Paul Wallbank – Brilliant Communications

Category: future

  • Is Facebook worth $50 billon?

    Is Facebook worth $50 billon?

    Goldman Sachs’ recent $500 million investment in Facebook that values the entire business at fifty billion dollars raises the question, can a business that was founded in college dormitory seven years ago really be worth that sort of money?

    It is possible Facebook is worth that sort of money, but to figure out if it really is, we have to crunch some numbers. So here is a back of an envelope calculation.

    Learning from others

    The first thing we need to look at is similar examples, the closest comparison is Google who were launched on the stockmarket shortly after Facebook were founded and today have a market worth of $195  billion.

    So Facebook’s investors are valuing the business at about ¼ of Google’s size. Yahoo’s stock analysis of Google allows us to look at the rough numbers.

    Income

    Currently, Google is earning 29.3 Billion and making a profit of 8.5billion for a Price to Equity (P/E) of 23.26.

    To justify a 50 billion dollar valuation on similar rations, Facebook would have to make around 2 billions dollars profit on revenues of $8 billion .

    Facebook is reported to have made $1.2 billion in sales with $355 millon profit in the first nine months of 2010. If we extrapolate that, crudely assuming no revenue growth in the last 3 months, we come to 2020 earnings of $1.6 billion and roughly $450 million profit.

    So Facebook has to grow revenues and profit by a factor of five, based on the same ratios as Google, to achieve the $50bn valuation. Where could this come from?

    Advertising revenue

    The bulk of Facebook’s current revenue comes from advertising, according to Inside Facebook in 2009 all but $10million of their $660 million earnings came from one form of advertising or another.

    Online advertising is going to continue to grow spectacularly, a 2010 Morgan Stanley research paper illustrated (on slide 25 of the previous link) how advertisers will have to increase spending onling by $50 billion to match the Internet’s share of media consumption.

    It’s a fair assumption that Facebook, as the biggest social medial platform, will get a large slice of that $50 billion. If Facebook were to capture 10% of the market’s growth, they’d achieve their valuation easily.

    We should also consider that most of Facebook’s revenue is coming from the United States and they barely touched international markets, so there’s even more potential growth in their advertising revenue.

    Games revenue

    One of Facebook’s biggest growth opportunities comes from the games. Games like Farmville and Mafia Wars are proving popular with the user base; Zynga, the developer of Farmville, itself has a projected market capitalisation of $5.8 billion.

    The global games business is valued at $105 billion dollars and much of this market is moving to web based, online platforms. Should Facebook based games grab 10% of that market, the platform’s 30% cut would see another 3 billion go into Facebook’s revenue, most of which would be profit.

    The credits market

    Related to the games market is the sale of credits for purchases of games and other features like virtual, and real, gifts and products.

    It’s almost impossible to quantify what that market would be but already credits have gone on sale in US stores like WalMart and Best Buy and the virtual world site Habbo Hotel reports 2010 credit revenues of 4.5 million Euros on a user base that is a fraction of Facebook’s size.

    So is Facebook worth $50 Billion?

    Facebook’s fifty billion dollar valuation is feasible. That’s not to say there aren’t risks, it’s possible Facebook could turn out to be another fad like Myspace or that users might decide to value their privacy over Facebook’s benefits.

    While it’s not an investment you’d like to see your grandmother in as a safe source of retirement income, for risk tolerant Russian fund managers and high income clients of Goldman Sachs, it’s a punt worth taking.

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  • Choosing the business battlefield

    Choosing the business battlefield

    Across the world industries are in turmoil as the Internet and globalisation allow new competitors into once safe markets. How do the incumbents deal with the upstarts and how do innovators challenge the establishment?

    One way is to redefine the market, instead of taking on the incumbent or challenger on their own terms, aim the product at a segment that hasn’t been properly developed. The best example of this is Apple’s iPod.

