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Science Fiction: Mining My Own Exhaust

 

A few thoughts on Big Data, self-knowledge, and my hopes for the emergence of a new genre of services.

I’m about to fulfill an old fantasy — the Great American Road Trip. Over the next three weeks, we’ll be driving all the way from Key West, FL to Palo Alto. In that spirit, today I’ll luxuriate in another, more distant reverie: Mining my own data exhaust.

I’m spurred to this indulgence by the words of Satya Nadella, Microsoft’s new CEO, at an April 15th event in San Francisco [emphasis mine]:

“The core evolution of silicon, software and hardware is putting computing everywhere humans are present,” Nadella said. “And it’s generating a massive data exhaust of server logs, sensor data and unstructured social stream information. We can use that exhaust to create ambient intelligence for our users.”

Nadella’s right. I leave a cloud of data exhaust with my Web browsing, credit card purchases, cell phone use, monthly blood tests, pharmacy purchases, and airline trips. Server logs detail the length and breadth of my social interactions on Facebook and Google+… And I don’t have to be on a computer to add to the cloud: I’m tracked by toll passes and license plate snapshots as I drive my car. The car itself monitors my driving habits with its black box recording of my speed and direction. This list, far from exhaustive [no pun intended], is sobering – or exciting, full of possibilities.

Today, we’ll skip the Orwellian paranoia and fantasize about an alternate universe where I can “turn the gratis around”, where I can buy my data back.

Google, Facebook, and the like provide their services for free to induce us to lead them to the mother lode: Our cache of product preferences, search history, and web habits. They forge magic ingots from our personal data, sell the bullion to advertisers, and thus fuel the server farms that mine even more data. I’m not here to throw a monkey wrench into this business model; au contraire, I offer a modest source of additional revenues: I’d like to buy my data back. And I’ll extend that offer to any and all entities that mine my activities: For you, at a special price today, I’m buying my data.

(We all understand that this fantasy must take place in an alternate universe. If our legislators and regulators were beholden to us and not to Google, Verizon, and “Concast” [a willful typo from Twitter wags], they would have long ago made it mandatory that companies provide us with our own data exhaust.)

Pursuing this train of thought, one can conceive of brokers scouring the world for my exhausts — after having secured the right permissions from me, of course. Once this becomes an established activity, no particular feat of imagination is required to see the emergence of Big Data processing companies capable of merging and massaging the disparate flumes obtained from cell carriers, e-merchants, search engines, financial services and other service providers.

So far, especially because it lacks numbers and other annoying implementation details, the theory sounds nice. But to what end?

The impulse can be viewed as a version of the old Delphic injunction: Know Thyself, now updated as Know Thine Quantified Self: Quantify what I do with my body, time, money, relationships, traveling, reading, corresponding, driving, eating… From there, many derivations come to mind, such as probabilistic diagnoses about my health, financial situation, career, and marriage. Or I could put my data in turnaround, mandate a broker to shop facets of my refined profile to the top agencies.

Even if we set aside mounds of unresolved implementation details, objections arise. A key member of my family pointedly asks how much do we really want to know about ourselves?

This reminds me of a conversation I once had with a politely cynical Parisian tailor. I ventured that he could help his customers choose a suit by snapping a picture and displaying it on a 80” flat screen TV in portrait mode. My idea was that the large scale digital picture would offer a much more realistic, a more objective image than does a look in the mirror. The customer would be able to see himself as others see him, what effect the new suit would produce – which, after all, is the point of new duds.

“No way,” said the Parisian fashionista, “are you nuts? My customers, you included,” he tartly added, “really don’t want the cruel truth about their aging bodies…”

Still, I’m curious. And not just about the shape and color of the data exhaust that I leave in my wake, about the truths — pleasant or embarrassing — that might be revealed. I’m curious about the types of companies, services, and business models that would emerge from this arrangement. Even more fascinating: How would the ability to mine and sell our own data affect our cultural vocabulary and social genetics?

JLG@mondaynote.com

PS: As offered here, I recently downloaded my Facebook data set. The data doesn’t appear to be very revealing, but that could be the result of my low Facebook involvement — I’m not a very active user. I’d be curious to see the size and detail level associated with a more involved participant.

PPS: I’ll be on the road, literally, for the next three weeks and may or may not be able to post during that time.

Religion is a safer bet than Facebook

 

Facebook’s incredible global reach and success appear to forestall challenges. In the long run, though, the social network’s growth and its frantic quest for new revenue sources raise questions. (First of two articles)    

Casting doubt on Facebook’s future is like going to Rome and questioning the existence of God. It’s not the right venue to do so. First, you can’t argue with figures, they’re overwhelming. Each institution features about the same number of devotees: 1.2 billion across the world. As for financials, Facebook’s annual report shows strong growth and wealth: $7.8bn in revenue for 2013 (+ 55% vs 2012), net income at $1.5bn and a $11bn cash pile. As for the Catholic Church, since it doesn’t not issue financial statements, we are left to guesstimates. Two years ago, a story in the Economist provided a back-of-the-envelope calculation putting the operating budget of the American Catholic Church alone to $170bn, the bulk being health and educational institutions, with $11bn for parishes where hardcore users are – which, for that part, is much better than Facebook.

Why, then, question Facebook’s future? Mainly for two reasons: ARPU evolution and diversification.

Let’s look at a few metrics. The most spectacular is the Monthly Active Users (MAUs) base: 1.23 billion people for the entire world. An interesting way to look at that number is to break down the global MAUs into geographic zones and combine those with ARPU numbers (calculated from the quarterly figures stated in the annual report). The results look like this:

316_facebook_arpu

Facebook’s long term challenge comes from these two factors: North American growth will be flat this year, and the rest of the world doesn’t bring much. The company is heavily and increasingly dependent on advertising: from 85% of its revenue in 2012 to 89% last year. Logically, its only option is to squeeze more money per user — which it steadily managed to do thus far. But, in the Facebook ecosystem, making more money from ads means milking more cash from users’ data. This, in turn, will lead to a greater invasion of privacy. It certainly doesn’t seem to bother Mark Zuckerberg, who is a transparency apologist.

Actually: Is he or was he?

As author David Kirkpatrick pointed out in his excellent opus, The Facebook Effect, Zuckerberg once said that “Having two identities for yourself is an example of a lack of integrity” (and judging by FB’s content policy, anyone can wonder if putting a breast-feeding pictures a sign of depravation?)

That was then.

Now, to address privacy concerns, Facebook is said to consider anonymous logins. It’s probably a good idea to back off a bit on the totalitarian pitch quoted above, but since the extensive data-mining performed by the network is made much more valuable by its use of real user names, anonymous logins are sure to impact the ARPU in the more mature markets. Along that line of thought, in Europe, Facebook’s ARPU is less than half of what it is in the US & Canada: $8.04 vs. $18.70. This significantly lower number stems from privacy concerns that are much more developed in European countries. There, the 20-25 segment seems especially worried about the consequences of spending too much time on Facebook.

