There has been a lot of debate as a result of recent announcements about Goldman Sachs investing $450m in Facebook at a valuation of $50bn, and planning to raise another $1.5bn at the same valuation, apparently by attracting wealthy private investors into a special purpose vehicle at high speed.
Much of the debate is about the valuation, with talk of Bubble 2.0 (and even 3.0, I lose count nowadays).
The valuation doesn’t surprise me, however dark the art of valuation may have become. Why? Because Facebook is the new new telco.
What do I mean? Let’s start with the original telco, which comprised of the following components:
- A population of subscribers, aggregated into a directory, with relevant personal contact information (addresses, telephone numbers)
- Reduced search costs within those directories as a result of classifications and groupings: alphabetical (A-D, E-H and so on) geographical (London, Birmingham and so on) and functional (white, yellow and so on)
- Multiple modalities of communication between the subscribers (post, telegraph, telephone)
- A record of changes, published regularly as errata and addenda
Original telcos provided services via fixed devices and spent vast amounts of money on infrastructure. They sought to justify monopoly positions by pointing to the infrastructural expenditure required.
For over a hundred years, all we had was original telcos.
Then, just over two decades ago, came the new telco. The best-known member of this class is Microsoft. And the new telco extended the componentry:
- Personal contact information now included e-mail and IM addresses
- Directories became online, searchable and downloadable (personal and public address books)
- Modalities of communication now included email and IM
- Changes were now applied continuously to the directories, but were not published.
- And some new components were added: it became possible for subscribers to schedule meetings between each other, and to use general-purpose devices like computers and smartphones to do all this.
New telcos provided services via fixed and mobile devices, delivered principally to corporates, and everyone spent vast amounts of money on infrastructure, much of it on-premise. Personal customers were nibbled at via email and IM, but the thrust of the new telco was at the corporate.
For a few decades now, all we had was original telcos and new telcos.
Then, six years ago, Facebook arrived, the leader in a new class of telco, the new new telco. Again, the componentry was extended:
- Personal contact information became enriched to form profiles, user-editable
- Classifications and groupings of people within directories were enriched as well, user-creatable networks and groups emerged
- Modalities of communication now included, or will soon include synchronous and asynchronous audio and video
- Scheduling of meetings now became more pub-sub in structure, via the use of open and closed events
- Changes weren’t just applied continuously, they were published continuously. This record of changes was called a News Feed.
- All this was done on a user-creatable, user-editable, personalised-access-and-view basis
- And the whole shebang was then carefully bundled and exposed as a platform upon which other people could build services, viral, social, mobile
New new telcos provided multimedia services across multiple types of device using multiple modalities of communication. And they did everything “over the top”. No infrastructure costs. No on-premise software.
And to top it all new new telcos had new new assets, information about relationships and flows. What Facebook call the Friend Graph.
So let me see. Facebook has more customers than most original telcos put together, more customers than most new telcos put together. It offers more modalities of communication with lower transaction costs, higher end-user empowerment, personalisation and customisation. It does not have to invest in communications infrastructure, in customer premises equipment, in devices, in on-premise software.
600 million active users. A “subscriber base” larger than any country bar China or India. Revenues growing from $777m to $1.2bn between 2009 and 2010, with net income up from $200m to $355m.
The new new telco. Now think of the valuations of old telcos and new telcos, then look at the difference in costs, in scalability and globalness, in revenue and profit opportunity.
Let’s put this into context.
I have a lot of time for a Boston professor I’ve known since the nineties, N. Venkatraman, Venkat to his friends. Around a decade ago, across a number of conversations, Venkat convinced me of a critical change that was taking place in business as a whole:
He said that businesses used to be hierarchies of business units whose assets were called customers and products; that they are changing into networks of business units whose assets were called relationships and capabilities.
New new assets. Relationships and capabilities. Social capital. Human capital. Assets we have carefully avoided learning how to value. Assets we have refused to value, however much we speak of the importance of talent and knowledge and collaboration.
That’s where the new new value is.
New new telcos are not just for consumers, there is immense value to be created by and for businesses as well, from the sole trader through to the megalith. And with the continuing growth of consumerisation, the distinction is blurring more and more anyway, there’s a singularity approaching in this context.
Facebook is concentrating on the pure consumer play, and that’s fine. They can afford to experiment with their market and learn from their experiments: the profile, the news feed, Beacon, the privacy settings, there’s been a powerful suck-it-and-see mentality, coupled with an excellent responsiveness and adaptiveness to feedback.
Businesses are social as well. Markets are Conversations. As Doc Searls immortalised in The Cluetrain Manifesto (Disclosure: I count all four authors as my friends, and contributed a chapter to the 10th Anniversary Edition of the book).
So companies need better ways of evolving, enhancing and exposing their capabilities and relationships, making it easier for their customers to do business with them.
