Social Gaming Network (SGN) Jumps to #3 on the Adonomics 100^™

As noted in the recent TechCrunch article, the consolidation trend that was predicted in this earlier post is continuing on Facebook.  The most competitive app category right now is casual gaming with Social Gaming Network (SGN) recently jumping from #20 on the list to #3 just behind Slide and RockYou and just ahead of Zynga (their direct competitor in the game category of killer apps for Facebook).  This development points to a future where a series of companies specializing in specific categories of social suite applications will emerge.  The ultimate battle in this Facebook app space war will be when one or more of these category-focused companies make a play to control multiple categories of apps in an attempt to become for Facebook what Microsoft Office is for Windows. 

SGN Steals a March on Zynga in Casual Gaming

Two months ago, after we launched the Adonomics 100, it became much easier to track the rise (and fall) of specific companies that were either developing a large number of apps or were acquiring exclusive marketing rights (or all rights) to certain standalone apps.  This allowed us to write the following on Feb. 22:

“If you investigate The Adonomics 100™ Top App Companies, you will note that some new names are starting to climb the charts.  Specifically, #4 Zynga and #20 Social Gaming Network have been adding apps to their companies much faster than they could develop them. Instead of developing the apps, they have been acquiring them outright or acquiring exclusive marketing rights to these apps. My belief is that they are each making a play to be the dominant Casual Gaming App Company on Facebook. Their approach is to offer upfront cash, salaries and options to their participating members. This type of consolidation and safety/strength in numbers is inevitable in a space like Casual Gaming because a person doesn’t just want to play one game with their friends forever. They want to have a little variety and yet not lose track of their leaderboard status as one app shrinks in popularity and another app grows.”

It is now clear that SGN has been busy working behind the scenes over these past two months to stage an assault on the highest levels of the Facebook App eco-system.  While Zynga remains in the #4 spot with 38 million installs, SGN now has over 48 million installs.  In that same period, Slide and RockYou’s number of installs has stayed flat at 93 and 80 million installs respectively.  SGN’s ability to extend their reach so quickly by applying the consolidation strategy that we predicted should make believers out of any skeptics about the potential synergies that exist within the huge number of installs under the control of a fairly small number of small developers.

How SGN Took The Lead In The Casual Gaming Category

The first step in the process for SGN was picking the category they would focus on.  For a number of reasons, Shervin Pishevar (SGN’s CEO) chose the casual gaming category.  He then focused on the developers.socialgn.com site and created the Gaming Hub using a few housebrand apps to get it working and immediately invited other game developers to join.  The motivation of the game developers at this point was simply the chance to cross-promote their game via the SGN GameBar to other Facebook users who enjoyed playing one specific game and who wanted to be introduced to other games that their friends were playing.

The next step was to cultivate relationships with all of the major unaffiliated game developers on the platform.  This process took several months of work before it began to pay externally visible dividends when certain shoes started to drop like Zach Allia of FreeGifts joining SGN. It was at this point that the basic outline of Shervin’s battle plan began to come into view.  The big surprises were the rapidity at which the plan was executed and the recently announced size of SGN’s app suite.  In just a matter of weeks, SGN acquired Oregon Trail and FriendBlock and coaxed the devlopers of Esgut’s apps (Suleman Ali and Jamal Ashraf) and Nicknames (Adam Gries, Wayne Mak) to join Zach Allia in contributing their apps to the consolidation cause and to become co-founders of SGN.  By making these app all-stars co-founders of SGN, Shervin showed he knows that when buying golden eggs it is very important to acquire and lock in the geese laying them as well.

Should Slide Be Worried About Their #1 Spot in The Adonomics 100?

Slide, which was recently valued at $550 million by its latest investors, has occupied the #1 spot in the Facebook application eco-system since the platform was launched almost one year ago.  For most of that time period, it appeared that RockYou would be its chief rival.  However, SGN’s rapid rise up the Adonomics 100 begs the question: “Should Slide Be Worried?” My answer to this question is “Yes!”

The reason Slide should be worried is that most developers view them as competition whereas most developers view SGN and Zynga as partners in the process of building the install base of their apps.  Slide also has a history of predatory app acquisition like their Favorite Peeps purchase which only paid the developer $60,000 for an app that was on the verge of catching up with TopFriends.  RockYou is less of a threat to independent developers because they have had no such negative press to cloud their reputation as a good partner and that have shown an ability to support the Facebook eco-system via their Cost Per Install ad offering (which many developers have leveraged to grow their apps). 

In a race to acquire apps and their developers, the primary assets that the acquiring company can bring to the table are upfront cash, earn-out cash, stock grants, stock options and co-founder status.  With the exception of the cash component which Slide has plenty of, SGN is in a better position to attract developers because its stock has not already had a run up in value.  As mentioned earlier, SGN also appears to be willing to share the credit for its success with the developers who are making it possible.  This attitude reminds me of the plaque on Ronald Reagan’s desk which read, “There is no limit to what a man can accomplish if he doesn’t care who gets the credit.”  This humble approach to the roll-up process is key to building a team of independent developers into a cohesive whole.

New Leaderboards for Applications, Companies, Developers and Ad Networks

Given the rise of SGN and its dual nature as both a Company that owns applications and a Network that offers a service to additional app developers who just wish to leverage SGN’s cross-promotion services, it is now time for Adonomics to create a few new leaderboards. Our goal here is to give each different type of entity that we track a chance to measure their success in relation to the best-of-breed in the entire Facebook eco-system.  For this reason, we are announcing the development of two new leaderboards, one for Developers and one for Ad Networks.  These are in addition to the ones we’ve had for Applications and Companies.

The Developers Leaderboard will be focused on the individuals who write the code that create the great user experiences available on Facebook.  Whether these individuals are sole proprietors or employees of the largest app companies, we want to give them a chance to show the world the men and women behind the curtain.  To get listed as a developer on the Developers Leaderboard, all that is necessary is that the person be listed as a developer on the app or to send us the information necessary to certify this by signing up on Adonomics as a developer and creating a developer profile.  Take a look at the current list here and congratulations to Jia Shen (who is listed as the developer of most of RockYou’s apps), Daniel Silverstein and Bobby Joe (who developed FunWall) and Blake Commagere (who developed the monster apps and Causes).

The Ad Networks Leaderboard will be focused on the companies that have an alliance of apps for whom they are managing ads.  The companies listed here will include both major app developers who offer advertising on the side (e.g., RockYou, Slide, etc.), hybrid companies that have apps of their own as well as their own advertising or cross-promotion networks (e.g., Buddy Media, Social Media, SGN, Zynga, etc.), standalone ad networks (e.g., Lookery, VideoEgg, etc.) and meta-ad networks that offer ad-rotation and optimization services to their members via ad slots that can be filled with ads from any of the available ad networks (e.g., TheUADA).

 What’s Next?

While several shoes dropped recently related to consolidating the social networking casual gaming category of killer apps, we should all be prepared for many more to come cascading down soon.  These might come from Zynga in response to SGN’s move or new categories starting to heat up — such as the dating category.   In all cases, it is great news for the individual facebook developer to be in the position of having multiple suitors courting them.  It is also great news for facebook users because they will be able to enjoy a more seamless user experience as they shift from one high quality app to another.

Will Bill or Mark or Someone Else Build The Social Suite of Category Killer Apps For Facebook? 