A remaining lever is what I’ll call the Big Tobacco strategy: Do elsewhere what you can no longer do on your home playing field. Facebook might not be as cynical as Philip Morris (reborn as Altria as an attempt to erase the stain), but it is undoubtedly bound to try and replicate its successful collect-and-milk consumer data mechanism.

This might take a while to achieve.

First because of the ultra-slim ARPU generated by emerging markets users. You might object that the Indian market, as an example, currently enjoys growth along two dimensions: more users, with growing incomes. Granted. But the more sophisticated the India market becomes, the more inclined it will be to create a social network much more attuned to its own culture than a Menlo Park-based system manned by geeks in hoodies. Never underestimate the power, nor the determination of locals. And, let’s not dream too much about a huge Chinese version of Facebook.

Also, for Facebook, the cost of operating its service will make the ARPU question one of growing urgency. Again, based on the 2013 annual report, FB’s Cost of Revenue — mostly infrastructure –  amounts to $1.9bn. Divided by the 757 million DAUs, it costs $2.5 per year to serve a single daily user, that is connecting to his/er pals, hosting photos, videos, etc. If we aggregate all the cost structure components (networking, giant data centers and also R&D, sales & marketing, administrative), the cost of taking care of a single daily user rise to $6.69 per year and $4.12 for a monthly user. It’s still fine for an American and a European, much less so for an Asian who brings a yearly ARPU of $3.15, or an African who brings a mere $2.64 (in theory, the strain on the infrastructure is roughly the same, regardless of user location).

But some will argue Facebook is doing quite well on mobile. Out of its 1.23 billion monthly users, FB says 945 million reach its service via a mobile each month and 556 million do so on a daily basis. And, as stated in its 10-K, mobile is at the core of Facebook’s future:

There are more than 1.5 billion internet users on personal computers, and more than three billion mobile users worldwide according to GSMA Wireless Intelligence, and we aspire to someday connect all of these people. 

Fine, but once again, the ARPU weakens the ambition. While a mobile subscriber in the US and Europe brings respectively $69 and $38 each year (source: GSMA), according to the Cellular Operator Association of India, a Indian mobile subscriber yields only $1.72 per year. This makes advertising projections a tricky exercise.

As it expands, Facebook’s current model will inevitably yield less and less money per user. Hence, its frenetic quest for diversification and service extensions — a topic we’ll address in a future Monday Note.

As for the Church, it certainly is a safer bet than Facebook: The user base is less volatile, the interface blends much better into local cultures, barriers to competitive entries are stronger (and much older), and believers have long sacrificed their privacy to articles of faith.

frederic.filloux@mondaynote.com

 

Facebook Home: Another Android Lock Pick

 

Facebook’s new Home on Android smartphone is an audacious attempt to demote the OS to a utility role, to keep to itself user data Android was supposed to feed into Google’s advertising business. Google’s reaction will be worth watching.

Amazon’s Kindle Fire, announced late September 2011, is viewed as a clever “Android lock pick“. Notwithstanding the term’s illicit flavor, Amazon’s burglary is entirely legal, an intended consequence of Google’s decision to Open Source their Android mobile operating system. Download the Android source code here, modify it to your heart’s — or business needs’ — content, load it onto a device and sell as many as you’d like.

Because it doesn’t fully meet the terms of the Android Compatibility Program, Amazon’s proprietary version isn’t allowed to use the Android trademark and the company had to open its own App Store. In industry argot, Amazon “forked” Android; they spawned an incompatible branch in the Android Source Tree.

The result of this heretic version of Android is a platform that’s tuned to Amazon’s own needs: Promoting its e-commerce without feeding Google’s advertising money pump.

And that brings us to Facebook’s new Home.

(The company’s slick presentation is here. Business Insider’s also provides a helpful gallery.)

Zuckerberg’s new creation is the latest instance of the noble pursuit of making the user’s life easier by wrapping a shell around existing software. Creating a shell isn’t a shallow endeavor; Windows started its life as a GUI shell wrapped around MS-DOS.  Even venerable Unix command line interfaces such as C shell, Bourne, and Bash (which can be found inside OS X) are user-friendly — or “somewhat friendlier” — wrappers around the Unix kernel. (Sometimes this noble pursuit is taken too far — remember Microsoft’s Bob? It was the source of many jokes.)

Facebook Home is a shell wrapped around Android; it’s a software layer that sits on top of everything else on your smartphone. Your Facebook friends, your timeline, conversations, everything is in one place. It also gives you a simple, clean way to get to other applications should you feel the need to leave the Facebook corral… but the intent is clear: Why would you ever want to leave Home?

This is audacious and clever, everything we’ve come to expect from the company’s founder.

To start with, and contrary to the speculation leading up to the announcement, Facebook didn’t unveil a piece of hardware. Why bother with design, manufacture, distribution and support, only to sell a few million devices — a tiny fraction of your one billion users — when you can sneak in and take over a much larger number of Android smartphones at a much smaller cost?

Second, Home is not only well-aligned with Facebook’s real business, advertising revenue, it’s even more aligned with an important part of the company’s business strategy: keeping that revenue out of Google’s hands. Android’s only raison d’être is to attract a captive audience, to offer free services (search, email, maps…) in order to gain access to the users’ actions and data, which Google then cashes in by selling eyeballs to advertisers. By “floating” above Android, Home can keep these actions and data to itself, out of Google’s reach.

Facebook, like Amazon, wants to keep control of its core business. But unlike Amazon, Facebook didn’t “fork” Android, it merely demoted it to an OS layer that sits underneath the Home shell.

On paper and in the demos, it sounds like Zuckerberg has run the table… but moving from concept to reality complicates matters.

First, Facebook Home isn’t the only Android shell. An important example is Samsung, the leading Android player: it provides its own TouchWiz UI. Given that the Korean giant is obviously determined to stay in control of its own core business, one wonders how the company will welcome Facebook Home into the family of Galaxy phones and phablets. Will it be a warm embrace, or will Samsung continually modify its software in order to keep Home one step behind?

More generally, Facebook has admitted that differences in Android implementations prevent the first release of Home from working on all Android phones. In order to achieve the coverage they’ll need to keep Google (and its Google+ social networking effort) at bay, Facebook could be sucked into a quagmire of development and support.

Last but not least, there’s Google’s reaction.

So far, we’ve heard little but mellifluous pablum from Google in response to Home. (Microsoft, on the other hand, quickly attempted to point out that they were first with an all-your-activities-friends-communications shell in Windows Phone but, in this game, Android is the new Windows and Microsoft is the Apple of the early 90′s.)