The Rolodex was the tool of the trade in the times of the original telco.
The on-premise customer information system was the tool of the trade in the times of the new telco.
What I could see was the potential for Chatter to be CRM on steroids, cloud-based, community-driven, multimedia, both synchronous as well as asynchronous, extending beyond the enterprise and supply chain to the customer.
What’s happening is that the stuff we called CRM is blending subtly with the stuff we called knowledge management, accelerated by the publish-subscribe mechanism of collaboration tools like Chatter, enriched further by the multimedia mobile, social, viral aspects of all this and delivered at speeds and price points made possible by cloud technologies.
All just in time for a generation who cannot remember a time before the web, a time before the mobile phone.
All just in time for a generation for whom “rent” means more than “buy”, for whom “share” means more than “own”.
All just in time for a generation who have rediscovered community.
That’s why the Facebook valuation does not surprise me.
That’s why I jumped at the chance when Marc Benioff asked me to join Salesforce.
New new times.
Exciting times.
[Incidentally, some of my posts are now cross-posted into The Cloud Blog, where I write alongside my colleagues at Salesforce. Here’s a link to the first post I wrote there.]
JP,
This is a great counterpoint piece to what I wrote yesterday about why I think Facebook is overvalued.
The thing that’s missing here is something that I call ‘Internet Alchemy’ – the process of turning somebody else’s pile of gold into your pile of nickles. In this case we see two piles of gold – one for the old telcos and another for the new telcos. My conjecture is that Facebook doesn’t get to grab these piles of gold. Internet alchemy will turn them into a pile of nickels, and so there is a lot less cash on the table. The canonical example here is Craigslist. It’s a phenomenally successful firm by any conventional metric, making $100m/yr with around 30 employees, and it has utterly destroyed a print classified business worth orders of magnitude more – Internet alchemy at work.
Of course Facebook is special, and it may yet find a way of making money that none of us have anticipated. But is it really 3.5x more special than Google? I don’t think so. People are calling this bubble 2.0 or whatever because we’re once again seeing a disconnect between cash flows and valuation with no substantive means of support.
JP,
(Personal Opinion below)
All well and good. This is absolutely logical and as you say, fits with the times. The danger is, the history of knowledge and experience is centralized through one source with its own EULA and the next generation is left with nothing to learn from if times shift. We’re wrapped up in relationships and the relationship economy now, for sure, but is the future really economies built on virtual goods and games? What happens when the machine stops? Potentially all we’re left with are etchings on a pyramid relating to how many birds were killed by spears (the real-life angry birds game of the Egyptian civilization) and all of the important learnings have to be dug out of the earth by archaeologists sifting and pontificating about what made that civilization great.
As a place for connections, Facebook might be great. As a new new telco, yes, it’s a platform for instant gratification, like picking up a phone and chatting to someone used to be. But if we’re to believe that this is where Facebook intends to stop and that it has the skill and desire to be the filter for everything that goes on on the web, with the customer at the heart of that proposition, I’m sorry, I don’t buy it.
Disclaimer: I closed my account in November last year and I was an early adopter. It just wasn’t useful any more and I got sick of the constant changes and increasing spam.
JP – While I absolutely buy the New Telco argument, I don’t buy the Facebook valuation given the sheer volume of the planet they have to dominate to “grow into” their supposed market cap. They already have about 1/6th of the global online population, and that generates a P?E of 100:1. To get to a “Mature P?E (like Google, not a Telco) they need to grow five-fold, i.e achieve somethjing like Telco level ARPU or something liek 1 in 2 of all the online people on the planet as customers.
While that is possible, what you have to believe makes it very improbable.
@chris: if the only pile facebook was going after was the original telco pile then I would agree with you. but when you factor in the other piles related to advertising, entertainment, gaming, news and archiving, and make it all global, then the picture changes. 600m is a big number of customers and it will continue to grow. there has been nothing like it before.
@justin I spend more time on twitter than on facebook, and less time on both as the years have passed. but I still spend time on them. what’s intriguing is the people I connect with on facebook now, as the early pioneers move on or rebel at the changes. they use fb in ways the early ones didn’t.
Of course there’s a lot to be worked out. of course we have the walled garden arguments to deal with, the data portability issues, the continuing learning and debate on privacy. but those things are normal when we’re at the relatively immature stage we’re in
@alan I think it’s what I tried to say in my answer to Chris. there are a number of markets that fb is disrupting: telcos, publishing, news, entertainment, archiving, advertising. many of those markets are the ones that apple is also disrupting. some of them are those that google are seeking to disrupt, but plateauing in their attempt.
but facebook are doing this at a scale that is amazing. and they learn very quickly. so by the time you consider the size of the markets being disrupted in the west, and the addition of global scale, there is something different happening.