    When the iPod was released there were hundreds of MP3 players on the market including those from Sony who were expected to continue their dominance in the personal entertainment device market which they had developed around the Sony Walkman in the early 1980s.

    Apple took that market and redefined it on their terms, they then repeated the strategy with both the iPhone and the iPad.

    While not every business will have Apple’s design talent, or the market opportunities that allowed Apple to time their entry with those products, their experience shows how choosing where you fight your market battles matters.

    In the United States, major airlines are deciding not to compete with cut price carriers on travel websites, the reasoning being that these online comparison services only compare products on price which is not the legacy carriers’ advantage. Instead airlines like American and Delta are pushing their own websites that emphasise their advantages such as free baggage allowances, lounges, inflight meals or downtown check-in facilities that their low cost competitors don’t offer.

    Qantas in Australia carried out a similar strategy when faced with low cost carriers entering their market. They set up Jetstar as a low cost carrier which started flying the price sensitive routes, mainly the leisure and holiday services, leaving the expensive full service legacy operations to focus on the business dominated routes that weren’t so concerned about price.

    In doing this, Qantas chose where they were going to fight and on what terms, which has helped them remain profitable at a time when many other legacy airlines have struggled.

    Traditional retailers are facing a similar problem to the airline industry as online stores are taking growing share of the shopping market. Some commentators are suggesting they need to compete with online services, but for many entering a field where someone else has the advantage would be a mistake.

    Instead it may be better to choose where a business’s existing strengths lie and build upon those. For a bricks and mortar retail store, this may mean service and convenience.

    A good example of this is the cornerstore of our grandparents days. With the rise of supermarkets, most of these smaller shops went out of business as they tried to compete with the better range, prices and convenience of the self service stores. We saw a similar process happen with speciality shops like butchers and greengrocers.

    In recent times we’ve seen the corner store being reborn as retailers have discovered that consumers are prepared to pay more than supermarket prices in return for convenience. The modern convenience store is different to the corner shop of our grandparents’ days, but it is a recognisable descendant which caters to the changed society and customer needs.

    This changing society and evolving customer demands is what today’s retailers, and every other industry, needs to consider as they look at the future of their business. The economy is going through a period of massive change and disruption.

    Building on strengths and recognising other’s advantages and weaknesses is the key to survival in such an environment. For a traditional, bricks-and-mortar appliance store, an e-commerce solution might be the answer as could a social media strategy or offering bid discounts to Internet shoppers.

    The key is to choose the marketplace where your business have the strengths, either by redefining markets as Apple often do or by focusing on key advantages like Qantas and the US airlines are trying to do.

    A similar rule applies when challenging the incumbents in the marketplace, in fields where barriers are low and it’s difficult to simply undercut the established players, you have choose the areas in which they are weak and the demand is strong.

    This isn’t to say incumbents shouldn’t adopt new technologies, they should and they can use them to build on areas they are strong while looking at how new methods can fix their weaknesses. Similarly upstarts can compete in an incumbent’s core market if the existing players are weak or aren’t adapting to changing conditions.

    Choosing the battlefield is the key, whether you’re an incumbent protecting your market position or an upstart looking at building a new market, working from a position of strength makes success far more likely.

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  • The age of the whistleblower

    The age of the whistleblower

    “I would have done it anonymously” when the girl in the middle of the Australian football “dickileaks” scandal was asked what she would have done differently after being ordered by a court not to post any more nude photos of star players she had obtained through a relationship with one of their team mates.

    Having unsuccessfully tried to pass them over the local Melbourne press, who instead tipped off the governing Australian Football League, the girl posted them on Facebook and was quickly shut down by lawyers and a hostile local media more concerned about their access to star footballers than the ethics or behaviour of their beloved sports teams.

    The lesson has been learned with events like this and the systemic corporate shut down of Wikileaks; that the media, big business, governments and the media cannot be trusted.

