Paul Wallbank – Brilliant Communications

Category: Internet

  • Valuing Facebook

    Valuing Facebook

    After over a year of speculation, Facebook has finally announced the terms of its US stock market float, valuing the company at $50 billion dollars according to Facebook’s SEC filing.

    The financial details that we’ve speculated over are now public and we can now make more than informed guesses about what Facebook is worth.

    What jumps out when first looking at Facebook’s financial figures is the exponential growth in their revenue from 153 million dollars in 2007 to $3,700 million last year. A twenty-fold increase over four years.

    Expenses though haven’t grown at the same rate going from 277 million to 1.95 billion over the same period. Like all bigger social media and web 2.0 companies, sales and marketing is the biggest expense.

    The Google Experience

    The closest comparison to Facebook is Google’s float in 2004. Google floated at a market capitalisation of 23 billion dollars on a reported revenue in their SEC statement of 389 million.

    At the time, Google’s profit margins were substantially lower with costs coming in at 234 million. These figures alone indicate Facebook today is a better prospect that Google was at the time of being floated.

    Google today is valued at $190 billion on a revenue of $38 billion and a profit of $25 billion. On those measures, Facebook investors will be expecting that exponential growth to continue.

    Growing Income

    How Facebook continues to grow their revenue is the big question. Currently over half of their revenue comes from advertising in the United States and the bulk of the rest from Canada, Australia and Western Europe.

    If online advertising continues to grow spectacularly, as a  2010 Morgan Stanley research paper illustrated then  Facebook, as the biggest social medial platform, will get a large slice of that $50 billion global market opportunity. This in itself would justify their valuation.

    One of Facebook’s biggest growth opportunities comes from games. Already Zynga, the developers of Farmville and Mafia Wars, contribute 12% of Facebook’s revenues.

    The global games business is valued at 60 billion dollars and much of this market is moving to web based, online platforms. Facebook’s 30% cut of income from games on their service is another lucrative revenue stream with few operating costs.

    While advertising remains Facebook’s main income stream, other payments from games and online payments went from almost 0 in 2010 to nearly 17% of income at the end of 2011.

    The threats

    This isn’t to say Facebook doesn’t face any threats in their businesses. The concentration of income from North America, Europe and Australia exposes how the service is a first world phenomenon, although they have high penetration rates in some countries like Chile and hope to achieve similar in India.

    Social media though is a fast moving field and there are plenty of opportunities for upstart businesses to displace Facebook just as MySpace faded away.

    In their established markets there’s the question of how sustainable social media as an advertising platform is; until recently social media was a novelty to most households and still is to businesses and advertisers.

    User fatigue is possible in the mature markets and Facebook – along with other social media services – not achieve the advertising revenue they hope.

    Privacy issues are also another concern; as users realise the value of their private information it may be that they demand more for it than seeing where their friends are drinking or playing an online game for free.

    Overall though, Facebook does appear to be worth the 50 billion dollar valuation when compared to other similar businesses like Google and is probably more sensibly priced than recent other IPOs like Groupon and Zynga.

    Whether the service will deliver on its promise remains to be seen, but those are the risks when investing in new industries.

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  • Can you trust your friends?

    Can you trust your friends?

    I remember the first time I heard about Google, it was in the run up to the year 2000 and my radio segments were mainly discussing if computers would blow up, dams collapse or aircraft fall from the sky as computer systems failed to deal with the change into the new millennium.

    Despite the risk of impending disaster, I had a play with Google search and found the results to be far better than the established sites like Yahoo! and Altavista. Millions of others agreed.

    Quickly Google became the definitive search engine. If you were serious about finding information on the web then Google was the way you found it.

    For a while we wondered how Google would make money, it turned out that linking advertising to the search results was immensely profitable and the company quickly became one of the richest in the world.

    Today, Google’s decided their searches will be something else. Rather than being a trusted source they’ll tell us what our friend think.

    Which is great if our friends are trusted sources on Aristotle, post colonial South American politics, how to book sleepers on the Trans-Siberian or the best pie shop in Bathurst. But it’s kind of tricky if they aren’t.

    As much as I love and enjoy the company of my friends both online and offline, not many of them are authorities in anything – except possibly pie shops.

    This the flaw at the heart of integrating search and social media, they are two different things and we have different expectations for them.

    As Pando Daily’s MG Seigler puts it; “Evil, Greed, And Antitrust Aren’t Google’s Real Problems, Relevancy Is.”

    For most of my online searches, my friends views and ideas aren’t relevant. If they are, I already know how to find them.

    The prediction is that tinkering with search will not end well for Google, it’s hard to disagree if we lose confidence in their results.

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  • The Internet’s cold war

    The Internet’s cold war

    “We’re designing exclusively for Android devices,” the software developer confided over a beer, “we don’t like the idea of giving Apple 30% of our income.”

    That one business owner is making a choice that software developers, newpaper chains, school text book publishers and many other fields are going to have to make in the next year – which camp are they going to join in the Internet’s cold war.

    As the web matures, we’re seeing four big empires develop – Google, Apple, