Social Networking

Web sites like Facebook, MySpace, LinkedIn, Orkut are billed as community sites. You can connect to your friends, and find out what they are up to. It’s a good way to keep track of what people you know are doing. I have a page on three of these sites. Since I am not a very social person, I find the LinkedIn page to be most useful: people update it when they change jobs, and from time to time LinkedIn sends me an e-mail message about changes in the people to whom I am linked.

That’s nice, but it’s not all that exciting. What are these community sites really good for? It seems to me that they are good for keeping up with people who you don’t see every day, and they are good for meeting friends of friends. They could be good for getting recommendations for movies, books, etc., on the theory that you probably like the sorts of things your friends like. They’re a convenient way to have a home web page, though there are several other ways to do that. Arguably I am not the best person to see the use of these sites, since I am not a heavy user. But that fact in itself means that these sites aren’t that useful to some people.

Facebook is in the news these days because Microsoft paid them an amount of money which gives them a $15 billion valuation. Of course that is a very misleading number: Microsoft paid to place ads on Facebook, and Microsoft took a stake in the company. Microsoft will make money selling those ads. In order to determine the valuation that Microsoft put on the company, one needs to distinguish the amount Microsoft paid for ad placement and the amount Microsoft paid for a stake in the company. We don’t know those numbers, so we don’t know what Microsoft really thinks Facebook is worth.

Facebook is also in the news for providing an API for people to write applications which can then appear on their site. That is a nice idea. But really the most interesting thing about these sites is that they provide a network of people. The sites use that to provide information on the site itself, but it would be much more interesting if they used that network to make other sites more useful. For example, while it’s useful on LinkedIn to see where other people work, it would be much more useful to see what other web sites people in my network like. And this might be what it takes to make web annotations really work–a network of people whose annotations you can see.

So what Facebook really should be doing is exporting their network so that other people can write applications which use it. Of course there are some serious privacy issues, but they should be resolvable–Facebook would have to make sure that the contents of the network were not exposed directly, just via things like “propagate to all connections” or “are these two people connected?”

Once Facebook does that, though, there is less reason to spend time on the Facebook site itself. And since Facebook doesn’t seem to have a revenue plan other than advertising, it’s not clear how they will make any money by exposing this information (it’s not clear that they will make much money on advertising either, but it is at least possible). So while I hope they see their way clear to doing this, I don’t know whether they really will.

2 Comments »

  1. rmathew said,

    November 7, 2007 @ 3:48 am

    Facebook is in the news these days because Microsoft paid them an amount of money which gives them a $15 billion valuation. Of course that is a very misleading number: Microsoft paid to place ads on Facebook, and Microsoft took a stake in the company. Microsoft will make money selling those ads. In order to determine the valuation that Microsoft put on the company, one needs to distinguish the amount Microsoft paid for ad placement and the amount Microsoft paid for a stake in the company. We don’t know those numbers, so we don’t know what Microsoft really thinks Facebook is worth.

    First off, Facebook itself claims to have been valued at USD 15 billion:

    http://www.facebook.com/press/releases.php?p=8084

    The exclusive deal was signed last year:

    http://www.facebook.com/press/releases.php?p=635

  2. Ian Lance Taylor said,

    November 7, 2007 @ 7:17 am

    It is in the interest of Facebook, Microsoft, and all of Facebook’s existing investors to claim as high a valuation as possible. That will minimize dilution if any further investment is required, and it will maximize the stock price if Facebook goes public. The revenue for Microsoft from the deal is not relevant in the public market sense, so they don’t have to disclose their thinking. Therefore, I think we can reasonably discount Facebook’s statements about the valuation.

    The exclusive deal signed last year was for the U.S. only. The new deal makes that international, and extends the time period. Microsoft presumably has some real revenue results from the first deal, and presumably used that to put a value on the expected revenue they would get from the new deal. However, that information has not been and will not be disclosed.

    My point is that we don’t know what Microsoft considers Facebook’s valuation to be. $240 million is small compared to $15 billion. To the take the maximal albeit unlikely case, if Microsoft expects to earn that $240 million back by selling international ads, then Microsoft effectively paid nothing for 1.6% of Facebook. That would put Facebook’s value at much less than $15 billion. I don’t know the expected numbers, and nobody outside of Microsoft or Facebook does either.

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