Google has shown that it can play nice with its competitors — as long as they aren’t actually competing on the same turf. The Mountain View company doesn’t mind making substantial ($1B or more) Traffic Acquisition payments to Apple because the two don’t compete in the Search and Advertising business. Facebook taking over an Android smartphone is another matter entirely. Google and Facebook are in the same game; they both crave access to user data.

Google could sit back and observe for a while, quantify Facebook’s actual takeover of Android phones, keep tabs on users’ reactions. Perhaps Home will be perceived as yet another walled garden with a massive handover of private data to Facebook.

But Google already sees trouble for its Android strategy.

Many Asian handset makers now adopt Android without including services such as Google Search, Gmail, and Google Maps, the all-important user data pumps. Samsung still uses many of these services but, having gained a leading role on the Android platform, it might demand more money for the user data it feeds to Google, or even fork the code.

In this context, Facebook Home could be perceived as yet another threat to the Android business model.

A number of possible responses come to mind.

In the computer industry, being annoyed or worse by “compatible” hardware or software isn’t new. As a result, the responses are well honed. You can keep changing the interface, thus making it difficult for the parasitic product to bite into its host and suck its blood (data, in this case), or you change the licensing terms.

Google could change or hide its APIs (Application Programming Interfaces) in order to limit Home’s functionality, or even prevent it from running at all (at least until a particularly nasty “bug” is fixed). Worse, Google could makes changes that cause the Facebook shell to still run, but poorly.

I’ll hasten to say that I doubt Google would do any of this deliberately — it would violate the company’s Don’t Be Evil ethos. But… accidents could happen, such as when a hapless Google engineer mistakenly captured Wifi data.

Seriously, FaceBook Home is yet another pick of the Android lock, a threat against Google’s core strategy that will have to be addressed, either with specific countermeasures or with more global changes in the platform’s monetization.

JLG@mondaynote.com

Facebook’s Gen Y Nightmare

 

GenerationY will — paradoxically — pay a high price for giving up its privacy to Facebook.                  

Taos, New Mexico, Fall 2012. At 18, Tina Porter has been on Facebook for four years. Duly briefed by her parents, a teacher and a therapist, she takes great care not to put contents — remarks on her wall, photos, videos — that could expose her in a unwanted manner.

Still. Spending about 30 hours a month on the social network, she has become as transparent as a looking glass. It will impact the cost of her health insurance, her ability to get a loan and to find a job.

Denver, Colorado, spring 2018. Tina is now 24. She’s finishing her law degree at Colorado State University. She’s gone through a lot: experimenting with substances, been pulled over for speeding a couple of times, relying on pills to regain some sleep after being dumped by her boyfriend.  While Tina had her share of downs, she also has her ups. Living in Denver she never missed an opportunity to go hiking, mountain biking, or skiing — except when she had to spend 48 gruesome hours in the dark, alone with a severe migraine. But she remains fit, and she likes to record her sports performances on health sites — all connected to Facebook — and compare with friends.

Seattle, winter 2020. In a meeting room overlooking the foggy Puget Sound, Alan Parsons, head of human resources at the Wilson, McKenzie & Whitman law firm holds his monthly review of the next important hires. Parsons is with Marcus Chen, a senior associate at Narrative Data Inc., both are poring over a selection of resumés. Narrative Data was created in 2015 by a group of MIT graduates. Still headquartered in Cambridge, Massachusetts, the startup now helps hundreds of corporations pick the right talent.

Narrative Data doesn’t track core competencies. The firm is more into character and personality analysis; it assesses ability to sustain stress, to make the right decision under pressure. To achieve this, Narrative Data is staffed with linguists, mathematicians, statisticians, psychologists, sociologists, neuroscientists. What they basically do is data-mining the social internet: blogs, forums, Twitter, and of course Facebook. Over the years, they’ve drawn a map of behaviors, based on language people use. Thanks to Narrative Data’s algorithm, everyone aged above 20, can have his or her life unfolded like a gigantic electronic papyrus scroll. HR people and recruiters love it. So do insurance companies and banks.

Of course, in 2015 no one will be dumb enough to write on his Facebook wall something like “Gee, bad week ahead, I’m heading to my third chemotherapy session”. But Narrative Data is able to pinpoint anyone’s health problems by weaving together language patterns. For instance, it pores over health forums where people talk, openly but anonymously, about their conditions. By analyzing millions of words, Narrative Data has mapped what it calls Health Clusters, data aggregates that provide remarkable accuracy in revealing health conditions. The Cambridge company is even working on a black program able to “de-anonymize” health forum members thanks to language patterns cross-matching with Facebook pages. But the project raises too many privacy issues do be rolled out — yet.

Tina Porter’s resumé popped up thanks to LinkedIn Expert, the social network’s high-end professional service. LinkedIn, too, developed its own technology to data-mine resumés for specific competences. Tina’s research on trade disputes between Korea and the United States caught everyone’s interest at Wilson, McKenzie. That’s why her “3D Resumé” — a Narrative Data trademark — is on the top of the pile, that is displayed on a large screen in the meeting room.

Narrative’s Marcus Chen does the pitch:
“Tina Porter, 26. She’s what you need for the transpacific trade issues you just mentioned, Alan. Her dissertation speaks for itself, she even learned Korean…”
He pauses.
“But?…” Asks the HR guy.
“She’s afflicted with acute migraine. It occurs at least a couple of times a month. She’s good at concealing it, but our data shows it could be a problem”, Chen said.
“How the hell do you know that?”
“Well, she falls into this particular Health Cluster. In her Facebook babbling, she sometimes refers to a spike in her olfactory sensitivity — a known precursor to a migraine crisis. In addition, each time, for a period of several days, we see a slight drop in the number of words she uses in her posts, her vocabulary shrinks a bit, and her tweets, usually sharp, become less frequent and more nebulous. That’s an obvious pattern for people suffering from serious migraine. In addition, the Zeo Sleeping Manager website and the stress management site HeartMath — both now connected with Facebook –  suggest she suffers from insomnia. In other words, Alan, we think you can’t take Ms Porter in the firm. Our Predictive Workforce Expenditure Model shows that she will cost you at least 15% more in lost productivity. Not to mention the patterns in her Facebook entries suggesting a 75% chance for her to become pregnant in the next 18 months, again according to our models.”
“Not exactly a disease from what I know. But OK, let’s move on”.

I stop here. You might think I’m over the top with this little tale. But the (hopefully) fictitious Narrative Data Inc. could be the offspring of existing large consumer research firms, combined to semantic and data-mining experts such as Recorded Future. This Gothenburg (Sweden)-based company — with a branch in… Cambridge, Mass. –  provides real time analysis of about 150,000 sources (news services, social networks, blogs, government web sites). The firm takes pride in its ability to predict a vast array of events (see this Wired story).

