Facebook is currently valuated between 50 and 80 bn . Microsoft and Apple are valuated at about 250 bn each.
Why is Facebook valuated so high? After all it is just a website. Microsoft or Apple make actual products (both hardware and software), have offices around the world, employ thousands of people and yet they are valuated at just 4-5 times the worth of Facebook.
And Facebook is not the only case, I see similar valuations for other popular websites.
Why are websites valuated so high? I mean, tomorrow a new site might appear and people start moving there and abandon Facebook, the valuation would drop to zero. At least a more traditional business like Microsoft, in the unlikely event that they go belly up, they would still have a ton of assets to liquidate.
Is website valuation a repeat of the dotcom bubble?
Your right but what is Google? It’s just an algorithm backed up with ads. Look what happened to Digg.Com. It’s still around but worth far less than it was years ago.
I don’t know what the true valuation of Facebook should be. The market has converged on a number for it right now and it is as real as any other company’s value. Your characterization of saying it is just a website isn’t very ingenious however. Amazon.com is just a website and it started out as just a way to sell books over the web and now it is a huge company that sells just about everything. Microsoft wasn’t that different when they started either. They just sold and marketed computer code often based on other people’s previous work who didn’t realize what it was really worth.
Mark Zuckerberg doesn’t run Facebook out of his basement these days. It is a large and extremely fast growing company with the same types of employees that every other company has plus massive cash buy what it needs. You are only thinking about the part of Facebook that you personally see and use which is probably the point of confusion. That is just the tip of the iceberg. They have incredible amounts of personal data on hundreds of millions of people which is largely unexplored territory in targeted marketing. Based on their algorithms, they can identify your family members and probably also that girl you went out with a few times 15 years ago and then lost track of. They are building this incredible web of data of individual’s personal relationships, history, and preferences and how they all fit together as a group. That is not only useful in business but also for science and even intelligence gathering. The possibilities are endless.
One big reason is that it isn’t just another website is the amount of data they have at their disposal to store and analyze. We aren’t talking about a few servers. They have to have dynamically scalable data centers that can potentially handle hundreds of thousands of servers just to show you what appears when you search for a person or add a friend and sell valuable data to others. Google is same position. Once a web based company scales up that high, the barrier to entry for new players at the same level is exorbitantly expensive. It is possible that some new startup could eat into their market share but that will soon be like someone writing a new operating system from scratch and trying to take on Microsoft. There is a huge resource inbalance that makes direct competition less likely the bigger they get and Facebook could always just buy any startup with a really promising idea.
Shagnasty really hit the nail on the head, certain companies like Google and eBay are so far ahead of the curve it’d be hard to bring them down. But it’s not impossible, but Google and eBay are examples of “effective monopolies.” This means for all purposes they control the market, though in fact anyone can still compete with them.
But there is room for people to pull sections off of these big companies. For instance, eBay started out basically as an online garage sale. This aspect of eBay has pretty much been lost. Another company with capital and right marketing could bring back this “online garage sale” concept.
Marketing is very important, for example eBay really took off when Rosie O’Donnell started saying how great it was, every day on her afternoon talk show. This drove people to the site. And since, Rosie had nothing to do with the site, the endorsement was taken seriously.
Google has really become a shell of its former self, with scraper sites dominating the results, and it would be ripe for someone to start stripping bits from it. The problem is, you’re going to have to lose money for years before you could damage Google enough to switch.
MySpace still is big, though now it is decisively “uncool” especially when compared to Facebook. Facebook could suffer if someone popular enough was to get the message that Facebook was uncool.
If you rephrase the words, it will make more sense.
Why is [a company with terabytes of social data, and patented algorithms to data mine it, and an applications platform that 3rd-party programmers use, with millions of sticky users, etc] valuated so high?
Any company with those characteristics will be worth a lot. You don’t even need a website with millions of users. UPS Logistics (United Parcel Service Logistics) … the same company that delivers packages in their brown trucks has a separate division that sells transportation logistics to other companies. That information heavy business depends on terabytes of detailed data about streets and addresses (e.g. optimize driving for minimal left turns, etc). They also have more terabytes of data about each countries convoluted tariffs and duties. If you wanted to set up a complicated global supply chain, their knowledge base may be of use.
Facebook required real programmers to build them, just like Microsoft required programmers to build MS Office or MS Windows. Those Facebook applications required hundreds of man-years to build. Sure, you can throw up a new website with some HTML in 2 hours but it would be missing the entire backend processing to make it functional and reliable for millions of users.
But it’s not just the migrating users that dictate the ecosystem. As mentioned previously, you also have thousands of 3rd-party programmers writing games and utilities on top of the Facebook “platform”. Facebook also has hundreds (thousands?) of contracts with businesses for cross marketing, exposure, interaction with its users. This would also have to be replicated at the new site. In other words, there’s a tone of inertia involving multiple parties that would have to be overcome. It’s not impossible but it will take an incredible value proposition to dislodge Facebook at the moment.
The dotcom bubble had companies with zero profits attracting speculation (pets.com, ValueAmerica.com,) . Facebook already makes a profit today. Facebook may be overvalued, but at least it generates real profits to help investors evaluate the potential.