Cap was $240.25B
4. Amazon – Amazon should be interested in buying Facebook, but I think it would be a stretch. It has cash and short-term marketable securities of $5.11B. Recently, Amazon's Market Cap was $57.13B.
5. eBay - eBay should be interested in buying Facebook, but I think it would be a stretch. It has cash and short-term marketable securities of $4.9B and an additional $1.83B in long-term marketable securities. Recently, eBay's Market Cap was $28.15B.
6. Yahoo – Yahoo should be interested in buying Facebook, but I think it would be a stretch. It has cash and short-term marketable securities of $3.24B. Recently, Yahoo's Market Cap was $19.71B.
In Summary:
Due to antitrust concerns, I do not think Google is a prospect to buy Facebook. I think Apple and Microsoft could do the most with Facebook and therefore should be able to pay the most. Both Apple and Microsoft seem to be able to afford Facebook, which has a current estimated value in the $11B to $23B range, based on various online reports. I don’t know what Facebook is worth, and what it is worth will vary from buyer to buyer based on what they think they could do with it, but it was reported in April 2009 that the Facebook owners thought it was worth $6B, so a price in the $11B to $23B range would be a big increase in a short period of time. I am skeptical about Facebook’s current management being able to achieve the company’s profit potential. I think Microsoft could benefit the most from purchasing Facebook because it could lead to growth opportunities that Microsoft needs. On the other hand, based on their track record, I think Apple could probably make the most of the opportunities Facebook offers. The acquisition of Facebook by either Apple or Microsoft could negatively impact other large companies such as Google, eBay, Amazon and Yahoo, and smaller companies such as Netflix.
(1). From http://weblogs.hitwise.com/heather-dougherty/2010/03/facebook_reaches_top_ranking_i.html, Facebook Reaches Top Ranking in US, March 15, 2010, Heather Dougherty, Director of Research at Hitwise
Disclosure: No positions in referenced companies.
Copyright Jack Huddleston, 2010
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Jack Huddleston, http://www.jamesjackhuddleston.com