Regarding the “de-anonymizing” the web, two years ago in Paris, I met a mathematician working on pattern detection models. He focused on locating individuals simply through their cell phones habits. Even if the person buys a cell phone with a fake ID and uses it with great care, based on past behavior, his/her real ID will be recovered in a matter of weeks. (As for Facebook, it recently launched a snitching program aimed at getting rid of pseudonyms — cool.)

Expanding such capabilities is only a matter of refining algorithms, setting up the right data hoses and lining up the processing power required to deal with petabytes of unstructured data. Not an issue anymore. Moore’s Law is definitely on the Inquisitors’ side.

frederic.filloux@mondaynote.com

Facebook: The Collective Hallucination

Facebook’s bumpy IPO debut could signal the end of a collective hallucination. Most of it pertains to the company’s ability to deliver an effective advertising machine.

Pre-IPO numbers looked nice, especially when compared to Google at this critical stage of their respective business lives:

Based on such numbers, and on the prospect for a billion users by the end of 2012, everyone began to extrapolate and predict Facebook’s dominance of the global advertising market.

Until some cracks began to appear.

The first one was General Motors’ decision to pull its ads off Facebook. This was due to poor click-through performance compared to other ads vectors such as Google. No big deal in terms of revenue: according to Advertising Age, GM had spent a mere $10 million in FB ads and a total $30 million maintaining its presence on the social network. But Facebook watchers saw it a major red flag.

The next bad signal came during the roadshow, when Facebook issued a rather stern warning about its advertising performance among mobile users.

“We believe this increased usage of Facebook on mobile devices has contributed to the recent trend of our daily active users (DAUs) increasing more rapidly than the increase in the number of ads delivered.”

If Facebook can’t effectively monetize its mobile users, it is in serious trouble. Numbers compiled by ComScore are staggering: last March, the average American user spent 7hrs 21 minutes on mobile versions of Facebook (80% on applications, 20% on the mobile site). This represents a reach of more than 80% of mobile users and three times that of the next social media competitor (Twitter), see below:

(source : ComScore)

More broadly, Facebook experiences the unlimited supply of the internet in which users create inventory much faster than advertising can fill it. This trend is known to push ads prices further down as scarcity no longer contains them. The reason why the TV ad market is holding pretty well is its lasting ability to create a tension on prices thanks to the fixed numbers of ad slots available over a given period of time.

Unfortunately for its investors, in many ways, Facebook is not Google. First of all, it has no advertising “killer format ” comparable to Google’s AdWords. The search engine text ads check all the boxes that make a success: they are ultra-simple, efficient, supported by a scalable technology that makes them well-suited for the smallest advertisers as well as for the biggest ones; the system is almost friction-free thanks to an automated market place; and its efficiency doesn’t depend on the quality of creation (there is no room for that). One cent a time, Google churns its enormous revenue stream, without any competition in its field.

By contrast, Facebook’s ad system looks more traditional. For instance, it relies more on creativity than Google does. Although the term sounds a bit overstated considering the level of tactics Facebook uses to collect fans and raise “engagement” of any kind. For example, Tums, the anti-acid drug, developed a game encouraging users to throw virtual tomatoes at pictures of their friends. On a similar level of sophistication, while doing research for this column, I landed on the Facebook Studio Awards site showcasing the best ads and promotional campaigns. My vote goes to the French chicken producer Saint Sever, whose agency devised this elegantly uncomplicated concept: “1 ami = 1poulet” (one friend, one chicken):

If this is the kind of concept Facebook is proud to promote, it becomes a matter of concern for the company’s ARPU.

Speaking of Average Revenue Per User, last year, Facebook made $4.34 per user in overall advertising revenue. A closer look shows differences from one market to another: North America, the most valuable market, yielded $9.51 per user vs. $4.86 for the European market, $1.79 in Asia and only $1.42 for the rest of the world. Facebook’s problem lies exactly there: the most profitable markets are the most saturated ones while the potential for growth resides mostly in the low-yield tier. In the meantime, infrastructure costs are roughly identical: it costs the same to serve a page, or to synchronize a photo album located in Pennsylvania or in Kazakhstan (it could even cost more per user in remote countries, and some say that FB’s infrastructure running costs are likely to grow exponentially as more users generate more interactions between themselves).

Facebook might be tempted to mimic a rather questionable Google trait, that is “The Theory Of Everything”. Over the last years, we’ve seen Google jumping on almost everything (including Motorola’s mobile business), trying a large, confusing array of products and services in order to see what sticks on the wall. The end result is an impressive list of services that became very valuable to users (mail, maps, docs). But more than 90% of Google revenue still come from a single stream of business, search ads.

As for Facebook, we had a glimpse already with the Instagram acquisition (see a recent Monday Note), which looked more like a decision triggered by short-term agitation than by long-term strategic thought. We might see other moves like this as Mark Zuckerberg retains 57% of the voting shares and as the company sits on a big (more than $6 billion) pile of cash. Each month brings up a new business Facebook might be tempted to enter, from mobile phones, to search.

All ideas that fit Facebook’s vital need for growth.

frederic.filloux@mondaynote.com

Decoding Share Prices: Amazon, Apple and Facebook

There are many religions when it comes to calculating the “right” price for the shares of a publicly traded company. At a basic level, buying a share is an act of faith in the company’s future earnings. The strength of this belief manifests itself in the company’s P/E (Price/Earnings) ratio. The stronger the faith, the higher the P/E, an expectation of increased profit.

Sometimes, an extreme P/E number beggars belief, it invites a deeper look into the thoughts and emotions that drive prices.

One such example is Amazon. On the Nasdaq stock market, AMZN trades at more than 174 times its most recent earnings. By comparison, Google’s P/E hovers around 17, Apple and Walmart are a mere 14, Microsoft is a measly 11.

This is so spectacular that many think it doesn’t make sense, especially when looking at Amazon’s falling profit margin (from this Seeking Alpha post):

Why do traders bid AMZN so high in the face of a declining .5% profit margin?

In his May 5th PandoDaily piece, “Nobody Seems to Understand What Jeff Bezos is Doing. Does He?”, Farhad Manjoo questions Jeff Bezos’s strategy and Amazon’s taste for obfuscating statements:

“Amazon is not merely “willing” to be misunderstood, it often tries to actively sow widespread misunderstanding. This works [to] its advantage; if competitors don’t know what Amazon is up to, if they can’t even figure out where and how it aims to make money, they’ll have a harder time beating it.”

…and he concludes:

“Is Bezos crazy like a fox? Or is he just plain crazy? We have no idea.”

