Facebook Backlash: What If They Can't Sell Any Ads? (Updated)
There's a growing counter theory to the snowballing buzz on Facebook. The contrary view is that the company, rather than having a potential value in the billions, might really be worth next to nothing.
Context & Ripple Effects
The valuation fight over Facebook has gone mainstream within days: the same-day "What is Facebook worth?" exchange set up the bull case, and this counter-theory — that the company might be worth next to nothing if it cannot sell ads — got picked up by CNN Money's 7 Wall St. blog (using a $10 billion figure as the foil) and Valleywag's "Mythbusting" takedown. The skepticism is not coming from nowhere: TechMeme chatter already asserts Facebook's advertising isn't working, even as the company's 2007 revenue is projected to top $100 million.
The stakes are concrete because Facebook has real alternatives on the table. It turned down a $1 billion acquisition offer from Yahoo the year before, is reportedly weighing a $6 billion sale to Microsoft (unconfirmed), and just named ex-AOL executive Chamath Palihapitiya marketing chief with an explicit mandate to find new revenue streams. With thousands of third-party applications now on its platform, showcased at Fortune's iMeme conference, the ad question determines whether any of that value can be captured.
First-order effects
- Facebook's negotiating position in any Microsoft or other acquirer discussion hinges on resolving the ad-effectiveness doubt — a rumored $6 billion price is indefensible if the bear case sticks, which puts pressure squarely on Palihapitiya's newly created marketing-chief mandate to prove revenue models beyond the status quo.
Second-order effects
- The thousands of third-party developers who built on Facebook's platform after iMeme are exposed to the same question: if Facebook cannot monetize attention, the platform economics underwriting their distribution get repriced, and rival suitors like Yahoo — rebuffed at $1 billion a year earlier — gain leverage to argue social-network valuations were inflated.
Third-order effects
- If the pattern holds, the industry gets a durable test case for whether social-network attention converts into ad revenue at all — the same valuation-versus-monetization gap that keeps recurring in Facebook coverage, from the 2010 "$33 billion" skeptics onward, traces back to this 2007 dispute over whether the audience itself is worth anything to advertisers.
The trend: Social-network valuations are decoupling from current revenue, with advertising effectiveness emerging as the single variable that decides whether platforms built on user attention are worth billions or next to nothing.