Speculation has begun about TheUADA (see TechCrunch.com’s article TheUADA: Biggest Facebook App Co or Marketing Scam, AllFacebook.com’s article TheUADA: A United Front For App Developers, see FaceReviews.com article TheUADA: Mystery Entity Tops Adonomics Top 40 App Companies ).  Folks are curious as to what TheUADA is, who the members of TheUADA are, which services TheUADA will offer to Facebook developers, when TheUADA will have its IPO and how TheUADA will effect the Facebook eco-system in general. All of these speculations by the press and the blogosphere are actually a healthy part of the process.

My current favorite comment came from a valley researcher inspired by the TechCrunch article who was frustrated by the lack of folks willing to comment about TheUADA:

<<
1. Slavish Excess
February 18th, 2008 at 12:12 pm
I saw this THEUADA thing today as well. An hour of followup and research yielded zip. There is no way something this big on Facebook goes uncommented unless they have a waterboarding clause for violating their NDA.
>>

Well, I can guarantee Slavish Excess that the NDA for TheUADA doesn’t have a waterboarding clause.  That being said, the best way to find out everything about TheUADA is to stay tuned to TheUADA.com web site on Feb. 29, 2008. 

The one area I am willing to talk about is the future of app development on Facebook and the evolution of the first Social Operating System in comparison with the evolution the first Graphical Operating System Windows.

Building the Microsoft Office Suite of Productivity Apps for Windows

When the first mainstream graphical operating system in the form of Microsoft Windows first arrived in 1984, Steve Ballmer was able to demonstrate just a few Windowing Apps.  Specifically, Clock and Calculator.  Given the 640K DOS application program memory footprint and the 640 x 240 primitive bit map display, simultaneously running these two apps plus the desktop with icons and windows plus DOS plus the Windows User Interface was viewed as a major accomplishment.  However, Windows was not yet ready for prime time in terms of being a platform for office productivity applications.

 Over the next 11 years, Windows 1.0, 2.0, 3.0 all shipped and the hardware advanced from 8086, 386, 486 and the available memory grew from 640K, 1MB, 2MB, 4MB.  This set the stage for Windows 3.1 launch (the first usable version of Windows) and finally Windows 95 (the first mainstream version of Windows).  When Jay Leno stood on the stage with Bill Gates and talked about Windows 95 to a crowd of press and Microsoft employees the “long march” to Graphical Operating System dominance was complete.

 In addition, Bill Gates had wisely used these 11 years to bet heavily in the Windows Application space.  Starting with Excel on the Mac which he then ported to Windows and Word for Windows which was built on the MS Word for DOS product and via acquisition of PowerPoint for Windows and Visio for Windows, Microsoft put together the cornerstones of the Office Suite of Productivity Apps.  The Suite Wars at the time started when Microsoft linked their apps together via document interchange and similar user interface conventions in a manner that made it hard for stand-alone app providers like Word Perfect or Lotus to compete.

One can say that Microsoft leveraged their control of Windows to dominate the application space.  However, I think that it was really the Windows app developer community that missed the boat.  Microsoft took 11 years perfecting the Windows platform and this should have been plenty of time for another company to pull together a suite of category killer apps for Windows.  That opportunity passed all of us by, but I think a similar opportunity is staring the Facebook developer community in the face today.

Building the Social Suite of Category Killer Apps for Facebook

If you investigate The Adonomics 100™ Top App Companies , you will note that some new names are starting to climb the charts.  Specifically, #4 Zynga and #20 Social Gaming Network have been adding apps to their companies much faster than they could develop them. Instead of developing the apps, they have been acquiring them outright or acquiring exclusive marketing rights to these apps. My belief is that they are each making a play to be the dominant Casual Gaming App Company on Facebook. There approach is to offer upfront cash, salaries and options to their participating members. This type of consolidation and safety/strength in numbers is inevitable in a space like Casual Gaming because a person doesn’t just want to play one game with their friends forever. They want to have a little variety and yet not lose track of their leaderboard status as one app shrinks in popularity and another app grows.  

By my count, the Casual Gaming Category is the Eighth major category of killer apps for Facebook that has emerged.

The First Category was the Friend Communication Category. The dominant App Companies in this category are Max Levchin’s #2 Slide and Lance Tokuda and Jia Shen’s #3 RockYou and they have gone back and forth attempting to win the Wall Wars, the Poking Wars and Slideshow Wars. Each of these apps (along with Profile Expression apps like Top Friends, Fortune Cookie, Horoscopes), work together with Facebook’s own Newsfeed, Photos, Events apps to turn your profile page into a “Bloomberg Terminal for Your Life.” The Friend Communicaiton App Category is probably the most evolved segment in the Social Suite of Category Killer Apps that is just now starting to emerge.

The Second Category was the Music Category. Ali Partovi of #11 iLike was first mover in this space and still dominates.

The Third Category was the Movies Category. Joe Greenstein of #8 Flixster was first mover in this space and still dominates.

The Fourth Category was the Monsters Category. Blake Commagere (the inventor of the “invite-centric” app with Vampires, Zombies, Werewolves and Slayers apps that collectively have 20 million installs) of #7 Commagere Ventures created a category of apps that has spawned a myriad of imitators. What is clear about this type of app is that it has staying power and serves some basic need in human beings. What is unclear is what that need actually is. The one thing I know is that the app category makes money and is the envy of both Zynga and Social Gaming Network and a few other companies who would love to have Blake’s App Installs added to their Adonomics 100™ ranking.

The Fifth Category was the Fans Category. Justin Smith of #9 WaterCooler, Inc. is the master of this strategy of using individual Facebook apps like Addicted to Simpsons, Addicted to Lost, New England Patriot Fans, Green Bay Packer Fans, plus 450+ more focused fan apps, to fish for micro, mini and maxi audiences within the ocean of 70+ million Facebook users. His top Fans Apps have 700,000+ installs each and collectively represent 350,000+ Daily Active Users. This Fans Category is full of lots of tiny long tail apps but when you bind them all together they become very interesting to the exact same advertisers that might be interested in the Simpsons demographic, the Lost demographic or the Monday Night Football fan demographic.

The Sixth Cateogry was the Dating Category. Cliff Lerner of #14 SNAP Interactive is the current leader in this space. I would expect that it will be only a matter of time before he starts using his public stock currency to start buying up other Facebook apps that fall into the flirting/dating category such as some of the Stanford Class apps like: Best Match!, KissMe, Hugs, Bless You, etc.  It is quite likely that this category will be one of the first to enjoy a significant amount of acquisition activity by the likes of Match.com and eHarmony.com because if they can afford 10’s of millions for TV ads, they can surely afford the millions it would cost to buy their way to dominance in this dating category within Facebook.  However, if they don’t act quickly, an investment in SNAP Interactive might be a very interesting play.

The Seventh Category was the Gifting Category. #21 Zach Allia was actually the second mover here (after Facebook’s own Paid Gifts app) and he remains an important player in the space. Keith Schacht with #10 42 Friends has since surpassed Zach with total installs, although it is possible Zach still has more uniques than Keith because Zach has only the one app almost 8 million installs vs. Keith’s three apps that have been heavily cross-promoted. This category is morphing right now to include various Real Gifts apps and I believe that in the long run, Gifting will be a very lucrative category based on real transactions. This will be especially true when Facebook’s payment system is developed and released.