He’s not alone: Year after year, critics have challenged Bezos’ business acumen, criticizing his grandiose views and worrying about the company’s bottom line. But the top line, revenue, keeps rising. See this chart from a Seeking Alpha article by Richard Bloch:

The answer to Farhad’s question, the cold logic behind the seemingly irrational share price is clear: Amazon sacrifices profits in order to gain size and, in the process, kill competitors.

That’s step one.

Step two: After having cleared the field, Amazon will take advantage of what is delicately called “pricing power”. As the Last Man Standing, they will raise prices at will and regain profitability. This isn’t Amazon’s only game. The breadth of their offering, their superior customer service and awesome logistics, make life difficult for poorly managed competitors such as Best Buy, or the undead Circuit City, to name but a few companies whose weaknesses where exposed by Amazon’s superbly efficient machine.

But traders recognize the wink and the nod behind today’s numbers, they are willing to pay a high price for a share of Amazon’s future dominant position.

Apple’s share price sits at the other end of the P/E spectrum. Revenue and profits grow rapidly: + 58% profit year-to-year, + 94% net income. “Normal” companies in their league are supposed to fall to the Law of Large Numbers: High percentage growth becomes well-nigh impossible when a company achieves Apple’s gigantic size. A $100B business needs to dig up $25B in new business to grow 25%. $25B is roughly half the size of Dell. When Apple’s revenue grows 58%, that’s more than one Dell on top of last year’s business.

Apple is the nonpareil of fast-growing, prosperous companies. They’re in a young market: smartphones and tablets. They can easily break the Law. With only 8% of the mobile phone market, the iPhone enjoys considerable headroom. And the iPad’s +151% year/year unit growth shows even greater potential.

So why isn’t Wall Street buying? Why do they think Apple has so much less room to grow than Amazon?

First, a big difference: Apple’s founder is no longer with us while Bezos is very much in command. This is no criticism of Tim Cook, Apple’s new CEO. A long-time Jobs lieutenant, the architect of Apple’s supremely effective Supply Chain, a soberly determined man, well liked, respected and healthily feared inside the company, Tim Cook is eminently credible. But traders are cautious; they want to see if the Cook regime will be as innovative, as uncompromisingly focused on style and substance as before.

Second, the much talked-about iPhone subsidy “problem”. The accepted notion is that Apple has strong-armed carriers into paying “excessive” subsidies for the iPhone, some say as much as $200 more than carriers pay other handset makers. (See “Carriers Whine: We Wuz Robbed!” of March 11, 2012.) Carriers rattle their sabers, they let everyone know they’re looking forward to the day when they will no longer be fleeced by the Cupertino boys.

The numbers are impressive. Take about 150 million iPhones this calendar year (37M units in the last quarter of 2011); assume that 80% of these iPhones are subsidized by carriers…that’s $24B in subsidies. For people who are betting on Apple’s future profits, these are big numbers that could go either way: Straight to Apple’s bottom line as they do today, or back to the carriers’ coffers “where they belong”. For Apple, with today’s P/E of 14, a swing of $24B in profits would result in a change of $336B in market cap. (Today Wall Street pegs AAPL at $525B.)

I’m not saying such a shift is likely, or that it would happen in one fell swoop. I use this admittedly caricatural computation to make a point: Carrier subsidies have a huge impact on Apple’s bottom line, and the perceived uncertainty over their future gives traders pause.

I’ll now take the opposite tack with this Horace Dediu tweet:

In my venture investing experience, it sometimes happens that the top salesperson makes more money than the CEO. In most instances the exec is happy to see big revenue come in and doesn’t begrudge the correspondingly large commissions. But, in the rare case of the CEO turning purple because a lowly peddler makes more money than him (it’s a male problem), we take the gent aside and gently let him know what will happen to him if he does it again.

Carriers sound like the bad CEO complaining about excessive sales commissions racked up by their star revenue maker. Carriers are contractually obligated to keep iPhone figures confidential so we can’t make a direct ARPU comparison — but we have anonymous leaks and research-for-hire firms, they’re curiously silent on the question of actual ARPU by handset. In the absence of a clear case made to the contrary, we’ll have to assume that the iPhone is the carriers’ top revenue generator, and that the subsidies will continue.

This said, if Apple comes out with a mediocre iPhone, or if Samsung produces a distinctly more attractive handset, the salesman’s commission will disappear, Apple’s revenue per iPhone (about $650 in Q1 2012) will drop precipitously, and so will profits.

That’s the scenario that makes traders cautious: Large amounts of profit are at risk, tied to carrier subsidies. They wonder if Apple’s lofty premium is sustainable and, as a result, they assign AAPL a lower P/E.

But “caution” may be too weak a word. In a May 7th 2012 Asymco post, Horace Dediu plots Apple’s share price as a function of cash:

This is troubling. It implies that cash is the only determinant of Apple’s share price.

Put another way, and recalling that share prices are supposed to reflect earnings expectations, it appears Wall Street puts little faith in the future of Apple’s earnings [emphasis mine]:

“Given this disconnect from the income statement, the pricing by balance sheet multiple seems to be a symptom of something deeper. Reasons vary with the seasons, but the company is not perceived to have sustainable growth.

Fascinating. The collective wisdom of Wall Street is that one of the most successful high-tech companies of all times, with three healthy product lines, strong management, generally happy customers and employees is not perceived to have sustainable growth.

We’ll see.

(In the interest of full disclosure, I’ll repeat something I’ve stated here before: I don’t own publicly-traded stocks, Google, Microsoft, Apple or any other. I consider the stock market a dangerous place where, across the table, I see people with bigger brains, bigger computers, and bigger wallets than mine. I can’t win. The casino always does…unless you don’t trade but, instead, invest–that is buy shares and keep them for years, the way Warren Buffet does.)

And Facebook?

I’ll wait for the dust of this botched IPO to settle before I try to figure out what Facebook’s share price reflects. I agree with Ronal Barusch in his WSJ blog piece: I’m not convinced that Facebook or its bankers will suffer irreparable damage.

Still, rumors and accusations are flying. Following Nasdaq’s disastrous handling of Facebook’s opening trades, we hear that the New York Stock Exchange is discreetly suggesting that the company move to a more sophisticated trading platform. This is a great opportunity for Facebook to change its FB stock trading symbol and adopt one that more accurately reflects its opinion of Wall Street.

I have a suggestion: FU.

JLG@mondaynote.com

Facebook in Frantic Mode

Facebook’s acquisition of Instagram — for one billion dollars — tells a lot about Mark Zuckerberg’s state of mind. Which is at least as interesting as other business considerations and was best captured by cartoonist Ingram Pinn in last week’s Financial Times comic. To illustrate John Gapper’s excellent Facebook is scared of the Internet column, Ingram Pinn draws an agitated Mark Zuckerberg frantically walking through a hatchery, collecting just hatched startup-chicks as fast as he can, while, in the background, AOL and Yahoo collect older chickens in larger carts.

