The Chicago Tribune reported today that Facebook will be getting a $200 Million investment from Digital Sky Technologies, a Russian firm. The investment is said to be in exchange for almost 2% of Facebook’s stock, valuing the California-based internet social networking site at roughly $10 Billion. This is down from the $15 Billion valuation of the company represented by the $240 Million investment Facebook received from Microsoft for a 1.6% stake in the company, but it grossly exaggerates the $3.7 Billion valuation Facebook gave itself during settlement negotiations in its legal dispute with ConnectU, Inc.
While these numbers seem astonishing given that Facebook hasn’t ever turned a profit, I can’t completely agree with the opinion of IP Finance, in its recent post warning that this is a terrible investment. IP Finance’s reason for its sentiment seems two-fold:
(1) “its portfolio of IP rights doesn’t appear to pose particularly high barriers to market entry”
(2) “while Facebook has 200 million users, around 70% of these are from outside the US. This means that the market reached by advertisers is relative diverse in cultural and geographical terms — and many of its users are children whose financial spend and nagging power is relatively limited.”
As to the first argument: while its IP patent portfolio may not be very strong, the complete IP portfolio must also include its trademarked brand. That brand, which has been built by an extremely large first-mover advantage in the market, is enough to erect barriers to entry in the social networking market high enough to compensate for its lack of high quality patents. The Facebook brand continues to grow through its first-mover advantage because of the personal investments made by its users in both time and relationships through using the site. It would take a monster of a competitor (with a very strong patent portfolio), to attract the same clientele away from Facebook, and attracting another 200 million users that don’t use Facebook isn’t going to happen, because the biggest thing going for Facebook and its ability to attract more users is the very fact that 200 million people use it already. Therefore, while Facebook itself could implode, I don’t see a competitor taking its market share because of a “weak” IP portfolio.
As to the second argument: Mark Zuckerburg, the fearless leader of Facebook, has stated that its advertising is the company’s fastest growing revenue generator. This comes at a time when advertising expenditures are way down. And the fact that mostly young people use Facebook is not a deterrence to advertise because they have less money, but a reason to advertise if you have internet-based sales because this is the generation that shops online. Furthermore, I should also point out that the average age for Facebook users is steadily climbing, and that trend will continue as its faithful users continue to get older (inevitable). Soon, it will be a social networking site for all ages.
The value of the IP of social networking sites like Myspace, Facebook, Youtube, and Twitter has always been doubted because these companies can’t seem to find a way to turn a profit, despite the millions of users. Yet, when we speak of IP value, here, we must include all intangibles, including a brand built through first-mover advantage in a market filled with insatiable users. You could say that this value isn’t based on anything income-based to provide liquidity for a return, but it certainly got the attention of Microsoft and Digital Sky Technologies.