The Eighth Category was the Casual Gaming Category.  As mentioned above, Mark Pincus’ #4 Zynga and Shervin Pishevar’s #20 Social Gaming Network are battling it out in this space via an acquisition / licensing strategy.

The Ninth Category was the Friend Comparison Category. Naval Ravikant started the ball rolling here with his Compare People app that is now a part of #5 Chainn Inc.  Suleman Ali is another important player in this space with his Superlatives app this is owned by #6 esgut.  Each of these app companies have a variety of apps in this category and in certain adjacent areas.

The Tenth Category was the Self Expression Category. Markus Weichselbaum of #13 TheBroth has some of the most interesting apps in this category (e.g., numerous quotes apps and the infamous What’s Your Stripper Name app). Markus and his team at TheBroth are also masters of an emerging category tied to social interaction in the graphic space with their highly innovative PuzzleBee app. This category has lots of other miscellaneous apps from a long tail of tiny app companies. The bottom line is that people like to make fun of themselves and also use their profile page to send a message about what they care about. Facebook’s Groups app would also fall into this category, despite the fact that Groups have much more potential within Facebook than merely being a “badge” or “tatoo” users display on their profile page to show they care. The last major player in this Self Expression Category is the Causes app from #17 Project Agape.

The First 10 App Categories and Their Role in the Social Suite

The leading apps in the First 10 App Categories in the Social Suite are as follows:

1. Friend Communication — Top Friends, Fun Wall, Super Wall, SuperPoke!
2. Music — iLike
3. Movies — Movies
4. Monsters — Vampires, Zombies, Werewolves, Slayers
5. Fans — Addicted to ____, _______ Fans
6. Dating — Are You Interested?
7. Gifting — Free Gifts, Growing Gifts, Hatching Eggs
8. Casual Gaming — Texas Hold’em, Ghost Racer, Jetman
9. Friend Comparison — Compare People, Likeness, Likeness Unrated
10. Self Expression — Fortune Cookie, My Questions, What’s Your Stripper Name?, Causes

The Killer Apps represented in these initial leading App Categories helped Facebook grow 5x in 2007 (from 12 million active users to 60+ million). The staying power of the current leaders in each of these categories will vary. However, the categories themselves will still be important 5, 10 or 15 years from now. This is similar to the way that the leaders in the Word Processor Category, which was one of the first Killer App Categories for PC’s, have changed over the years shifting from WordStar to Word Perfect to WORD. Apps may come and go, but App Categories remain.

The real question now is what comes next?

One area I’ve already written about is the Super Groups category. In addition to Super Groups, I see the following contenders for future inclusion in the Social Suite of Category Killer Apps:

TBD — stay tuned

Facebook is the Perfect Path to Profits for the Pluckiest Programmers on the Planet

EBay’s genesis story relates how Pierre Omidyar’s passion for his girlfriend led to the creation of the planet’s first person-to-person marketplace for purchasing Pez dispensers. Although this story is not true, it does capture the essence of eBay’s earliest usage as a way to find/buy/sell just about anything from broken laser pointers to used cars. In Pierre’s original vision, the site’s main users would be individuals periodically selling to one another using the auction model to arrive at a perfect market-clearing price for obscure, one-of-a-kind items.

However, this is not really what drives eBay today. Instead, eBay is a big business built on the backs of thousands of Power Sellers.  Pierre’s “little auction web site” has in fact enabled an entire group of individuals to exercise their entrepreneurial instincts and recast their expensive hobbies into profitable enterprises. Ebay’s elite group of Power Sellers have been able to inexpensively access eBay’s network of buyers and to conduct sufficient amounts of commerce to allow them to quit their day jobs.

In like manner, I believe that Facebook will be remembered as God’s gift to developers because developers can now convey their code to millions of consumers in a matter of days with no need to raise any VC money, hire a marketing team and/or spend money advertising their apps. This is the real reason for the excitement about Facebook opening up their HIGHLY EFFICIENT word-of-mouth engine to 3rd party developers on May 24, 2007.   While everyone knows that Facebook’s platform and their apps have been wildly successful, many do not know how much money is being made by and will be made by developers.

 Why Developers Have Rarely Made the Big Money From Their Creations

By their nature, most developers are proud of their programming but shy about their financial status. Unlike those sales and marketing types who tend to puff up how successful they are (in essence marketing themselves to the world), the best developers I’ve met would rather let their apps’ architectures and algorithms do their talking. In addition, many of these developers are a bit surprised that they actually get paid a reasonably high salary for doing something that is as much fun as programming.

In my experience, many developers would just as soon turn over the mundane aspects of monetizing their creations to someone else. A developer’s key payoff for the hard work of creating something new under the sun is the knowledge that millions of users are interacting with code they wrote and loving the experience. In the past, this has led to many developers not making as much money from their work as they should have. Instead the big money has been made by those who built the big teams of sales and marketing types that have historically been necessary to build a business around a piece of code.

However, something has been changing recently. Successful engineering-oriented, entrepreneurs have been able to take the money they’ve made in former ventures (e.g., like Peter Theil from PayPal) and provide the seed funding to the next wave of developers (e.g., like Mark Zuckerberg). In like manner, although not with his money but with his marketshare, Mark has now paid it forward by accidentally creating what I believe will become the biggest engine of wealth creation for individual developers ever. The key to this new opportunity for riches is the way in which apps spread on Facebook.

How Apps / Events / Photos / Groups / Ideas Spread on Facebook

Most folks understand that the best advertising in the real world is word-of-mouth marketing.  The reason is obvious.  Whenever a product is so REMARKABLE that a friend decides to REMARK about it you, you know by the very rarity of this type of recommendation to stop what you’re doing and pay attention.  The problem for most consumer companies who want to encourage word-of-mouth marketing is that their products are not really that remarkable and/or most consumers don’t believe their friends will want to hear about their recent, reasonably positive, purchase decisions. 

The reality is that if I had infinite time and I knew at some perfect level in which products all my friends were interested, I could  run around and play the role of marketing maven as they contemplate their purchases.  However, this push-oriented marketing approach is not only impossible but also impolite.  What the world needs is a pull-oriented marketing method that would allow my friends to notice my actions and decide which of these actions were noteworthy to them.  Fortunately, this need has been filled in the form of Facebook’s viral channels, such as Invites, Request, Notifications, Newsfeed Stories, etc.

Facebook is essentially a “Word-Of-Mouse” engine where almost ever action I take creates a little news item that some of my friends might be in the mood to hear about.   Although I can’t read my friends’ minds, Facebook’s algorithms know which of my friends have reacted in the past to which types of my actions.  For example, if every time a certain friend of mine is tagged in a photo, I go and look at this photo, then the Facebook newsfeed algorithms can reinforce this information flow and ensure that that this action is the one item reported to me out of the 499 other items that end up on the edit room floor.

Everything Big on the Web will be Reinvented and Reinterpreted in a Better Form on Facebook

Facebook’s system of trusted referrals that are created without my friend taking any other action than using the normal features of an app has led to certain applications from Facebook like Photos and Events being orders of magnitude bigger than their Web 1.0 competitors.   Even apps written by third party developers have grown to be almost as big as their web counterparts in a matter of months.  Examples include the Facebook versions of the web businesses of iLike.com, HotOrNot.com and BigDates.com.  In fact, BigDate’s Birthday Calendar app, which added 4 million users in 45 days, is already 2 to 3 orders of magnitude bigger than their web business and the company spent $0.00 to promote the app.