In last week’s Monday Note, I hinted that I’d never put my savings in Facebook’s stock. (For that matter, I see writing on business and owning stocks as incompatible). When I read the news of the Instagram acquisition, I wondered: Imagine Facebook already trading on the Nasdaq; how would the market react? Would analysts and pundits send the stock upward, praising Zuckerberg’s swiftness at securing FB’s position? Or, to the contrary, would someone loudly complain: What? Did Facebook just burn the entire 2011 free cash-flow to buy an app with no revenue in sight, and manned by a dozen of geeks? Is this a red-flag symptom of Zuckerberg’s mental state?

Four things come to mind.

1/ Because he retains 57% of Facebook voting rights, Zuckerberg rules its board and can make any decision in a blink of an eye, no debate allowed. This can be a great asset in Silicon Valley’s high speed tempo, or it can stir up shoot-from-the-hip impulsiveness.

2/ Facebook’s founder attitude reminds one of Bill Gates during Microsoft’s heydays: no crack allowed in the wall of its dominance. The smallest threat must be eliminated at any cost. Where Microsoft used legally dubious tactics, Facebook unsheathes its wallet and fires a billion dollars round. In the startup world, this will have two side effects: For one, Facebook is likely to become the exit of choice Google once was. Two, the size of the Instagram transaction (some of it in stock) is likely to act as a beacon for any startup harvesting users by the millions. It sets an inflationary precedent.

3/ By opting for such a deal, Facebook’s management reveals its own feelings of insecurity. It might sounds crazy for a company approaching the billion users mark and providing an array of services that became a substitute to the internet’s basic functions. But, with this transaction, the ultra-dominant social network acted like an elephant scared of a mice. Instagram has 35 million users? Fine. But how many are using the service more than occasionally? Half of it? How many are likely to switch overnight to a better app? Most likely many will. Especially since Instagram is not a community per se, but a gateway to larger ones such as Twitter and Facebook.

4/ From a feature-set perspective, Facebook might find itself in a quandary. Kevin Systrom and Mike Krieger designed the ultimate stripped-down application: a bunch of filters and a few basic sharing features. That’s it. It is both Instagram strength and main weakness. Such simplicity is easy to replicate. At the same time, if Facebook-Instagram wants to raise the feature-set bar, it might lose some of its users base and find itself competing with much better photo-sharing applications already populating Apple or Android app stores.
To put it differently, Facebook photo-sharing model had been leaking for a while. Zuckerberg just put  a serious plug on it, but other holes will appear. A couple of questions in passing: Will Facebook continue to accept and encourage loads of third parties photo-sharing apps that connect to its network? Some are excellent — starting with Apple’s iPhoto, especially the iDevice version that will always benefit of an optimized hardware/software integration. How does Facebook plan to deal with that? And if it chooses to grant some level of exclusivity to the Instagram app, how will the audience react (especially when you read comments saying “We liked IG because it wasn’t FB”)?

Lastly, the bubble question. Again, three things.

First, let’s be fair. If indeed there is a new internet bubble, Facebook isn’t the only player to fuel it; investors who lined up at Instagram’s doorstep did it too. A few days before the deal, IG raised $50 million at a half billion valuation; Zuckerberg snatched the company by simply doubling the bet.

Two, comparing the FB/IG deal to Google’s in 2006 acquisition of YouTube for $1.65 billion doesn’t fly either. From the outset, everyone knew internet video was destined to be huge; it was a medium of choice to carry advertising. Therefore, the takeover by Google’s fantastic ad-machine was likely to yield great results. YouTube became a natural extension of Google services — just look at how competing services such as DailyMotion in France, or Vimeo are doing without the ad rocket-engine.

Three, the metrics used in an attempt to relativize the deal are dubious at best. Instagram had no monetization strategy–other that a lottery-like exit. This says applying any kind of cost per user ($33 for the theory in vogue) is bogus. Being unable to project any sustainable revenue mechanism makes such a valuation process completely pointless. In Instagram’s case, the only way to come up with a price tag was guessing the amount of money a small group of suitors–Facebook, Google and Twitter–might be willing to cough up for Instagram’s eyeballs.

If this deal shows one thing, it is the frenzied, cutthroat competition these three players are now locked in. Mark Zuckerberg is not through with collecting hatching eggs. He won’t be alone either.

frederic.filloux@mondaynote.com

The “Sharing” Mirage

This week’s most stunning statistic: In February, Facebook drove more traffic to the Guardian web site than Google did. This fact was proffered (I couldn’t bring myself to write shared) at the Changing Medias Summit Conference by Tanya Corduroy, Guardian’s director for digital development (full text of her speech):

Eighteen months ago, search represented 40% of the Guardian’s traffic and social represented just 2%. Six months ago – before the launch of our Facebook app – these figures had barely moved.

A recent Pew report echoed these figures, revealing that just 9% of digital news consumers follow news recommendations from Facebook or from Twitter. That compares with 32% who get news from search.

But last month, we felt a seismic shift in our referral traffic. For the first time in our history, Facebook drove more traffic to guardian.co.uk than Google for a number of days, accounting for more than 30% of our referrer traffic. This is a dramatic result from a standing start five months ago.

She made her point with a graph showing the crossing of the two traffic lines, even though the Facebook referrals now appear to be receding:

This is obviously a great achievement for the team who created the FB app. Overall, The Guardian’s relentless pursuit of digital innovation is paying off. Its last month traffic stats are staggering: more than 4 million unique browsers (+64% vs. Feb 2011) and almost 70 million unique browser monthly (+76% vs. Feb 2011). As for its mobile site, it is growing at a year-to-year rate of… 182%, with 640,000 unique browsers a month.

The Guardian Facebook App played a critical role in this rise in traffic. Over the last five months, 8 million people downloaded it and 40,000 are signing up every day, again according to Tanya Cordrey.

While it is the most documented, the Guardian’s case is far from being an isolated one. Scores of online news organizations are now betting on Facebook to boost their traffic. So far no one regrets the move. Not even the reader who can now enjoy for free what s/he is otherwise expected to pay. Take the Wall Street Journal: Against my objections, by forcing me to buy the mobile version, it abusively charged me €307 to renew my yearly subscription (which translate into a 100% price hike!) — this while most of it content is available on Facebook for free. And here in France, I know of one of the most viewed newspaper site about to go on Facebook with the following rationale: ‘We know we are not going to make a dime from this move, but we have to be there. We know our FB app will be a hit, and we’ll decide later what to do next…’ Once hooked on that eyeballs fix —even non-paying ones— it is safe to assume this company’s marketing people will be reluctant to lose their valuable new audience.

