Where could Facebook’s value come from?

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FACEBOOK IllustrationsImage by escapedtowisconsin via Flickr

By paying $200m a 1.96% stake in Facebook, Russian investors Digital Sky Technology put a $10bn price tag on the social networking site. There has been much discussion today about whether Facebook is actually worth this amount of money. Whether the social networking site can realise enough revenue to make this a viable valuation. In essence they are asking why would somebody pay $10bn for Facebook.

Of course, this is, to some extent, a fallacious question. Investors in Facebook are unlikely to be basing their decisions on what Facebook currently is, but on what it will become. They are taking a gamble, as any investor does, on the future development and position of social networks online (and of the role of Facebook in this space).

So, where could the value come from Facebook? Rather than debate the opportunities for realising advertising revenue, I suspect the real value comes from looking at the way the internet is developing. We’ve seen a constant increase in the amount of time that people spend in social networks – we know that they are spending more time in social networks than in email. The role of social networks is changing, and it is in this change that investors may be seeing the potential return from the likes of Facebook.

Social networks have developed in the last few years from being sites that people visited when they wanted to find and connect with old school friends (for example), to sites through which people begin to manage and co-ordinate their social lives. And as these sites become ever more important in this role, they take on a greater importance in the online mix. We find and keep in touch with our friends through sites like Facebook. We plan events and record our lives. They have moved from being sites that we visit irregularly to places where we spend an ever increasing amount of our time online.

Social networks are developing to become the critical destination online for many people. Their share of time online has increased and will continue to increase. And alongside this will increase another measure – the share of ideas. It is the value of both of these that investors are considering.

The internet and online services are central to our lives and social networks are playing an increasingly pivotal role in this. The value in sites like Facebook is not potential revenue from advertising or even from the data they hold on members. The value is to be poised to capitalise upon the growing importance and central role that these sites will play in our online lives (and indeed the continuing growth of importance that online plays in our lives overall).

So people are investing in the future. But they are also investing in the potential future development and role of social networks. Sites like Facebook are to become an even more central part of our entire online experience and of our offline lives too. This is a powerful role that investors want to be part of.

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