The pile of gold of old telcos is for services people subscribe to. FB and others will give them away for free. Or are you suggesting all current FB users will become paying subscribers?! I don’t see the substitution effect you suggest, since the network utility still needs to be paid for by somebody. Another “pile” is ads revenue, but the new new Telco arguement doesn’t pull that revenue since the old telcos weren’t. A bit of a mixed argument between the progress of online service ownership, old to new new, and FB valuation; might be better split out. But I really like the underlying concept of changing customer ownership.
@kevin three things.
One, we shouldn’t worry too much about “business models”, we should look at sources of revenue and sources of cost. Peter Drucker used to say that people make shoes, not money. Companies make money because they make their particular shoes so well that customers are prepared to pay beyond cost for them. Opensource people solve problems, they don’t build business models. if you solve a problem well then you will make money.
Two, there is a Because Effect in operation here. Facebook makes money because of the assets it has rather than with the assets it has. of course there is a tendency, often driven by greed, to lock customers in, but the age of customer lock in is dead. facebook will continue to learn and adapt.
Three, we’re at a stage where for the first time we can experiment with the economics of abundance rather than scarcity. When you have a billion customers, the fact that they pay a pittance (in comparison with historical prices) for services is rendered irrelevant by the scale and the scale-free nature of the costs.
Valuation is a dark art at best, so much is driven by momentum and confidence, or their lack.
Isn’t switching a whole lot easier with Facebook? I remember my telco boss talking about churn and retention and all the things telcos go sleepless nights over. FB surely will face those to a much greater degree.
Wonderful Googly. Worthy a cross-post. (Redact my cricket, they’ll never get it)
@paul data and metadata and context portability is what people will regulate, and fb will have to respond. but they’re pretty adaptive when it comes to such things. anyway, with david recordon there, I would worry less. david is a good guy.
@clive more a bosanquet sir, in a week where both India and England excelled in the southern hemisphere.
I think your reference to immaturity in a comment above is key JP. Would a five year old telco (even with such growth and size of user base) have merited an equivalent valuation in the past? I’m not so sure and the telcos had the built-in advantage of a physical infrastructure monopoly. Yes there are significant switching costs for FB users but I’ve noticed recently that regular people (i.e. people I know who don’t read blogs and to whom Facebook is two years old at most) are already voicing resentments about the impositions it places on their individual life and behaviours and that of their social aggregates. It’s time-sapping and socially pressured in a way the telcos never were.
There will be a new telco for sure, but whether it’s Facebook, another commercial entity or maybe a truly open system, is too soon to tell.
@john people scoffed at google valuations. people scoffed at skype valuations. and for at least five years people have been telling me about the death of facebook. when MS bought in the first time, people scoffed. when DST came in people scoffed. When GS came in people scoffed.
Accel. Microsoft. DST. Goldman Sachs. Not names you would normally associate with stupidity. You may not like the companies, but that’s a different matter.
Differences between the basic nature of the infrastructure used by these companies is to be noted as well. Though the infrastructure laid by the telcos was global and interconnectable, the telcos have to stitch a path between two parties willing to communicate. So the end users have to continuously depend on the telcos to connect with other users. Contrasts to this, the infrastructure used by new telcos and new new telcos didn’t require this since the paths were stitched already, so to speak. Still end users faced a difficulty during the era of new telcos: people were not always attached to the infrastructure and when they were attached, it was not known the point of attachment. So the new telcos took on the role of mediator of this information. Once this information is know there is no intrinsic need for them any more. Even though this should have suggested piles of gold have become piles of nickel, the market ignored it. So new telcos like ICQ and Skype harvested their “gold”, either literally or in kind. During the era of new new telcos, many of us are always connected to the infrastructure or the ability to be your own telco is both easy and inexpensive, there is really no need for “telcos”. But new new telcos declare that they facilitate introduction of our friends and maintenance of the connection. But this is superflous in the case of telcos like Facebook which try to facilitate connection between people who are already connected. So if it becomes norm for people to be their own telcos and conduct social life that are otherwise facilitated by telcos like Facebook, the current crop of new new telcos will whither away. My concern is that the current valuation of Facebook doesn’t take into account this possibility.
@aswath excellent points. the key is that fb have to provide value above and beyond the facilitation; that’s why the facebook platform, the dev community, the friend graph, the fb connect, the privacy settings, all these become meaningful. they also garner one flickr every five or six weeks, in terms of photo uploads. not to be sneezed at.
but i agree with you, I’ve just taken a more bullish view on their ability to keep inventing and reinventing at the edge
JP, With Facebook as the new new telco, I wonder where this leaves Google?
@alexander think you’d better ask google that question….
JP:
I am not belittling the current level of popularity experienced by Facebook, nor am I suspecting that their ability to offer new features. But I am betting both literally and figuratively that we as individuals will prefer to own our own social graph and data. Once the necessary hardware and software are made available to do just that in an appliance form factor, majority will prefer that. I believe that for real-time communication and think that holds true for other social sharing as well.
