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Saturday, September 23, 2006

Weekend Edition: Dear Yahoo!: Facebook Is Not Worth $1 Billion

Is Facebook worth $1 Billion?????

Here is a description of Facebook, from the company: Facebook is a social utility that helps people better understand the world around them. Facebook develops technologies that facilitate the spread of information through social networks, allowing people to share information online the same way they do in the real world. Anyone with a valid email address from a supported organization, company, college or high school can register for Facebook. They can then create profiles to connect with friends, share interests, join groups, send messages, write notes and post photos. Facebook launched in February 2004, and the website now has over 9 million registered users across more than 40,000 regional, work, college and high school networks. According to comScore, Facebook is the seventh-most trafficked site on the web and is the number one photo-sharing site.

After reviewing Facebook and its claims in the past and again today, this is a stretch and then some. How do they claim to help better understand the world around them? Maybe they develop technology, but this is a me-too social networking model. Even if it is in the top 20, that may just be a temporary phenomena.

Facebook is far behind the reach and implications of MySpace, and far ahead of a contact manager Plaxo (which could be a huge social networking if it wanted to be). Google grew their own via and Yahoo! already launched Yahoo!360. MySpace does have a younger user base image, but it has crossed over to the 20 and 30-somethings as well, and has been used for business. There is also the independent site LinkedIn, which has been sort of designated as the business person's social networking site. LinkedIn has Netscape founder Marc Andreessen as one of the backers of the company. There is also the YouTube and other video craze going on simultaneously.

The WSJ has noted that the price for Facebook is said to be in the $1 Billion range. The street was at first very critical when Rupert Murdoch committed $580 million of NewsCorp's (NWS) for a Intermix because he wanted a fledgling service for kids and yound adults called MySpace. They thought the model was not even going to catch up, but now Rupert gets to say "Who's Laughing Now!" at those calls. MySpace's dominance essentially raised the bar for the value of social networking sites, but Facebook was just a few months ago given a much higher valuation by backers than it was in the open market. So Yahoo! could essentially be paying double for far less. I won't even go into details about press reports on the founder Mark Zuckerberg.

You just have to wonder what Yahoo! is considering. It is obvious that they have found themselves bent over the barrel and shareholders want more. They just lowered guidance on what they blamed on weak auto and financial services ad spending, and we do not yet know if that is just at yahoo! or if it is systematic. The company has delayed its new 'Panama' search engine, and that has been a sore topic. Yahoo! also allowed Google to go get the MySpace search contract, and that was their mistake.

The really sad issue here is that Yahoo! may HAVE to do this deal just as a defensive measure to keep from losing its number one status in the US and in global web traffic. Alexa still lists Yahoo! as the number one traffic site in the world, followed by Microsoft Network, and then followed by Google. In US traffic, Alexa lists Yahoo! as the leader and Google as number 2, and lists MySpace as number 3 in overall traffic rankings. Facebook is listed on Alexa as the number 15 site in US traffic, but puts the site as number 70 in the global traffic ranking. It falls off on a global basis because of the popular international sites that are more frequently used in Asia and Europe.

Since Google has the MySpace search contract, you would think Rupert Murdoch would walk away from them if they bought facebook because it would be competing against MySpace more than Google's site. That would leave other bidders like AOL, IAC, Microsoft, or a few others, but the $1 Billion will be an over-payment from hell.

Facebook is a popular site, but giving it a $1 Billion value is a stretch and then some. They could invest a fraction of this to populate Yahoo! 360 mush more than they have. Yahoo has a market cap of $35 Billion and the street expects it to have revenues of some $4.7 Billion for 2006. There are some pointing that facebook could do $100 million in sales.

Yahoo! has managed to recover today after a second day of negative action, but this would be a waste of its solid assets and it may inflate some of perceived values of other second and third tier sites. Maybe they think it is 1999 all over again, but hopefully the market will remind them of history.

If Yahoo! could snag YouTube, that might be a better fit.

Jon C. Ogg

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