    For anybody with sensitive information that upsets people in power – be it Julian Assange, a girl with nude footballer photos or a US pilot posting inconsistencies in the Transport Security Administration’s policies – it is essential to get your message out, you don’t have to wait for a producer or editor to decide to publish the story based upon whatever news values they think have priority.

    The next wave of Wikileakers won’t be waiting for Julian Assange to do deals with The Guardian, New York Times or Der Spiegel, they’ll be setting up anonymous websites on services like Blogger or WordPress and hiding their IP address to publish the details directly.

    Sure most of them will get caught, but instead of finding the leaker in ten minutes, as would happen should they post on Facebook or contact a journalist more loyal to powerbrokers than their readers,  it may take the authorities weeks or months to find them and shut them down.

    For the media – who have largely sat on the girl’s story since it first broke in May last year, kept silent on the TSA’s flaws and ignored much of the obvious that is stated in the Wikileaks cables – they are no longer the trusted brokers. Too many journalists and media proprietors have cosy, safe relationships with the organisations they should be reporting upon.

    For those journalists, their cosy world is over. No longer are they the trusted gate keepers with the privileges that come with the position.

    The next generation of media proprietors and journalists understand this and are figuring out the ways to regain trust as sources of factual, useful information.

    Digital technology means there will be many Deep Throats and Daniel Ellsbergs in the future, while they won’t need a newspaper editor to get the message out, a channel to vouch for their veracity will be needed and that’s where trusted journalists will matter.

    Wikileaks and similar direct publishing channels won’t kill media, but it’s going to be a very different world from that of the 20th Century.

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  • The innovation myth

    The innovation myth

    Innovation is the buzz world of the moment, along with the belief is that all organisations have to innovate to survive. Recently the Massachusetts Institute of Technology’s Sloan Review looked at what they believe are the five myths of innovation.

    All five have good reasoning behind them, particularly the rebuttal of the idea that every innovation requires a “Eureka” moment as most good business ideas are steadily developed over time.

    One of the writers’ ideas that can be taken issue with is that today’s innovations are now about business processes. This overlooks that  innovation and the resulting competitive advantage throughout the industrial revolution – such as Henry Ford’s mass production, Josiah Wedgewood’s sales stategies and Alfred Sloan’s building of General Motors – were about applying innovative business processes to new production technologies.

    While dispelling some myths, The article perpetrates one of its own by concluded “innovation is the lifeblood of any large organization” as not all organisation are innovative, or need to be innovative.

    The innovative drive might actually be the wrong thing for many institutions. For instance, we certainly don’t want doctors and nurses trying out innovative treatments without first going through various ethical and safety tests.

    For public service departments, being innovative is usually outside their mandate as they are legally required to carry out a function, such as registering a motor vehicle or collecting statistics. While innovation may help them carry out their mission it isn’t necessary or the lifeblood of the organisation.

    In the private and public organisations innovation can be anathema to many managers who didn’t get to where they are by taking risks. In many larger organisations, successful managers are a group selected by survivor bias, they are there because they didn’t take risks and their innovative colleagues long ago dropped away when their ideas “failed”.

    Many of those big corporations operate in markets where two companies dominate the market, so there’s little incentive to be innovative, just do enough to differentiate yourself from the competition through some expensive marketing. Telecommunications providers, television stations and cable TV companies are good examples here.

    Some of these businesses, to be fair, are highly regulated so managers and staff are cautious to be innovative as they are wary that implementing new ideas or business processes may find them in breach of various laws or regulations. This particularly true in industries like insurance and the legal professions.

    We can also see how innovation doesn’t matter even in companies that appear to be innovative; the tech sector provides some case studies where businesses like Microsoft and Google have steady cash cows so the innovative sides of their businesses don’t matter. They just need to do enough to protect their critical cash cows and all other innovation, while fun and stimulating, is largely irrelevant.

