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L016: Facebook Sandbagging, 2011 Revs Really $12B Not $4B

While the chattering class wonders if there’s an upper limit to Facebook’s valuation (and throws around that “bubble” word again) our LAUNCH analysis suggests the company is holding back on the throttle.

We believe they may actually be under-monetizing by a factor of three or more.

If so Facebook’s true 2011 revenue could potentially blow away the ~$4B figure that’s been widely leaked by as much as 3x -- for a truly staggering $12B.

Carrying forward to 2012, $6B in revenue could actually be closer to $18B. That would put the then 8-year-old company at nearly half of Google's 2012 projected $40B. Assuming a 35% margin, this would imply net earnings of $4.5B in 2011 and $6 billion plus in 2012.

Combine that with a 20x forward-looking EBIDTA multiple, as appropriate for such a fast-growing company -- and Facebook cruises neatly to a $120B valuation.

And that’s just next year, 2012.

Suddenly the question of why Goldman’s a buyer despite the $50B valuation (not to mention rich civilians paying even more on the secondary market) may make a little more sense.

Remember guys, this is Goldman we’re talking about. They never spend more on an acquisition then they have to of course (cf. rules #001-003).

Now, it's common for pre-IPO companies to sandbag their performance and use the old “UPOD” approach to save some bullets for a rainy day, but Facebook's under-monetization may be unprecedented. We’ve drilled down into eight units we've identified to demonstrate just how.

(that stands for underpromise and overdeliver in case you’re wondering)

Responsible for this conservative strategy is none other than the motherly business genius that is Sheryl Sandberg. It’s the same approach she employed cannily for Google which -- come to think of it -- has missed earnings expectations just four times in 27 quarters and has always grown, even in a down market.

Mark Zuckerberg famously doesn’t love playing the expectations game, but when you’re a public company, earnings are essential to keeping stock prices up -- and employee stock options from going underwater. Just ask Google, which recently thumbed its nose at Wall Street with a disastrous result.

Here are eight ways Facebook could grow revenue by three times almost instantly.

We took a little time to have these features mocked up by a designer friend of ours who really didn’t appreciate us slamming him with short-notice work. But he did a killer job anyways -- thanks Gene!

(hmmm... if  only we had a designer to do these more often, in exchange for a link -- hint, hint)

We’re hoping this little brainstorm gets product geniuses like Kevin Rose and Excel nerds like Henry Blodget to expand (and correct) our assumptions.


Jason + the LAUNCH team

1. FacebookSense Attached to Every Facebook Like Button

Over 2.5M sites have "integrated" with Facebook’s platform (Facebook Connect, Like buttons), and an average of 10,000 sites come on board each day. LAUNCH believes Like buttons are a Trojan horse for Facebook to launch an advertising network for publishers.

Rumors about this network have floated for a long time, and our sources say it will launch shortly before or after its IPO. This service would challenge Google's AdSense business for publishers, which accounted for 30% of Google’s revenue in 2010 (or $8.8B).

In the screen shot below we show the familiar Facebook Like box on the New York Times showing your friends who have also liked the New York Times. Also included in the box is a video advertisement for the second season of The Walking Dead. You've been shown this targeted advertisement because you are reading an article about TV and because you've liked one of 20 dramas that correlate with folks who already like The Walking Dead.

Depending on how aggressive Zuckerberg feels at the moment, Facebook could make these ads default or even mandatory. Remember, Zuck is the product designer who thought it was fine to post your movie ticket purchases on your wall without asking, let you be tagged in photos without your permission and allow you to be added to groups you didn’t actually join (by way of your mischievous friends).

In fairness, Zuck’s aggressive product nature leans toward human interaction and viral momentum at all costs -- not revenue. All of Google’s serious publishers would experiment with FacebookSense, and if they captured just 10% of the market that would be $880M a year.

Total FBSense revenue potential: $3.9B/year


2. In-stream Advertising

Currently, Facebook limits advertising to the right hand column of its pages. Twitter, Google and every other Internet advertising player at scale places units in the main column as well.

Side advertisements on Facebook typically have a CTR (click-through rate) of 0.051% (down from 0.063 in 2009).

Main column advertisements perform at least double that, with a CTR of around 0.1% in 2009 (2010 data not yet released). If users were willing to see just one advertisement every every other page on in the main column of Facebook -- as opposed to the three out of four you typically see on Google searches -- Facebook would double its advertising base.

The math is simple on this: doubling the CTR half of the time means the main column would earn roughly the same as the right-hand column (less a slight drop in right-hand clicks due to left hand clicks on 25% of the pages). If 75% of Facebook's revenue comes from these ads, and it’s on track to make $4B in 2011, that's an additional $3B.

The mockup below shows a typical news feed with an advertising unit for a Groupon targeted to the user's city, relationship status and likes.

Total Facebook in-stream advertising revenue potential: $3B/year


3. Marquee Video Ad Units

If you've been to YouTube, the New York Times or the Wall Street Journal this year, you've seen "marquee" style ads. These enormous ads run the width of the page (typically ~1,000 pixels) and contain an autoplaying video. The CPM for these units is extraordinary, with top properties charging averages of $10-$15, while a recent rate card listing for put a pre-roll video ad at $75 CPM.

If Facebook were to show one marquee per week to 500 of its 700 million members at a $20-$35 CPM, the firm would net $10M-$17.5M a week -- or $520M-$910M a year.

