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.

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