The portion of the world’s social graph currently represented by Facebook is 70 million active users strong and will grow to 200+ million by the end of 2008.   To be counted, an active user must have visted the site in the past month.  The amazing fact is that half of Facebook’s active users visit the site EVERY DAY.  While on the site, these active users follow certain routines which expose them to countless actions of their friends.  Curiousity and/or Boredom leads these users to try new things that their friends are finding to be fun, unusual, useful and/or entertaining.  In this process, developers have a chance to get their creations onto the profile pages and computers of literally millions of users.

Unlike a standalone web site or simple download of a new piece of software, a Facebook app doesn’t start at ground zero in its quest to provide the user with a payoff worthy of the time it takes to add the applicaiton.  A Facebook developer can exploit all the information that Facebook knows about you and all of your friends to create an user experience that is instantly familiar and functional.  As Edward Tufte would say, “the computer admistrative debris” is minimized.  As an example, the stunning, instant-on, simplicity of Birthday Calendar is achieved because it is immediately useful without the need to type in all of their friend’s birthdays (which is what the Web 1.0 site requires).

How Developers Can Get Rich On Facebook

The key to real wealth is ownership of assets that passively churn out money.  A Facebook app that is popular with users and is properly monetized is just such an asset.  If you owned a house that rented out for $9,000 per month, you’d make $100,000 per year in passive income.  If you had the ability to build a number of such houses for next to nothing in your own spare time and effort, you would be foolish not to do so. That is the HUGE OPPORTUNITY staring developers in the face on Facebook.

Likewise, to make $100,000 per year in advertising-related income on Facebook, an app would need make $300 per day (i.e., $9,000 per month).  Assuming a $3 RPM (Revenue Per Thousand Page Views), an app would only need 100,000 Page Views per day which at a rate of 10 Page Views per Active User works out to 20,000 daily active users.  This type of app is not that rare within Facebook and we would hear more about Facebook app developers making $10,000 per month from their hit apps if they took the monetization of their apps as seriously as they should.

Hosting services, like Joyent’s, provide a scalable infrastructure that Amazon spent billions on in the Web 1.0 timeframe for monthly fees that are substantially less than 10% of an app’s earning potential from advertising.  Ad networks, like RockYou, SocialMedia, Lookery, AdBrite, AdSense, etc., provide the beginnings of a monetization method that a developer can exploit within minutes.  The barriers to owning, writing, popularizing, scaling and monetizing an app have never been lower.  So, now is the time to start drilling for the ‘black gold, texas tea, oil that is’ that has the potential to make almost any developer a millionaire.

Deciding Which App to Build

If you wanted to be an eBay Power Seller, how would you decide which products to sell?  The smart move would be to study the folks who came before you and apply their success patterns to your venture.  After you’ve grounded yourself in what makes a popular app by looking at what is already popular in Facebook, you need to look elsewhere for inspiration.  Trying to compete with Blake Commagere by building Vampires II is probably not going to work.  Blake owns that franchise and unless he ignores his users for a sustained period of time, I’m confident that he will own it for years to come.

A better strategy is to look in the offline world and in the Web 1.0 online world.  The activities that people spend time doing in these other venues are likely to be similar to what they will want to do inside of Facebook.  While the Facebook platform allows new levels of efficiency and single user reach, the underlying activities of sharing photos, planning events and meeting new people are still an important part of life.  These areas are already represented by some of the killer apps on Facebook.  So, what is missing?

If I were an app developer, I would be building Lead Gen applications.  The act of selecting an app to install on Facebook demonstrates at least as much intent as clicking on a search result on Google.  The key difference is that on Google this act of clicking on a link costs an advertiser between $0.25 and $25.00.  Major brands and Web 1.0 advertisers will happily spend significant development dollars and CPA fees for an app that spreads virally through the Facebook ocean of fish and hooks just the ones that want their product or service. 

Another way of pursuing this LeadGen strategy is to first build an app that attracts a highly targetted following and then offer this app for sponsorship by the primary advertisers interested in your app’s demographics.  To ensure you pick a topic area that advertisers care about and to inform you who you should seek for sponsorship revenue, my recommendation is to build an app that is similar in focus to one of the hundreds of magazines available at your local bookstore.  In the back of each magazine is a list of the advertisers who might pay you $10,000 to $100,000 per month to sponsor your app.

In Facebook: Developers Rule

If you are a developer, now is your time to shine.  Our goal at Adonomics is the help you claim the birthright that is yours.  In the same way that eBay has helped some entrepreneurial individuals to make tens of thousands of dollars per month, Facebook can help the motivated developer achieve a level of financial independence and personal wealth that no other platform provides.  The suite of services we offer are designed to let you do what you do well (i.e., write code), while we do what we do well (i.e., monetize code).  We look forward to working with you to create something great and to make you wealthy along the way.

Thanks,

Lee Lorenzen
CEO, Altura Ventures — the First Facebook-Only VC
(c) Copyright 2008, Altura Ventures LLC.

The Adonomics 100™ Top App Companies Chart

The recent investment of $50 million in Slide at a post-money valuation of $550 million has proven that Mr. Market (see Warren Buffett’s description of him) is highly valuing at least one Social Networking App Developer. The long term correctness of this implied company valuation of over half a billion dollars will be most dependent upon Max and his team’s execution. My bet, based on their former PayPal win, is that it will turn out to be low.

That being said, this valuation for Slide ($550 million) is much higher than the sum of each of Slide’s app’s Adonomics valuations ($60 million). Part of this gap can be closed by realizing that one half of Slide’s value comes from their MySpace widgets and one sixth from web site widgets. However, if we say Slide’s Facebook Apps are worth one third of the total of Slide’s value that still implies a very high number ($180 million). So, Slide’s Facebook App business enjoys a 3x Valuation Premium.

Why Should Slide Enjoy a 3x Valuation Premium?

I believe that the primary reason for Slide’s 3x Valuation Premium is that our Adonomics valuation formulae didn’t factor in the potential market power and other benefits of owning/controlling a suite of apps that collectively touch such a large percentage of all of Facebook’s users. It is easy to understand that if one company controls a suite of apps with 80 million installs, 40 million unique facebook users and 6 million daily active users, then that one company can exercize certain Multi-App Marketing Techniques that would be impossible for a smaller app company to accomplish.

Multi-App Marketing Techniques

Some examples of such techniques might be tab chaining to promote your other apps, e-mailing users of one app about your other apps, integrating cross-app features to better lock-in users, communicating to users who have removed one of your apps using the other app’s e-mail list, obtaining better advertising revenue share rates from the ad networks, creating your own ad network, developing your own points system, connecting users from one social networking platform to other, building an app-centric social network, etc.

Company Valuations vs. App Valuations

Ever since the Adonomics site began calculating App Valuations and displaying them for developers and their potential investors/acquirors to notice, we have heard a consistent message that our app valuations seem too high. We didn’t mind this too much because we felt like we were always acting in the best interests of developers who could use their apps’ Adonomics valuations (even if they didn’t fully believe in them) as a starting point to obtain better terms from VC’s, Angels and potential acquirors.

