Facebook's Billions are Only as Good as Its Game(s)

The web is agog today with the Facebook IPO of course, but if you look closely, there's some astute analysis that lets us know something fascinating about FB -- and why Second life was so eager to ride on its coat-tails.

MG Siegler lets us know some of the impressive numbers.

"Google had $961.8 million in rev and $105.6 million in profit when they went public."

Really? That's all? They have nearly a billion coming in, and so many costs that they only had  only $105.6 million now?

You know, I couldn't help thinking of our own dear Linden Lab. They claimed they had $75 million in revenue for years, and now are reported as having $100 million in revenue (we don't know what the profits are because it's not a public company).

The point is, however, that Linden Lab only has -- soaking wet, if we all really log on -- 1 million regular customers. Or maybe 900,000. Or something. Or is it back up above 1 million? Well, around a million (someone can correct me).

Compare and contrast that one million customers that generate revenue of $100 million for the Lab, a factor of 0.01, with the 800 million customers for Facebook that only generate $1 billion revenue and $105.7 million profit, i.e. a factor of 0.80. What does this mean? I think it means you need more customers on Facebook to generate more revenue to make more, relatively speaking, than Second Life does -- even though MG Siegler calls Facebook a "refined profit machine". (Since I suck at math, I'm sure someone can figure out what this means -- what rate of customers do you need to get a dollar of revenue -- and keep in mind that Facebook was LOSING when it had less customers, so it may require some X number of customers to keep the momentum to get Y dollars).

For more detail on the losses FB suffered over the years, look at Siegler's Alma Mater, TechCrunch, per Alexia Tsotsis.

But here's where it gets really interesting -- and here's another former TechCruncher, Paul Carr, who is on Sarah Lacy's new daily blog Pando (yet another former TCer) who sort of ho-hums -- because this ad agency called "Facebook" isn't really that interesting a business -- but look down in the comments:

Steve Manuel on February 1, 2012 at 2:35 pm said:

This IS interesting:

page 18:

“We currently generate significant revenue as a result of our relationship with Zynga, and, if we are unable to successfully maintain this relationship, our financial results could be harmed.

In 2011, Zynga accounted for approximately 12% of our revenue, which amount was comprised of revenue derived from payments processing fees related to Zynga’s sales of virtual goods and from direct advertising purchased by Zynga. Additionally, Zynga’s apps generate a significant number of pages on which we display ads from other advertisers. If the use of Zynga games on our Platform declines, if Zynga launches games on or migrates games to competing platforms, or if we fail to maintain good relations with Zynga, we may lose Zynga as a significant Platform developer and our financial results may be adversely affected.”

Wow. Quite the admission! the sort of thing you have to admit in a, well, initial public offering.

It's 12 percent of their revenue! That's a lot. If they lose Zynga, as they almost did in the past, they are way down, and there could be a further knock-on effect. If Zynga was a separate site that added a little social to their games -- all they'd have to do is make some of them like Metaplace with the ability to actually go inside the little Farmville games and talk to other people in chat with your avatar and interact with them, i.e. gift-giving, plant, sit, etc -- and they could have a barn-stormer, and people just wouldn't go back to Facebook. Especially when you think of mobile.

My sense is that Facebook is farther alone in the game than MySpace, but that it could still start to suffer and wane if something better came along that had better privacy and less annoyances. That thing would NOT be Google+, which is now sucking up your data across all its products, whereas before it would leave you along in gmail with your SL avatar name.

 Then there's this to consider: whatever that "coefficient" of "refined profit" -- customers per dollar of revenue and what it takes to get them and the expenses for servers and such -- what LL has said is that SL generated $450 million in sales of virtual goods (that includes land presumably_ inworld. So LL has made a platform that generates revenue for OTHER people, creators, merchants, service providers.

Facebook has ap engineers who make money from it, and marketers and social media gurus who consult around it, but can it really be said to provide entry-level means of making revenue online for ordinary people like Second Life? No.

You can toil away in Farmville for hours, and never make any real money. In SL, you can flip land or texture a cube and start making real money.

Comments

[Ahab Qvetcher]

What I am reading is to be interpreted as "Don't buy Facebook stock." It is always the little footnotes that get you, isn't it. O h by the way if we lose 12 % of our revenue we may have a problem. Could be grim.

[Pussycat Catnap]

NPR was abuz on this this morning as I was waking up. Didn't hear everything, but caught a comment that the valuation of this companies on the market right now assumes the account for 1/5th of all the advertising revenue on the planet - for the entire human species... which is well, slightly more than the actual business they manage to do. :)

SL makes money hand over fist, both for itself and others. And it can be entry level money for the savvy person. Facebook makes money for corps, less for 'small time mom and pops', and it does so at an invasive cost to personal rights.

[Desmond Shang]

A few predictions.

1) Facebook will flee California in fact, if not in corporate letterhead, once it becomes a public money game. Notice what Google and Apple quietly do. Wouldn't be surprised to see them offshore someday.

2) Not that they will last. Friendster/Myspace/Facebook... it's a lot like Oldsmobile/Buick/Cadillac. What are the odds that the driver of the Buick in front of you has white hair? The kids won't be on mom's facebook for long.

3) It's all about hiding profits ~ I don't believe their statements until a 3rd party audit has been all over their operations. State of California is salivating over this one, the state loves IPO's and the revenue they bring.

4) Did you hear the hot tip? AOL and Time Warner are going to merge and totally dominate the future!!!! Oh... wait, that was a decade ago and we already know how that went.

[Ann Otoole InSL]

If you have spare money then buy a block and wait until half of it is worth what you paid for all of it. Sell the half and get your money back. Then parlay the rest into risky profit. You will not loose money. That is how this works.

[Celestiall Nightfire]

RE: The FB games, I have them all blocked.

@ Desmond...my two sons friended *me* on facebook. I would not have sought that, as it would have put them *on the spot*. But they initiated it So, not all children shun their parents.

@ Pussycat: Can you explain how FB makes money "at an invasive cost to personal rights."?

Being on FB is a voluntary action. No one is forced to use FB. Plus, I *am* on FB, and have yet to see my "personal rights" invaded.

When someone says that an entity makes money for a "corp", and says it with disdain, they must not understand what a corporation is. It is shareholders, lots of them. They are individuals, single people, couples, kids, retirees, they can be anyone. A corp is not some evil inhuman monster sucking the life-blood out of society. It is more analogous to a co-op than a regular business. Shareholders split profits, vote on decisions, and can even takeover.

[Ahab Qvetcher]

We see how well that worked with Enron, Ann Otoole.

Historically, back when Benjamin Graham was showing Warren Buffett how the value theory of investing worked, IPOs tended to lose money. There was an initial upsurge of hype, and then a decline in valuation. Some of the companies won and made money over time, and many went away.

Of course, we see the vast number of first generation internet IPO's that are still with us. They had a new theory of valuation that was going to set value investing on its ear, because it didn't matter if the company turned a profit, it would make it up on volume. So the IPO allowed it to expand and burn through its money even faster.

When I see comments like, 12 % of the revenue comes from one source with which there has been a rocky relationship or the valuation depends on 1/5 th of the total advertising budget of some astronomical thing, I immediately think in terms of sealing up the wallet.

Before everyone jumps me, I know about Google, and have kicked myself for ignoring advice to buy. But it is the exception not the rule.