    Innovation is the lifeblood for high growth and start up businesses. If you are challenging existing players, as Google did with Yahoo!, then you need to be innovative and if an organisation wants to grow fast, it needs to be innovative in what it offers to its customers.

    While innovation is important it isn’t the lifeblood of many organisations, particularly bigger ones. That’s where the opportunity lies for new businesses.

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  • Business tech 2010

    Business tech 2010

    2010 was always going to be an interesting year as the tech and business worlds came to grips with the economic shocks of 2008 and 2009 and the big tech companies like Apple, Google and Microsoft made their moves to meet various challenges and changes in their marketplaces.

    Microsoft’s release of Windows 7 late in 2009 and the release of the new Windows Phone operating system made us think 2010 would be the year of Windows, but if anything 2010 will be most remembered as the year of the iPad.

    The iPad
    At the end of 2010 it’s difficult to think that the iPad isn’t even ten months old such has been the way Apple has captured the tablet computer market. For a decade, the corporate market had been gagging for a decent tablet system but had been continually let down by poorly designed Windows based models. The iPad delivered what the market wanted and the second version, expected in March 2011, will probably cement Apple as the leader in this segment.

    Cloud computing

    The iPad’s success was partly due to the plethora of cloud based applications available for the device. Being able to store your data or run your software on a remote server that can be accessed from anywhere made portable devices like the iPad and smartphone killer business tools. While the underlying principles under cloud computing are nothing new in the IT world, cloud products really started to take off in the business and consumer world.

    Wikileaks
    The fundamental flaws in the cloud and how the Internet works were exposed by the visceral reaction to Wikileaks’ release of the US State Department Cables. Wikileaks’ release of the Climategate emails, Iraq war tapes and finally the State Department Cables forced us to look at security, the ease of setting up websites and how dependent we are on the arbitrary whims of the privately owned corporations who own great chunks of the Internet.

    Investment mania
    As Helicopter Ben and his counterparts in Europe and China printed money to avoid deflation and to save big to fail banks from failing, hot money started to slosh out of the bank vaults and into the venture capital market with a mini dot com 2.0 boom beginning to appear. This was illustrated best by the group buying mania, best illustrated by Amazon’s $175 million investment in Living Social and Google’s rejected offer to buy Groupon for $6 billion.

    Plagiarism
    An entertaining side issue was the Cook’s Source plagiarism scandal which showed how much content is being stolen on the net, the attitude of many who do copy and paste other people’s work and how the Internet can quickly mobilise angry mobs.

    Crowdsourcing
    Probably the biggest buzzword of 2010 was crowdsourcing, the technique of getting those Internet mobs onto solving your business problems. While there’s still some confusion on the difference between outsourcing, crowdsourcing and running dodgy pitch competitions – which raise even more interesting questions about plagiarism, IP protection and business ethics –we’re seeing the hype die down and the real business models start to evolve.

    The march of Facebook
    With the passing of the 500 million user mark, Facebook showed it was a market force to be reckoned with. The launch of Facebook Places in August seeks to extend their network strengths into the local search business, making them an even greater threat to Google and smaller startups like Foursquare.

    Politics meets technology
    Something no-one would have expected is how the National Broadband Network became the defining issue of the 2010 Federal election. The fact it did probably speaks more for the policy vacuum on every other issue the two parties presented to the electorate. In many ways it’s a shame the discussion of how we should build such important infrastructure became bogged down in cheap partisan politics on both sides and it illustrates the hollow “Restaurant At The End Of The Universe” mentality that is the feature of modern Australian politics.

    As 2010 draws to a close, a reflection on the year would see it’s been the year of connectivity. Businesses, particularly those in the retail and media sectors are beginning to figure out what drives the online economy and how it can be profitable for them.

    2011 will be the year we start to see more businesses experimenting with iPads, Groupon, Facebook and other devices or services that help them connect with their markets and communities. it’s going to be an exciting year and we’ll have a look at what’s in store for January’s first column.

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