The New York Times’s curtain-raiser on the Facebook IPO this morning asks, “Personal Data’s Value? Facebook Is Set to Find Out.”
But is that really what Facebook is set to find out? The Times says about all this private data: “It is a siren to advertisers hoping to leverage that information to match their ads with the right audience.”
You would think so.
But perhaps there’s a more basic and old-media explanation for why Facebook is expected to debut at a $75 billion to $100 billion valuation: It’s a fast-growing company with lots of eyeballs that already make the firm tons of cash, even if it’s curious why they don’t make it more.
Facebook made a billion-dollar profit last year on $3.7 billion in revenue, which jumped 88 percent from 2010. It has 845 million monthly users, up 39 percent from 2010. And no wonder, with a business like this:
Facebook has deftly kept more and more users on its site for hours every day. Its users can stream music, read the news, play virtual games, check horoscopes or upload family pictures — all without leaving Facebook’s orbit. They reveal to the company not only their names (Facebook prohibits pseudonyms) and hometowns, but also their friends and family members and their tastes on everything from pop music to politics.
Facebook offers advertisers a giant basket of information so they can find precisely the audience they covet: a Boston woman who posts that she is “engaged” may be offered an ad for a wedding photographer on her Facebook page, while a Bombay bride-to-be might see ads for wedding saris. Similarly, every press of a “like” button on Facebook signals a consumer’s preferences and shapes the ads that are shown. The Facebook Connect service allows users to log into millions of sites using their Facebook username and password — and it can report back about their activity on those sites, amassing even more data for Facebook’s trove.
It certainly doesn’t seem that Facebook’s hoard of private data is making its ad space worth more than others’. Indeed there’s another way to look at this: Why does Facebook makes so little money off each of its users?
That $3.7 billion in revenue last year comes to about $4.38 for every user of the service, or a bit more than a penny per day. You can look at this a couple of ways: One, it’s so low that the company has got a lot of upside. Two, why isn’t it already much higher?
After all, old-school media companies like newspapers, after all their woes, still take in hundreds of dollars in ads per reader per year, with relatively primitive data. More to the point, the newspaper industry takes in more than ten times the ad revenue per reader online that Facebook does (I’m talking about the amount of revenue of all newspaper sites combined from an average single reader).
Now, granted, I’m using Facebook’s average global numbers. A user in Uruguay is presumably worth far less in ad revenue than one in Utah. Facebook says 44 percent of its revenue came from outside the U.S. That would imply roughly $1.77 billion of its ad revenue came from the U.S. Roughly 150 million to 160 million Americans (the company combines U.S. and Canada numbers) use Facebook every month. That works out to about $11.80 in ad revenue per user per year. Facebook surely has far more data on its users than newspaper industry does and they click many more of its pages and spend more time on its site than they do for the newspaper industry combined. So why aren’t advertisers paying more for its eyeballs and data? I wish the Times had asked this.
I’d say much of this is because Facebook is still a young business figuring out how to sell ads and figuring it how aggressive it can get without ticking off users.