After the $580 million sale of MySpace to Murdoch's NewsCorp, and around the time of the $1.76 billion sale of YouTube to Google, Facebook came up on the chopping block. Yahoo moved aggressively and bid $2 billion; then the 22 year-old CEO and founder of Facebook shocked the world and said, "no thanks." What is this kid thinking?! was pretty much the standard buzz, but what exactly was this kid thinking?
Did he think he could get more? Well, yes. In comments made afterwards, Peter Thiel, a Facebook Board member, claimed to have valued the company at around the $8 billion mark. This article will explain how/why/and WTF?!
Facebook's internal valuation was done based on the market value and revenues of MTV. The logic here is, since we have pretty much the same demographic of users (a demographic that just happens to be the highly coveted 16-28 year olds), the company should be valued in the same range. It is also based on their estimates that they will be generating revenues of $1 billion by 2015… if they are around.
To dissect the numbers and come up with Ali-Corp's own valuation and understanding of Facebook in relation to MTV, I had to do some digging. Facebook is a privately held company and they aren't too fond of making a lot of information available. So these calculations will look at different elements that are generally known through various market intelligence sources and industry insiders, and then we'll compare them to MTV's known information.
Facebook: 7 billion page views per month (est), and advertising rates received at $3 CPM (Cost per Thousand Impressions) = $21 million revenue per month, or $252 million annual revenue. Let's be generous and pad those numbers to come up to even $300 million (there might be some other sources of income that we don't know about, and also to accommodate for a margin of error). We'll go ahead and ignore the knowledge that during the time of the MySpace acquisition Facebook raised $25 million of VC money with a rumored valuation of $750 million.
MTV: 2004 revenues were estimated at nearly $5.5 billion ($5,471 million if you prefer apples to apples comparisons) according to Hoovers Research. Their online digital revenues alone were approximately $500 million according to Jupiter Research. Since they have ad's before videos and songs, those fetch a much higher price, so even if they don't have the same number of page views as Facebook, they actually have higher revenues.
I didn't get the chance to independently value MTV, since it is a subsidiary of Viacom and it isn't the easiest thing to value without spending all day on it. So just based on the information we have, the most basic and least amount of info we need in order to value a company, we see that Facebook has annual revenues of $300 million (being generous), compared to MTV's $5,471 million (or $5.47 billion). Add to that the reach of MTV to a much much more global audience (MTV has specialized channels all around the world), and not to mention the Brand Equity that MTV has built over the years, it's safe to say that MTV has Facebook spanked in terms of value.
Put a dollar figure on it you say? OK…
Based on revenues alone, if $5,471 million = $8 billion in value, then $300 million = $436 million. But wait, Facebook is growing at a much higher rate than MTV, so lets take that into account and make it a nice $600 million valuation (I'm being nice). But then bring it right back down based on the Brand Equity we talked about earlier… $450 million say? Then you have to look at assets. MTV has a couple of decades worth of programming, real estate, equipment, and trademarks. Facebook has a couple of trademarks and a bunch of servers that will be obsolete by the time Goldman Sachs does a real valuation on them- Drop it down another $50 million to $400 million. Done? Not quite. Now, as an investor, you have to keep the risk factor in mind. Facebook is one website away from going the way of Friendster and entering oblivion. MTV has shown it's staying power and withstood the test of time. That sounds like a big $100 million risk to me. Current count?… $300 million.
So, when you take Facebook's own logic and apply it here, you are left wondering what the hell they were thinking by not accepting $2 billion when it was offered, since they are worth, on their best day, a solid $300-$400 million dollars. I know I failed my MBA prof's in coming to this conclusion by using a shoddy ad-hoc method, but the logic is still sound.
So if companies that are worth $300 million valuing themselves with a straight face at $8 billion makes you think we're in another tech bubble… you bet your ass we are!