There are plenty of good reasons for large news organizations to be on Facebook. But the current frenzy also raises questions. Here is a sample:

#1: Demographics. As the Guardian example shows in the graph below, FB’s demographics are attractive: most of its social users are among the 18-24 group which, for this newspaper, is otherwise harder to reach:

(I found this graph on Currybetdotnet, a blog maintained by Martin Belam, the Lead User Experience and Information Architect at the Guardian. Martin wrote this great piece about the Guardian Facebook app).

#2: Control. Facebook apps are usually Canvas Apps. The pages are hosted and served by the publishers within a Facebook iFrame. This is the equivalent of an embedded mini site on the brand’s Facebook page. One of the key advantage is you retain control of all the relevant analytics (unlike working with Apple or Amazon). It can be quite helpful to see what kind of content the 18-24 group is interested in.

#3: Audience quality. In theory, being able to tap into Facebook’s 845 million users is attractive. But reaching readers in a remote African country, thanks to Facebook’s growing penetration in the region, makes very little economic sense from an advertising standpoint. More broadly, the web already suffers from of a loss of audience quality as publishers are pursuing eyeballs or unique visitors just for the sake numbers. A Facebook page (or app) doesn’t carry any stickiness: 8 out of 10 readers look at a single page and go elsewhere —and every marketer knows it. Being big on Facebook won’t translate into big money.

#4: Dependence. To me, that’s the main issue. Media should be very careful with their level of reliance on other content distributors such as Facebook, Google, Apple or Amazon. This can be summed up to a simple question: can we trust them?

The short answer is no.

It has nothing to do with any evil intent from these people. I’m just stating a mere fact: these companies act primarily in their own best interest. Everything they do is aimed at supporting their core business: building a global social rhizome for Facebook; extending its grasp on search and, as a result, on the related ad dollars for Google; selling more iPads, iPhones, and Macs for Apple; and up-selling high margin products and retaining the customer for Amazon. Everything else is secondary. If, at any given moment, distributing media content through deals attractive to publishers serves these goals, fine. But conditions might change and pragmatism always wins the day.

Facebook might decide to charge for hosting a media site, or require the use of its Credits currency for the transaction it carries. Amazon might alter its revenue sharing scheme without warning. Apple can decide overnight that some application features are no longer accepted in the AppStore, etc. Shift happens, you know.

Don’t expect any support from the legal side: all contracts are under US jurisdiction. You can challenge the big ones only if you seek seven figures damages. But let’s face it: for a media group form Sweden, or for a regional paper from the Midwest, it is completely unrealistic to consider suing a Silicon Valley player.

Of course, that doesn’t mean a media company shouldn’t work with large American tech companies. All have products or distribution vectors that result in fantastic boosters for the media business. But, updating the old saying: When you dine with one of these high-tech giants, bring a long ladle.
Naïveté is not an option.

frederic.filloux@mondaynote.com

Twitter, Facebook and Apps Scams

Here is the latest Twitter scam I’ve heard this week. Consider two fictitious media, the Gazette and the Tribune operating on the same market, targeting the same demographics, competing fort the same online eyeballs (and the brains behind those). Our two online papers rely on four key traffic drivers:

  1. Their own editorial efforts, aimed at building the brand and establishing a trusted relationship with the readers. Essential but, by itself, insufficient to reach the critical mass needed to lure advertisers.
  2. Getting in bed with Google, with a two-strokes tactic: Search Engine Optimization (SEO), which helps climb to the top of search results page; and Search Engine Marketing (SEM), in which a brand buys keywords to position its ads in the best possible context.
  3. An audience acquisition strategy that will artificially grow page views as well as the unique visitors count. Some sites will aggregate audiences that are remotely related to their core product, but that will better dress them up for the advertising market (more on this in a forthcoming column).
  4. An intelligent use of social medias such Facebook, Twitter, LinkedIn and of the apps ecosystem as well.

Coming back to the Tribune vs. Gazette competition, let’s see how they deal with the latter item.

For both, Twitter is a reasonable source of audience, worth a few percentage points. More importantly, Twitter is a strong promotional vehicle. With 27,850 followers, the Tribune lags behind the Gazette and its 40,000 followers. Something must be done. The Tribune decides to work with a social media specialist. Over a couple of months, the firm gets to the Tribune to follow (in the Twitter sense) most of the individuals who already are Gazette followers. This mechanically translates into a “follow-back” effect powered by implicit flattery: ‘Wow, I’ve been spotted by the Tribune, I must have voice on some sort…’ In doing so, the Tribune will be able to vacuum up about a quarter or a third — that’s a credible rate of follow-back — of the Gazette followers. Later, the Tribune will “unfollow” the defectors to cover its tracks.

Compared to other more juvenile shenanigans, that’s a rather sophisticated scam. After all, in our example, one media is exploiting its competitor’s audience the way it would buy a database of prospects. It’s not ethical but it’s not illegal. And it’s effective: a significant part of the the followers so “converted” to the Tribune are likely stick to it as the two media do cover the same beat.

Sometimes, only size matters. Last December, the French blogger Cyroul (also a digital media consultant) uncovered a scam performed by Fred & Farid, one of the hippest advertising advertising agencies. In his post (in French) Cyroul explained how the ad agency got 5000 followers in a matter of five days. As in the previous example, the technique is based on the “mass following” technique but, this time, it has nothing to do with recruiting some form of “qualified” audience. Fred & Farid arranged to follow robots that, in turn, follow their account.  The result is a large number of new followers from Japan or China, all sharing the same characteristic: the ratio between following/followed is about one, which is, Cyroul say, the signature of bots-driven mass following. Pathetic indeed. His conclusion:

One day, your “influence” will be measured against real followers or fans as opposed to bots-induced accounts or artificial ones. Then, brands will weep as their fan pages will be worth nothing; ad agencies will cry as well when they realize that Twitter is worth nothing.

But wait, there are higher numbers on the crudeness scale: If you type “increase Facebook fans” in Google, you’ll get swamped with offers. Wading through the search results, I spotted one carrying a wide range of products: 10,000 views on YouTube for €189; 2000 Facebook “Likes” for €159; 10,000 followers on Twitter for €890, etc. You provide your URL, you pay on a secure server, it stays anonymous and the goods are delivered between 5 and 30 days.

The private sector is now allocating huge resources to fight the growing business of internet scams. Sometimes, it has to be done in a opaque way. One of the reasons why Google is not saying much about its ranking algorithm is — also — to prevent fraud.

