Why Facebook *is* Worth $15 Billion

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The news has now broken. Microsoft has taken a minority stake in Facebook that places a valuation on the company in the $15 billion range. How could this possibly make sense? Is it just a simple multiple on a revenue number based on a current and projected growth rate? Probably hard to make a $15 billion case based on that alone. (100x current revenue!)

The real answer lies in how Facebook differs from the riff raff of “social networks.” Facebook has always distanced itself from that term, prefering “social utility.” Why? Because Facebook isn’t about friending strangers. It is, instead, one of a small number of players that have staked a play based on the belief that “who you know” is fundamentally valuable, and that if you could ever amass a large enough collection of who-you-know data, that “social graph” would enable a variety of monetization strategies. For Facebook, and now for Microsoft, the bet is that the social graph can turbo-charge online ad targeting.

The two other most prominent players in the who-you-know space are LinkedIn and Plaxo. (Disclosure: I run marketing at Plaxo.) Oh, and outside the U.S., a company called Xing, which is, like LinkedIn, focused on “business networking.” LinkedIn makes money from being a middleman between job seekers and recruiters.

Plaxo, on the other hand, got its start in the who-you-know business with a “networked address book” and a “freemium” business model. More recently, to the surprise of most industry-watchers, the company has been re-inventing itself as a next-generation social network, leveraging the huge piece of the social graph that they are hosting for tens of millions, by “bringing address books to life.” And how are they monetizing their social network, Pulse? With targeted advertising, of course!

With Facebook valued at $15 billion, what are the implications for others in the who-you-know business space? Will the rising tide lift all boats equally or some more than others? 

To really understand this deal, see Part 2 of my analysis, that explains what Microsoft actually paid for.

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2 thoughts on “Why Facebook *is* Worth $15 Billion

  1. […] Why Facebook is Worth $15 Billion – You can keep drinking the kool-aid too. […]

  2. […] To read what I think are the implications for others in the space, like Plaxo and LinkedIn, here’s a post I did yesterday.  […]

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