Bronte Media

These are all from a largely investment point of view:

1. An ad network with premium targeting will be rolled out and what I call a merchandizing network can be rolled out. Every single demographic, geographic and maybe even psychographic variable is on someone’s Facebook profile. And the most amazing thing is: It’s all true. People don’t lie on their Facebook profile which means the data quality is extremely high.

Now, advertising sucks in a communications environment (facebook.com) but when you plug in this high quality data into external sites it becomes really exciting. I don’t want to even call this an ad network (using the data to target banners on other media sites) but something more like a ‘merchandising network’.

What if the front page of Zappos was completely driven by this data? If a 21 year old girl from West Hollywood showed up and the site had the latest Ugg boots and reviews from like-minded people (friends and famous taste-makers), what would that do to conversion rates and average order value?

Facebook is slowly edging its way towards this reality but it would be a shame for them to stop at just banner ads. They are so large in scale they could literally change the way the Internet is personalized.

2. The site is still growing like a weed off a huge base. While the recent emergence of twitter has been quite astounding, Facebook is still adding more unique visitors per month. Eyeballing this chart, it seems Facebook is adding between 20-50m per month. Compare that to Twitter (and not to take anything away from them because it is quite amazing too), who grew 13m from March to April (32m – 19m).

3. The site will do rather well in an idiot scenario. Warren Buffet likes to invest in businesses that any idiot could run. And at this point, from a monetization point of view, any idiot could manage Facebook’s ad sales. The latest figures have Facebook projecting $500m in revenue, nearly 70% more than 2008. The growth is due to 2 very simple things: There are a shit load more people doing a shit load more things and the bottom feeder affiliate industry is making a profit being the first advertisers in Facebook’s self-service ad system (wrinkle cream, acai berries and ringtones).

Think about that: in a world where CPMs will likely halve for most sites in 2009, Facebook will be able to grow revenue by 80% or more.

4. Facebook as the tax man. The beauty of owning a platform is that once people start making a lot of money is that you can tax the shit out of it. Facebook apps make roughly what Facebook itself makes. And that’s the way it should be. In fact, the app ecosystem will be orders of magnitude bigger in years to come than Facebook itself.

This will allow Facebook to tax the system in many ways:
a) Verified apps (already done) and charging providers for app placement in directories (no doubt coming soon).

b) Centralizing payments. Goodbye external payment systems. If Facebook payments have a central wallet which converts better than other outside providers where users have to create multiple accounts and add their credit cards to some name they don’t know then app providers will just use Facebook payments. Facebook can take a cut of the action.

c) Run over the pace cars. Microsoft was famous for this when they came to own the most valuable category of software (office productivity) after they enabled Lotus and Worderfect thrive initially.

5) The media hype attention deficit disorder has finally moved on. The baton now has been passed to Twitter who can have Scoble, Dave W(h)iner and all the other social media dickheads verbally masturbate over the future.

This also means that valuations and expectations have come down. A lot of the money stuff is very boring compared to product innovation. But I believe that Facebook is at the right place in the ad revenue life cycle that a pretty incredible revenue ramp awaits them (see any idiot can do it point above).

That means a valuation of $2-3bn is a steal and anything less than $6bn reasonable at this point in time.

6) As an investment, the company needs the money but probably won’t need the money for long. Because the company needs a lot of servers and bandwidth and purchasing them requires a lot of money up front, the company actually is willing to take an investment. But two things will make this temporary: The most intensive things like photo storage will be brought down in cost so dramatically by new in-house/open source systems like Haystack. And servers in 2 years will be magnitudes cheaper and more powerful than they are for each $ spent today.

If I was Microsoft, I would stump up $500m-$1bn for an additional minority stake and not ask for a board seat or any sort of control (to protect them from themselves) given the return they are getting for the same money being deployed into MSN at the moment.