The Adonomics Valuation was Not Too High but Too Low!!!

In fact, in numerous blogs, folks have singled out Top Friends which is Slide’s most successful app as an asset that couldn’t possibly be worth $23 million (its valuation at the time). So, isn’t it ironic that it turns out that although the Adonomics combined valuation for Slide’s suite of Facebook apps was not to high but too low! In fact, we were 1/3 of what Mr. Market tells us Slide is actually worth today. The investors at T. Rowe Price and Fidelity are not unsophisticated players who are investing in Slide because they like SuperPoking each other. They are investing for a better than market-rate return. So, in reality Mr. Market is telling us that these investors believe Slide will, within a few years, be worth two or three times the valuation at which they invested.

Correcting the Problem

The solution to this is to begin to track the Top Multi-App Companies on Facebook and apply an appropriate Valuation Premium to those that control/own apps which touch a significant percentage of the Facebook install base. In order to do this, the first step is to link each Facebook app to the entity that controls/owns the app. This would be easy if App’s on facebook told us this information but since many apps list only their developers and some apps list fictitious company names and some apps don’t show up in the directory, our challenge is a bit harder. That being said, we have been able to do the research to compile The Adonomics 100™ Top App Companies table (see home page) and roll-up the suite of apps that each company owns/controls.

Making The Adonomics 100™ Top App Companies

After assigning all the facebook apps to their correct corporate entities, the next step was to rank them from #1 to #100 based on Total Installs of their app suites. We then sum up their Adonomics App Valuations and mulitply this total by a Combination Premium that varies based on where in the list each App Company falls. Obviously, the #1, #2 and #3 ranked companies deserve a higher Combination Premium than the #98, #99 and #100. All of this is taken into account to compute a Company Valuation for each of the Adonomics 100™ Top App Companies.

Congratulations to Everyone in The Adonomics 100™ 

I want to let everyone know that it is extremely impressive to be a one or two person deverloper shop and be able to own/control a suite of apps that have been installed 4, 8, 12, 16 or 20 million times. Never in the history of software have so many users been touched by so few developers in so short a time. As the friend of the developer, our goal at Adonomics is to ensure that you are recognized both publicly and financially for your achievements.

Thanks,

Lee Lorenzen
CEO, Altura Ventures — the First Facebook-only VC

P.S. If we missed any of you or if we are underestimating your number of installs because of the lack of granularity in Facebook’s stats, please contact bugs@adonomics.com and we will do our best to correct the oversight.

(c) 2008 Altura Ventures LLC

As Brad Stone reports in the New York Times, Slide just raised $50 million by selling 9% of their company at a valuation of $550 million. This represents a major step up in valuation for Slide and sets them on the path for an IPO with a significant warchest to use in their current battle with RockYou and coming battle with Facebook.

As Kara Swisher is quick to pessimistically point out in AllThings Digital, she’s convinced It’s Bubble Time. This is her standard line in any story that relates in any way to the coming dominance of Facebook as the first mainstream Social Operating System. In fact, Kara actually spends half the article making a petty argument over who should have gotten credit for the scoop.

As Sarah Lacy summarizes in BusinessWeek, Max Levchin is out to prove that PayPal was no fluke and that his goal is “generating more than the $1.5 billion PayPal fetched from eBay (EBAY) in 2002“. In order to do this, he most likely pitched this investment as a mezzanine round for Slide’s Q4 2008 IPO that will be in the $2 billion plus range.

Although I’ve been very vocal and bullish about Facebook’s valuation really being $100 billion, I don’t really know enough about Slide’s plans to speak with authority about this valuation goal in a post-IPO world of $2+ billion. Assuming a 40 P/E ratio after they go public, this would imply $50 million in earnings for Slide. They may be able to get there via advertising but they will always have a HUGE RISK FACTOR related to not controlling their underlying platform.

When Max Levchin and Peter Theil built PayPal on the back of eBay, they were able to achieve traction with eBay’s power sellers (who really control eBay more than Meg Whitman does) and this traction forced eBay to acquire PayPal before someone else did. Had Yahoo or Amazon or Microsoft acquired PayPal, they could have whittled away at the yoke that eBay has around the necks of its power sellers. This strategic threat to eBay helped PayPal go for a premium over their public market price.

This time around, it will be interesting to see if Slide can build a social network of their own that competes with both Facebook and MySpace. As I said when OpenSocial was announced, Slide’s Top Friends app is already the 3rd largest social network in the US. Now that Facebook is licensing their API, it seems quite possible Slide will roll their users on MySpace and Facebook into an App-Centric social operating system that bridges several social networks.

The Adonomics valuation for Slide’s top 8 Facebook apps is $74 million and this valuation doesn’t take into account that they are all owned by the same company. On Facebook alone these apps have 87 million installs and probably around 35 million unique Facebook users.

This makes Slide a strategic threat to Facebook just like PayPal was a strategic threat to eBay.

Congrats to Max on setting himself up for another big win and look out to Mark Zuckerberg who may find himself in the position of eBay’s Meg Whitman in that he may have to pay a post-IPO premium to recapture his user base and protect them from competitors like Google.

Thanks,
Lee Lorenzen
CEO, Altura Ventures — the first Facebook-only VC
(c) 2008 Altura Ventures LLC

In addition to explaining at http://blog.adonomics.com why Facebook is worth $100 billion, let me also mention the reasons from A to Z why I’ve been told Facebook can’t possibly be worth $100 billion and briefly refute each of them.

a. It only has $100 million in 2007 Revenues — Google only had $86 million in 2001 revenues before co-opting Overture’s Bid-Based, Cost Per Click advertising system as the perfect monetization vehicle for a search engine site whose goal is to get you to leave the site. Now, Google has a market valuation of $218 billion. The same thing will happen for Facebook when it co-opts a Cost Per Customer Acquired transaction system as its perfect monetization vehicle which is for a site whose goal is to get you to stay on the site.

b. It only has $30 million in 2007 profits — Google only had $6 million in 2001 earnings before learning how to monetize search. Google has 2007 earnings of $4+ billion. Facebook’s cost structure is already paid for with its current, ill-fitting, link-off advertising model and so all almost all future revenue will drop straight to the bottom line.

c. It is yet another flash-in-the-pan social network that will fade like Friendster and Orkut — Yahoo thought the same thing about Google (i.e., search is a commodity feature and not a business and will be replaced by something else). They were wrong and Google has surpassed Yahoo’s value because it became difficult to buy or build a faster, better, easier or cheaper than Google and the Google brand “stuck” in consumer’s minds. Facebook will be the social operating system brand that sticks in consumers’ minds and it will be very difficult to build a faster, better, easier or cheaper social networking experience than Facebook.

d. MySpace is still bigger — yes but about half of their users are either identity/advertising bots or fantasy identities. However, these millions of fake, exhibitionistic avatars are not, in the long run, that interesting to maintain nor fun to interact with when compared to Facebook’s users who are real people with real friends with their real names, faces, birthdates, likes and dislikes showing.

e. Google will crush it — Google’s brand power has only extended into GMail (which is still far behind Yahoo Mail and Microsoft HotMail) and they have failed miserably in video (so they bought YouTube), in VOIP (so they bid for Skype but lost out to eBay), and in hundreds of other Google Lab apps that haven’t broken out to mass market audiences.

