Why Facebook is Overvalued…

Today, Slate.com published an article called is Is Facebook the Next Google?. I have a simple answer to that question… no. Do I think they are worth the US$15B valuation? Definitely not.

Why do I think Facebook is overvalued and over-hyped? Because they choose to focus on advertising as their core revenue stream.

Let me get one thing straight… I love social networking and online communities. I use Facebook, MySpace, Wikipedia, YouTube, LinkedIn, Craigslist, Stockpickr, and many others. I currently work for a company that recently launched a online social networking platform that allows senior corporate executives to share solutions to common business challenges. I even helped to develop a hyper-localized social network called HolaNeighbor during Startup Weekend DC.

I like social networks because they bring like-minded people together to create and interact, and these networks provide an extremely effective way to build, find, and organize new content. Plus, social networks develop huge data assets that can be used by companies to mine for trends, develop new products or enhanced features, better understand target markets, etc.

Ultimately, the value of a social network lies in the content and data assets they create, not the ability to advertise to users.

Facebook or any other social network will never become as large as Google if it focuses on advertising because, by nature, social networks restrict the number of people it can reach. Right now, Facebook has about 50 million registered users. Since Facebook can only advertise to registered users, that means that they get, at most, 50 million potential customers (even though about half of its users are on Facebook in a given month).

On the other hand, you don’t have to be a registered user to take advantage of Google’s advertising. Heck, you don’t even have to be on Google’s web site or use their search engine. That gives Google a potential global market of over 1 billion people, with over 500 million unique visitors to its web site per month. Even if Facebook meets its growth projection of 300 million registered user, that still gives them only 150 million unique visitors… by no means small, way behind Google.

Can Facebook target advertising to users better than Google. Possibly, but I’m not sure. Right now, Facebook has more data about its users, but I’m not sure if all that data is 100% relevant when advertising to a user in the moment. Because Google’s ad strategy focuses on using your search strings as the data, it’s advertisements are more likely to be relevant to what you are thinking about in the moment. So, just because I put “soccer” as an interest on my Facebook profile, it does not mean that I want to buy a new pair of Adidas clients or buy tickets to a D.C. United game.

What if we could build a social network that was valuable to both users and non-users alike? Then, you wouldn’t need to limit your advertising to registered users, and you would be able to build a valuable data asset. Not a bad idea.

UPDATE: Fred Wilson blogged today about the diminishing economics of Facebook advertising.

This sums up my feelings on New York City pretty well…

Here is a quote from the blog of Scott Heiferman, CEO and Co-Founder of Meetup:

“New York is self-confident because it makes the TV commercials (who cares), it’s got Wall Street and hedge funds (no real value-creation), and Time Inc and Conde Nast are here (old farts). New York’s economy is made of increasingly irrelevant and/or unsustainable and/or uninteresting cash cows and cash machines.”

I grew up in a New York City suburb (Norwalk, Connecticut). Where I lived, everyone I knew thought that “The City” was the center of the universe. Most of the people I went to high school with attended college in the Northeast, migrated to New York after graduation, and would not consider living anywhere else.

I made the very unpopular decision to go to school in the South, in the fantastic city of Nashville, TN. Everyone thought I was crazy for not going to the Ivy League or another small New England college. Besides being incredibley ignorant, my friends made their decision to stay in NYC because they believe it runs the world. These people could not be more wrong.

Sometimes, I wish people in New York understood what both Scott and I know… because New York adds no real value to the economy (they buy and sell, instead of create), it has become bloated and increasingly irrelevant in the global business.

Besides, it is impossible to find any good pulled pork sandwiches.