As for Apple, its application ecosystem faces the same problem in. Over time, its ranking system became questionable as bots and download farms joined the fray. In a nutshell, as for the Facebook fans harvesting, the more you were willing to pay, the more notoriety you got thanks to inflated rankings and bogus reviews. Last week, Apple issued this warning to its developer community:

Adhering to Guidelines on Third-Party Marketing Services

Feb 6, 2012
Once you build a great app, you want everyone to know about it. However, when you promote your app, you should avoid using services that advertise or guarantee top placement in App Store charts. Even if you are not personally engaged in manipulating App Store chart rankings or user reviews, employing services that do so on your behalf may result in the loss of your Apple Developer Program membership.

Evidently, Apple has a reliability issue on how its half million apps are ranked and evaluated by users. Eventually, it could affect its business as the AppStore could become a bazaar in which the true value of a product gets lost in a quagmire of mediocre apps. This, by the way, is a push in favor of an Apple-curated guide described in the Monday Note by Jean-Louis (see Why Apple Should Follow Michelin). In the UK, several print publishers have detected the need for independent reviews; there, newsstands carry a dozen of app review magazines, not only covering Apple, but the Android market as well.

Obviously there is a market for that.

Because they depend heavily on advertising, preventing scams is critical for social networks such as Facebook or Twitter. In Facebook’s pre-IPO filing, I saw no mention of scams in the Risk Factors section, except in vaguest of terms. As for Twitter, all we know is the true audience is much smaller than the company says it is: Business Insider calculated that, out of the 175 million accounts claimed by Twitter, 90 million have zero followers.

For now, the system stills holds up. Brands remain convinced that their notoriety is directly tied to the number of fan/followers they claim — or their ad agency has been able to channel to them. But how truly efficient is this? How large is the proportion of bogus audiences? Today there appears to be no reliable metric to assess the value of a fan or a follower. And if there is, no one wants to know.

frederic.filloux@mondaynote.com

Strange Facebook Economics

Exactly three years ago, Charlie Rose interviewed Marc Andreessen, the creator of Netscape and Facebook board member. In his trademark rapid-fire talk, Marc shared his views on Facebook. (Keep the February 2009 context in mind: the social network had 175 million users and Microsoft had just made an investment setting Facebook’s valuation at $15 billion.)

About Mark Zuckerberg’s vision:

The big vision basically is — I mean the way I would articulate it is connect everybody on the planet, right? So I mean [there are] 175 million people on the thing now. Adding a huge number of users every day. 6 billion people on the planet. Probably 3 billion of them with modern electricity and maybe telephones. So maybe the total addressable market today is 3 billion people. 175 million to 3 billion is a big challenge. A big opportunity.

Indeed.
About monetization:

There’s a lot of confusion out there. Facebook is deliberately not taking the kind of normal brand advertising that a lot of Web sites will take. So you go to a company like Yahoo which is another fantastic business and they’ve got these banner ads and brand ads all over the place, Facebook has made a strategic decision not to take a lot of that business in favor of building its own sort of organic business model; and it’s still in the process of doing that and if they crack the code, which I think that thy will, then I think it will be very successful and will be very large. The fallback position is to just take normal advertising. And if Facebook just turned on the spigot for normal advertising today, it’d be doing over a billion dollars in revenue. So it’s much more a matter of long term (…)  It could sell out the homepage and it would start making just a gigantic amount of money. So there’s just tremendous potential and it’s just a question exactly how they choose to exploit it. What’s significant about that is that Mark [Zuckerberg] is very determined to build a long term company.

In another interview last year, commenting on Facebook’s generous cumulated funding ($1.3 billion as of January 2011), Andreessen said the whole amount actually was a shrewd investment as it translated into an acquisition cost of a “one or two dollars per user” ($1.53 to be precise), which sounded perfectly acceptable to him.

Now, take a look at last week’s pre-iPO filing: Marc Andreessen was right both in 2009 and in 2011.

Last year, each of the 845 million active members brought $4.39 in revenue and $1.18 in net income. Even better, based on the $3.9 billion in cash and marketable securities on FB’s balance sheet, each of these users generated a cosy cash input of $1.53 dollars.

How much is the market expected to value each user after the IPO? Based on the projected  $100 billion valuation, each Facebooker would carry a value of $118. Keep this number in mind.

How does it compare with other media and internet properties?

Take LinkedIn: The social network for professionals is fare less glamorous than Facebook, a fact reflected in its members’ valuation. Today, LinkedIn has about 145 millions users, for a $7.7 billion market cap; that’s a value of $57 per user, half a Facebooker. A bit strange considering LinkedIn demographics, in theory much more attractive than Facebook advertising wise. (See a detailed analysis here). Per user and per year, LindkedIn makes $3.5 in revenue and $0.78 in profit.

Let’s now switch to traditional medias. Some, like the New York Times, were put on “deathwatch” by Marc Andreessen three years ago.

Assessing the number of people who interact with NYT brands is quite difficult. For the company’s numerous websites, you have to deal with domestic and global reaches: 43 millions UVs for the Times globally, 60 millions for its guide site About.com, etc. Then, you must take into account print circulation for the NY Times and the Boston Globe, the numbers of readers per physical copy, audience overlaps between businesses, etc.

I’ll throw an approximate figure of 50 million people worldwide who, one way or the other, are in some form of regular contact with one of the NYT’s brands. Based on today’s $1.14 billion market cap, this yields a valuation of $23 per NYT customer, five times less than Facebook. That’s normal, many would say. Except for one fact: In 2011, each NYT customer brought $46 in revenue, almost ten times more than Facebook. As for the profit (a meager $56 million for the NYT), each customer brought a little more than a dollar.

I did the same math with various media companies operating in print, digital, broadcast and TV. Gannett Company, for instance, makes between $50 and $80 per year in revenue  per customer, and, depending on the way you count, the market values that customer at about $50.

Indeed, measured by trends (double digit growth), global reach and hype, Facebook or LinkedIn are flying high while traditional medias are struggling; when Facebook achieves a 47% profit margin, Gannett or News Corp are in the 10% range.

Still. If we pause at today’s snapshot, Facebook economics appear out of touch with reality: each customer brings then times less than legacy media, and the market values that customer up to five times more. And when News Corp gets a P/E of 17, Gannett a P/E of 8, Facebook is preparing to offer shares a multiple of 100 times its earnings and 25 times its revenue. Even by Silicon Valley ambitious standards, market expectation for Facebook seems excessive: Apple is worth 13 times its earnings and Google 20 times.

Facebook remains a stunning achievement: it combines long term vision, remarkable execution, and a ferociously focused founder. But, even with a potential of 3 billion internet-connected people in 2016 vs. 1.6 billion in 2010 (a Boston Consulting Group projection), it seems the market has put Facebook in a dangerous bubble of its own.

frederic.filloux@mondaynote.com