f. Open Social will crush it — herding 18 to 50 cats to build a social operating system will inevitably lead to a lowest common denominator set of features, a committee-designed UI and variably extended API that will not be compelling for end users. Imagine if the MP3 player industry tried to standardize on their own version of iTunes and an iPod — it would never be as clean as Apple’s. In addition, the advent of Facebook licensing their Social Networking API to Bebo and others means that every wanna-be social network can now get the secret formula to “the Real Thing” vs. Google’s imitation brand.

g. Users will hate it when they understand the privacy issues — in reality, Facebook users understand that what they put on Facebook can be seen by their 300 to 500 friends and this doesn’t particularly bother them. This “transparent lifestyle” works because it brings benefits to those who practice it that outweigh any real or perceived negatives. In addition, for those who want more privacy than Facebook’s defaults, all of the necessary privacy settings are there to achieve any level of control as to who sees what about you and your profile. Those who don’t trust these controls can simply not join. However, this represents a tiny minority of the people in the countries where Facebook has been launched.

h. E-mail / Search / Groups / etc. Suck on Facebook — although the Facebook apps mentioned have limits in comparison to their Web 1.0 counterparts, in most cases they also have HUGE benefits. For example, e-mail is limited by the lack of Forwarding, Sorting, Searching and CC’ing, however it benefits from being completely free of SPAM due to Facebook’s role as sherrif enforcing Terms of Service that punish those who would abuse their right to e-mail others. This is an also an example of how having simple, single function apps where every feature is used almost every day is better than having complex, kitchen sink apps that need to find an antidote for their feature bloat.

i. Facebook Apps are Toys for Toddlers — although some people of a certain age and relationship status (e.g., a certain all things digital columnist) don’t need or understand many of the flirtation and courtship apps that are popular on Facebook, they do serve a purpose for millions of Facebook users. In addition, apps like Birthday Calendar and Top Friends have real utility in managing your personal and business relationships with a level of connectedness that was typically reserved for very ambitious sales people and CEO’s who took it upon themselves to learn their customers and competitors’ spouses’ names, childrens’ names, pets’ names and birthdays.

j. People won’t click on ads — the low click-thru on Facebook CPC ads that take the user off of the site is really a testament to the stickiness of Facebook itself. If and when Facebook offers web search (in addition to people, event, group and app search), then click-thru rates will probably approach Google’s for that aspect of the site. In additon, when clicks stay within the site or are made to look like the Facebook newsfeed feature, they enjoy higher click-thru rates than Google’s sponsored links.

k. It’s all college students who won’t buy anything — in every country but the US the demographics of the users matches those of the online population. It is only in the US, where thanks to its 80% to 90% penetration of colleges that the demographics of the users skews to the 18 to 24 year old group. Even this is changing quickly and will continue to grow as the parents, aunts and uncles of high school and college age students begin to understand how useful Facebook is.

l. Business users will stay on LinkedIn — the instant that Facebook finishes their feature for grouping friends by their various types (e.g., school, social, church, business, family, etc.), sites such as LinkedIn will begin to see a mass exodus to Facebook. This may even be accelerated by LinkedIn’s support of OpenSocial which will allow “Exodus Apps” to be written that copy out a user’s profile and connections and migrates them over to Facebook. The reason for this is that Facebook is a site that is visited daily for news and updates whereas LinkedIn is only checked periodically when seeking a new job or business connection.

m. Older people won’t go on Facebook — those older people who loved AOL (and may still be on it) because it is a way of using the web that is shielded from some of its more offensive areas will also love Facebook when they are exposed to it. In addition, older people have children and grandchildren on Facebook that they wish to connect to and Facebook makes this easier than any other system available to them.

n. It hasn’t been localized — this is being fixed but even with its english-only user interface some of the fastest growing countries are places like Turkey and Egypt. This shows the power of Facebook is not the technology or interface but the people that are on the site and once a country tips toward a social network like Facebook, it will be almost as hard to get them to switch as getting the country to change their native language.

o. It has embarrassing photos from my college days — these are easily removed and will soon be easily segregated into areas that will be hard for business collegues and prospective bosses to find. In addition, many in the coming generation are more willing to have who they are be seen by not only their peers but also those who are older (e.g., witness the prevalence of tatoos and piercings in such business settings as high end restaurants, expensive stores and even banks).

p. The Social Graph is a silly term — every revolution needs its buzz word and this one does a fairly good job of describing the fact every person on the planet is connected to one another by a social fabric of friendships and relationships that can be mapped (or graphed) as a series of nodes and lines. Facebook’s goal is to have the most accurate online picture of this social graph and to leverage it by watching the actions of its users and alerting these users’ friends of what they are doing.

q. The management team is full of amateurs — although young, Facebook’s key managers have been parts of major companies before such as AOL, Amazon, etc. and their board includes the founder of PayPal (i.e., Peter Theil who beat an incumbent giant as they tried to launch a competitive payment system, executed an IPO for an initial liquidity event and then grew so threatening they forced eBay to purchase them at a post IPO premium). To date, the Facebook team has grown the company from 3 users to 60 million and from a $10 million valuation to $15+ billion valuation. All in all, not bad for a “bunch of amateurs.” Matt Cohler, Dustin Moskovitz, Adam D’Angelo, Chamath Palihapitiya,Owen Van Atta, Gideon Yu, Dave Morin, Ami Vora, Dave Fetterman have the right stuff and it shows as their their rocket ship has not only achieved escape velocity but is also more than half way to infinity and beyond.

r. Mark Zuckerberg is too young/arrogant/stupid/nervous on stage/insensitive — the same thing was said in just about every first press article about Bill Gates — the other Harvard drop-out that started an OS company with his former roommate. Mark has actually retained a level of humility that is admirable for someone so young with so much early success. I credit this to his parents and to him having his sister in the company to remind him and others about exactly how he was as an awkward youngster.

s. Facebook doesn’t care about their users — it is clear that Facebook is willing to push the envelope WRT features such as the newsfeed and beacon that its users either don’t initially understand or fully appreciate. However, Facebook is also fanatical about creating a safe platform where people are who they say they are (unlike MySpace) and which is family-friendly and where SPAM and phishing scams and data scraping efforts are essentially impossible.

t. The web should be open — As Dave McClure says, “open is not better, better is better.” The advantage of a walled garden with a strictly enforced Terms of Service is that those who would abuse the trust built into the system can be kicked out. This makes it better for those who choose to participate in an environment that works well for them. Most of those crying for Facebook to open up their bag of crown jewels are competitors who would never think of doing the same thing with their most highly prized assets.

u. Facebook is just AOL warmed-over — AOL was well-liked (even loved) by many users for what it offered with 10’s of millions paying a monthly fee just for the right to use it (even after the web became free) and unlike AOL which tried to keep their users from discovering the real web, Facebook’s users know all about the real web and are choosing to spend more and more time inside of Facebook because this is where their friends are. Just like that bar in Boston, Facebook is the place “where everybody knows your name and they’re always glad you came.”

v. Everyone in Brazil uses Orkut and everyone in the Phillipines uses Friendster — this just shows the stickiness of even a less than fully capable social network when an entire country standardizes on it. This loyalty and tipping-point style of dominance is what Facebook is enjoying in almost all of the countries where there are large economies. As I’ve said, getting a country to change its dominant social network is like convincing it to change its native language — it just won’t happen because everyone has to change on the same day to make it work.