You might have heard me say this before, but let me repeat here. In offline world, we have social interaction in our own living room and sometimes in a shared place like a bar. We see benefits in both. So I do believe that we will replicate it in the online world as well. But Facebook is not like a bar, given our expectation of privacy. Twitter has those characteristics, not Facebook.
So it comes down to whether the appliance I am postulating will come about. Free’s new Freebox Revolution is such a box; plug computers being pushed by Marvell could play that role. All these Internet TV boxes like Boxee, Google TV could take on this added role. Take a look at the proposed box from Aluratek (http://xth.in/gdKS4o). So I fully expect that within a year or two such boxes will be adopted by consumers to some degree. This will materially impact Facebook. Of course ISP’s can push this kind of box just as Free is doing.
Finally, if you have not seen this particular analysis (http://www.cnn.com/2011/OPINION/01/07/rushkoff.facebook.myspace/index.html), the author seems to think that it is inevitable that Facebook will see a decline. He thinks it will be replaced with another social network (centrally operated). But I am saying that it will be totally distributed and just to emphasize, not in the sense of Diaspora*.
Does anyone know how FB accounts vs. regularly active FB accounts? I know dozens of people who created accounts but never really used them at all, or rarely ever log in. Does anyone know a #? BTW, I have also heard of people creating numerous accounts for themselves, as well as reports of people creating literally hundreds of accounts in an attempt to spam people/push products.
@Jdover while the actual figures aren’t released by fb, there is some level of proxy available. the latest figures from Comscore suggest that facebook moved into third place for most visited site overall, with 648 million uniques in November 2010. Even allowing for a single account making multiple “unique” visits”, the adjusted figure is not going to be that small. So the dormant/inactive/deleted number is unlikely to be significant, based on site traffic. See http://www.engadget.com/2010/12/27/comscore-facebook-overtakes-yahoo-is-now-the-third-most-traffi/
It’s interesting that you describe FB as a telco. Telco’s have historically been described as natural monopololies, and as such, usually subject to government antitrust investigation and ultimately regulation. I’d love to see you take the next step in this essay and write about whether or not FB is/could be a monopoly, and whether regulation is in store for FB.
Some flaws in the argument if I may point out:
1. Old Telcos just didn’t have ‘subscribers’, they also had ‘users’ which were typically multiples of subscribers. FB doesn’t come close to being anywhere close….can’t think of ‘FB Booths’ and the value of such a contraption.
2. Telcos served a core need….communication which was 1-on-1. FB is more ‘non-personal’…i.e. if people were to wish someone on FB vs. by phone / telco, the FB greeting is more impersonal.
3. If you use the 5 Forces Model, FB has far greater threats from substitutes, suppliers, buyer power, lower barriers to entry etc. compared to Old Telcos (geographic monopolies) and New Telcos (lack of number portability).
By all commercial logic, FB is critically at risk from a disruptive competitor. Just a matter of time before it happens, unless they are extremely lucky and the likely challenger doesn’t raise the bar.
@debabrat can’t agree with you there. (i) fb has mail, chat, video mail, will have calling as well, supports SMS. seen anyone use a call box recently? (ii) the core need is to bond with others, talk to them. all the evidence from people like Pew Internet is that a new breed of supercommunicators is emerging, fb is augmenting not replacing face 2 face. (iii) industries that profit from network effects tend to exhibit first-proper-mover-advantage. by your reckoning Amazon, eBay and Google should not exist either. Or twitter. momentum, confidence, fear and greed are the four forces I recognise, not the five you mention.
In very many of the same ways, every company is a telco company… When you have a Telco hammer everything is a telco solution :)
With my media background “Every company is a media company.” I have a media hammer… :)
@tom good to hear from you, but not sure I see what you mean. Historically, the aggregation and production of directories, the provision of communications services, the issue of updates, these were all solely post/telegraph/telco functions and not the domain of any other industry. usually mandated by law. a monopoly enforced by the state. so I don’t get your point.
Is ‘new new teleco” a shorthand version of “externalized infrastructure costs and added value through new aggregation and connectivity software”?
I ask because I think that who pays for and maintains the infrastructure is still a pertinent question and not one I see addressed in the fb argument.
@JP Take your point about momentum, confidence, fear and greed. I still hold the view about FB being extremely impersonal (so do many more people). I deactivated my FB profile and hence do not know about some of the features. New breed of supercommunicators? I would call that impersonal-communicators.
I see the Phonebook still being more powerful than Facebook.
On your point about profits from network effects…there’s a big difference between real profits from network effects and ‘valuations’. FB is still in the ‘valuation’ space. Maybe the true economic performance of FB in the coming years should tell the story.