Based on YouTube's continuing massive growth, we think users would be willing to see two or three of these per week provided they were quality advertising. Every other day, 182 days a year, at $10M a day, would push Facebook to up to almost $2B in additional revenue.

The emergence of this advertising unit would, in fact, rock the advertising world. We can’t find another 250M+ user/$10M+ a day ad unit. YouTube reportedly costs $375K a day, and a Yahoo homepage takeover is $1M day.

Are there advertisers who could even afford to spend $5M-$10M in a single show with Facebook? If the sold-out Superbowl is any indication, car companies, blockbuster movies and CPG companies should line up for a chance to have one of the 182 "market to the entire world" Facebook take overs. (Note: We made up that tag line "market to the entire world," and yes we know it’s obnoxious and incorrect, but we’re channeling an overzealous sales manager looking for a $100K commission.)

In the image below, we see a marquee unit on Facebook neatly fitted below the top userbar.

Total Facebook Marquee revenue potential: $520M-$2B/year


4.-7. Wildcard Knockoffs: Groupon, FourSquare, YouTube and Google Search Clones

While LAUNCH analysts don't feel Facebook will be able to defeat Groupon, FourSquare, YouTube or Google, we are certain the company will achieve meaningful ($250-$500M) success in at least two of these four categories.  

While Facebook has not announced a YouTube or Google clone, it has already knocked off Groupon and FourSquare. Facebook's video hosting is only 90 days worth of development away from being a viable YouTube co-exister.

We believe, in fact, that Facebook is withholding its YouTube and search products for when Google launches its social network. Yes, it sounds petty, but big companies are just as petty as the small ones (see Google launching a Yelp competitor shortly after Yelp turned it down).

While our analysis, and gut instinct, says Google has a very small chance of creating a viable social network, Facebook could easily create massive success by launching a site. They already have 32M unique video viewers according to Nielsen’s March 2011 stats (in third place and a long way behind YouTube’s 112M), and are the largest photo site on the Internet.

Said another way, expanding its video-hosting service would be a layup for Facebook, while launching Facebook would be a Hail Mary for Google.  

FBVideo revenue potential: $500M/year

Here’s what we think could look like:


8. Facebook Pro: See Who’s Looked at Your Profile

LinkedIn charges $19.95 a month for a business account that allows you to see who has viewed your profile, among other benefits. Given Zuckerberg’s, ummmmm, risk-taking and aggressive stance on privacy -- and his desire to recreate AOL’s walled garden on the web --  there’s no doubt Facebook has considered a pro account.

If 2% of users joined a similar program that cost just $10 a month, Facebook could have 14M paying members. That’s $420M a quarter, or $1.68B a year. What if 5% of consumers decided to pay? Exactly. Subscriptions are going to be on the menu -- even if they are disguised as FB credits.

Now, some believe that seeing who looked at your profile killed Friendster. Are you going to look at your ex-wife's vacation photos if you knew she might know you did? However, there are a half dozen compelling things you sell to users as part of a pro membership, including turning off the industry standard advertising we propose in other sections.

Facebook Pro revenue potential: $1.68B/year


Wrapping Up

If Facebook were to leverage just five of these eight revenue streams in 2011 -- FacebookSense, main column ads every other page, marquee advertising, a YouTube clone and Facebook Pro -- it would hit or surpass $12B in revenue instead of "just" $4B.

Some believe Facebook will ultimately have a 50% margin. With those margins, Facebook would easily be worth $100B -- and at the high end $150B. The hype is there for a reason: sandbagging.

Now, there’s a long way between Facebook at $4B in revenue and Facebook at $20B, but if the last five years have taught us anything it’s that Facebook knows how to execute better than anyone in the technology industry.

These estimates, insights and ideas are just that. Many of you will have additional insights into how much Facebook is throttling their revenue, and how realistic you find our estimates. We would really like to hear from industry insiders at Facebook, LinkedIn and Google about where our assumptions are correct and where they break down.   

The comments are open below, and our anonymous tip line is  


1. So, Now That We Know Facebook’s Numbers, Is It WORTH $50 Billion? (Business Insider, Jan. 7, 2011)

2. Facebook 2011 ad revenue said to hit $4 billion. (San Francisco Business Times, Jan. 18, 2011)

3. Form 10-K, Google, Inc. (United States Securities and Exchange Commission, Feb. 11, 2011)

4. March 2011: Top Online Video Brands in U.S. (Nielsen Wire, April 13, 2011)

LAUNCH Media covers and celebrates new products, services and technology in two ways: an email newsletter and an in-person conference. LAUNCH was founded by a serial entrepreneur, former journalist and now angel investor we’re tired of promoting.

About the LAUNCH Newsletter
Our newsletter is compiled in a collaborative fashion by a half-dozen writers, researchers and industry pundits we invite to our Google Docs from time-to-time. Our conflicts are many, but our insights and facts are always well-researched, honest and to the point. We’re blunt to a fault -- by design.

About the LAUNCH Hackathon
Sometime this summer we’re going to host the first launch Hackathon, which will feature 200 hackers building prototypes of their dream product over 48 hours -- and then facing a Grand Jury of 25 angel investors who might fund on the spot. If you’ve got ideas or advice for us, email

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#21: Monopolies are bad for the industry -- until you own one.



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