w. Google / Yahoo can simply turn their e-mail systems into social networks — no they can’t because they don’t have their users’ permission to do so. In Facebook, if I add a friend I know that my whole network of friends will see this. However, if I add a GMail address, this can’t be shared with the rest of my address book and it is not even clear how one member in my address book, known only via an e-mail, would be recognized by someone else (e.g., “DM2007@aol.com just became friends with NiceGirl05@gmail.com” is much less useful than “Danna Lorenzen just married Kevin Holmes”).

x. Google owns web search forever — while the term Google currently equals Search in most users’ minds, the Facebook Search box is a wedge in this tight coupling the desire to search for something and going to the Google.com home page. The thin end of Facebook’s search wedge comes from the People/Event/Group Searches that are now performed more efficiently at Facebook. When users fully adopt Facebook as their gateway to the web, and Facebook offers web search (powered by Microsoft), then many users will opt for the most convenient Search box which will be inside of Facebook.

y. Microsoft’s investment doesn’t matter — given all of the software wars that Microsoft has won (e.g., Character OS, Graphical OS, Development Environment, Word Processing, SpreadSheet, Presentation, Database, Browser, Server, etc.), it is a mistake to dismiss them when they pick an ally in the Social Operating Systems war. Steve Ballmer likes to win and he has a 30 year track record as a winner — don’t underestimate the 3D chess match he and Bill are playing to beat Google using Facebook.

z. It can’t be worth $100 billion because it is actually worth more than $100 billion — okay, you got me. I can’t refute this one.

Thanks,
Lee Lorenzen
CEO, Altura Ventures LLC — the first facebook-only VC

(c) 2007 - 2008 Altura Ventures LLC.

NOTE: These are rough Talking Points from my Web Community Forum Keynote

Introduction

1. The Altura Ventures’ Genesis Story — I was not present on May 24th at the launch of the F8 Platform and I only knew a little about Facebook from my sons (one of whom graduated from college two years ago and the other who is a Junior this year). I did not have a Facebook account and had only checked out MySpace briefly after its acquisition by Rupert Murdoch. I was not impressed and tried to delete my account the same day I created it (without much success since they make this virtually impossible). In any case, after leaving SHOP.COM where I worked for 9 years to grow the site from 0 to 500,000 users and while working on a new software startup, I read the iLike story of how they launched their facebook app and added 600,000 in 8 hours!!!

   Clearly, there was something new under the sun in software. After studying Facebook from mid June on, I decided to reposition Altura Ventures as the first facebook-only VC.From that point on, I began to use Facebook itself as a way of building my own personal brand as a thought leader in the Facebook space. I created the “Official Altura Ventures and AppFactory Facebook Investment Fund” group and made officers in the group of about 100 of the top 300 Facebook App developers, key Facebook employees and key Microsoft employees. My strategy was based on the fact that since I couldn’t own any of Facebook’s Social Operating System, the next best thing would be to own a portion of Facebook’s Application Space.

   I also acquired Adonomics.com and began to use it as a site to convince developers that their Facebook apps were going to be worth a lot in the future and to not sell them too soon for too little money (e.g., like Favorite Peeps did when they sold an app with 1.5 million users to Slide for only $60,000).I also began to write about the comparison between Facebook’s Social Operating System and Microsoft’s Graphical Operating System. This comparison along with Facebook’s exponential growth in users and applications led me to conclude that they were worth $100 billion and I started to blog about this and attend Facebook conferences where I would explain why I thought this way.

2. $100 Billion!!! Are You Drunk? — At Dave McClure’s Graphing Social Patterns conference, I mentioned my belief about Facebook being worth $100 billion and this led to a series of reactions from the panel that followed mine in which I was accused of being drunk, an idiot and/or crazy enough to be escorted out of the building. While not true, these accusations were made by the likes of Jason Calcanis, Robert Scoble and Michael Arrington and indicated that calculating a valuation for a privately held company that is growing as fast as Facebook is something that is not well understood. It is my goal in this talk to explain how I arrive at the $100 billion figure, convince you that this number is right, show that Facebook has multiple paths to arriving at this number and failing all of that, demonstrate that I not drunk, on crack or crazy.
3. WATER FIGHT! and Birthday Calendar and Stanford Facebook Class — Before beginning, I should also mention that Facebook continues to be the fastest and cheapest way for any company to create an app that can gain 1 to 2 million users in an extremely short period of time. Altura Ventures demonstrated this with two apps WATER FIGHT! and Birthday Calendar that reached 1 million users in only 60 and 15 days, respectively. In addition, 5 of 25 apps from BJ Fogg and Dave McClure’s Stanford Facebook Class reached 1 million users in less than 30 days. This unbelievable growth was accomplished AFTER Facebook had eliminated the Ultra-Viral, Unlimited Invite System that was in place at the time of iLike.

Overview

1. Why Facebook Can’t Be Worth $100 Billion
2. Facebook’s Growth and Current Business
3. Graphical Operating System vs. Social Operating System
4. Value of a Registered Web User vs. a Facebook App User
5. Warren Buffett’s Views On Valuation
6. How Should We Determine Facebook’s Worth?
7. Valuation Time Machine
8. Getting To $100 Billion in 3 Easy Steps
9. $2.4 Billion Per Year from $1 Per User Per Month from 200 million Users
10. $2.4 Billion Per Year from 10+ Partners Paying $20 Million Per Month
11. $2.4 Billion Per Year from 100+ Major Merchandise Categories Paying $2 million Per Month
12. Conclusion
13. Commercial

1. Why Facebook Can’t Be Worth $100 billion?

See the blog post:  A to Z on Why Facebook CAN’T Be Worth $100 Billion. 

2. Facebook’s Growth and Current Business

2004 Feb – 3 users – Mark, Dustin and Chris
2004 Dec – 1 million users (college only members via .edu e-mail verification)

2005 Dec – 5.5 million users (adds high school members)

2006 Dec – 12 million users (opens up to any member)

2007 Apr – 20 million users

2007 May 24 – Platform Launched

2007 Dec – 60 million users

450 employees è -$45 million (headcount)
50 million users è -$25 million (infrastructure)
Page Views è 2.1 billion page views per day
Microsoft Ad Deal è $100 million (approx. $0.13 CPM rate)
Profit è $30 million

2008

900 employees è -$90 million (headcount)
200 million users è -$100 million (infrastructure)
Page Views è 8.4 billion page views per day
Microsoft Ad Deal è $400 million (approx. $0.13 CPM rate)
Profit è $210 million

3. Graphical OS vs. Social OS

	Graphical Operating System	Social Operating System
OS Name	Windows	Facebook
Founder(s)	Harvard drop-out and his former roommate	Harvard drop-out and his former roommate
Initial Launch	1984	2004
Critical Mass Achieved	1995	2007
Competitors	Digital Research’s GEM, IBM’s OS/2 Presentation Manager, VisiCorp’s VisiON, Sun xWindows, Apple’s Mac	MySpace, LinkedIn, Orkut, Friendster, OpenSocial
Focus	Windows SDK à Developers / Developers / Developers!!! 80,000 employees 4+ million 3rd party developers	F8 Platform à Developers / Developers / Developers!!! 450 employees 180,000 3rd party developers
Lock-in	OEM PC companies bundled Windows; Developers’ apps and API knowledge; Consumer investment in apps, file system and user interface	Consumer investment in Profile Data, Notes, Photos, e-Mail history, Groups, Apps, and Friend Network; developers’ apps and API knowledge
Killer Apps	Word, Excel, Powerpoint, Access, Outlook, Browser	Photos, Events, Friends, Newsfeed, Inbox, Groups, Profile Page Calendar, Dining, Travel, Gifting, Shopping, Turn-based Games, Super Groups

4. The Value of a Web User vs. a Facebook App User

	Web site Registration	Facebook App Install
User Actions Required to Accomplish Registration	Select Registration Button, Enter E-mail, Enter & Re-Enter Password, Enter other app related profile data	Select Add Application, Select Continue
Source of New Users	Cost Per Click Advertising (typically $0.25 to $1.00 to get a visitor), Cost Per Impression Advertising, Search Engine Optimization, PR, Offline Advertising, Blogs,	Friend Invites, Friend Newsfeeds
Cost of Registered Users	Assuming 2% conversion rate, $12.50 to $50.00	$0.00 via viral flow, $0.50 for Cost Per Install
Site Reminders	Bookmarking (<1%)	Profile page
Post Registration Marketing Methods	e-mail	e-mail, newsfeed, profile page, friends’ interactions
Opt-Out Rate	50% to 75%	< 1%
Hurdles to Re-using Site/App	Remember e-mail/password	Find app/icon on Profile Page and Click

 

5. Warren Buffett’s Views on Valuation

Warren Buffett’s Definition of Value

The value of any business today is determined by the cash inflows and outflows - discounted at an appropriate interest rate - that can be expected to occur during the remaining life of the asset.”

Owner’s Earnings is the amount all future cash that the investor could take out of the business without hurting the business’s long term competitive position.

Stock Market’s Definition of Value:

Valuation is any amount that a willing seller and buyer agree to

For public stocks, Mr. Market values every business each and every day

And, Warren’s fortune is based on buying stocks whose future earnings
are being undervalued by the marketplace

Valuation is not based on past or current earnings but on future earnings

6. How Should We Determine Facebook’s Worth?

Facebook’s Investment History

June 2004 à 5% sold, implied valuation à$10 million
May 2005 à 12.5% sold, implied valuation à $100 million
Apr 2006 à 5% sold, implied valuation à $500 million
Oct 2007 à 1.6% sold, implied valuation à $15 billion

Facebook’s Valuation Should NOT BE BASED ON:

Yesterday’s Small % Investors

Yesterday’s Earnings

Today’s Monetization Methods

Today’s Strategic Partners

My Estimate of Facebook’s Valuation Is BASED ON:

Today’s Growth Rate

Today’s Developer Platform

Today’s User Experience

Tomorrow’s Monetization Methods

Tomorrow’s Strategic PartnersSum Total of All Future Earnings

So, what is Facebook worth today?

                       Lee’s Answer à $100 billion

7. The Valuation Time Machine

What was Alaska worth in 1867?

1867 – Seward’s Folly:
586,000 square miles for $7.2 million (1.9 cents per acre)
$182 million in today’s dollars

1867 – 1958 à $40 billion in Fur, Gold, Copper, Salmon
1959 – 2006 à $375 billion in Oil, especially after the pipeline

2007 – Today’s valuation = ???

What was Microsoft worth in 1984?

1986 – Post IPO valuation à $750 million

1986 – 2006 à $126 billion in Net Income from OS Licenses, Office Suite Apps

2007 – Today’s Stock Market Valuation = $310 billion

What was Google worth in Dec. 2001?

2001 – AdWords CPM = 2001è $86 million revenue

2002 – AdWords CPM & CPC = 2002 à $347 million revenue

2003 – AdWords CPC only + AdSense = 2003 à $961 million revenue

2004 – Post IPO valuation à $31 billion

2001 – 2006 à $20 billion in Net Income from CPC Search

2007 – Today’s Stock Market Valuation = $218 billion

What was Facebook worth in May 2004?

2004 – $10 million???

Growth of non-college, non-US members
Signing Microsoft advertising deal
Opening of the platform for developers
Accepting Microsoft investment

2007 – Today’s Private Investor Valuation = $15 billion

8. Getting to $100 Billion in 3 Easy Steps

a. What will Facebook’s P/E Ratio Be?

14 – Disney ($62 billion)

17 – GE ($371 billion)

17 – American Express ($67 billion)

22 – Microsoft ($319 billion)

33 – MasterCard ($26 billion)

50 – Yahoo ($34 billion)

54 – Google ($218 billion)

103 – Amazon ($38 billion)

280 – eBay ($45 billion)

b. Earnings Required to Get to $100 Billion Post-IPO Valuation

25 P/E è $4 billion in earnings
42 P/E è $2.4 billion in earnings
50 P/E è $2 billion in earnings

c. Users Required to Get to $100 billion Post-IPO Valuation

2007 à 65 million
2008 à 200 million
2009 à 300 million
2010 à 400 million

d. $100 Billion Post-IPO Valuation è $1 per month per user

P/E ratio = 42
Late 2008 earnings run rate = $2.4 billion
$100 Billion = 42 P/E * $2.4 billion

200 million users$2.4 billion = $200 million per month * 12 months
$200 million per month = $1 per month * 200 million users

9. $2.4 Billion Per Year from $1 Per User Per Month

Add Web Search to Facebook:

28 web searches per user per month

1 in 7 lead to Cost Per Click Sponsored Link click

4 clicks = $1.20 per month per user

(Facebook’s rate: $0.04 per web search)
(Google’s rate: $0.26 per web search)

Create Web-Wide, Open AdSense that is Enhanced with User Data:

Google makes $4.7 billion per year in AdSense Revenue

Facebook could make it 50% better its User Knowledge

Works out to $2.4 billion per year in Facebook’s Share of AdSense Revenue

Offer a Facebook Mall with 35% New Customer Acquisition Fee (otherwise 5% fee)

Average Transaction Size = $30

35% New User Merchant Commission = $10.50

5% Existing User Merchant Commission = $1.50

Purchases Per Year Per User = 2

50% of Purchases are with New Merchants

Commission Fees = $12 on Total of $60 Per User

$12 billion in Mall Sales per year

Works out to $2.4 billion in Customer Acquisition and Commission Fees

Offer a Facebook Wallet (i.e, Web-Wide Auto-Login / One-Click Buy Service)

Prior Wallet’s have failed due to lack of Adoption

Facebook already has massive adoption and complete user data

Facebook already has 6 million credit cards on file

At 1%, this is $2.4 billion for assisting $240 billion in annual purchases

10. $2.4 Billion Per Year from 10+ Partners Paying $20 Million Per Month

License eBay to Power Person to Person Sales

License Amazon to Power Book/Music/Video Sales

License Visa to Power All Credit Card Sales

License Craig’s List to Power Classifieds

License AT&T to Power Yellow Pages

License Expedia to Power Travel

License YouTube to Power Video

License Skype to Power VOIP

License Apple to Power Music Downloads

License eTrade to Power Finance

11. $2.4 Billion Per Year from 100+ Merchandise Categories Paying $2 million Per Month

Gifting – Red Envelope, Gifts.com, Harry & David

Computers – Dell, HP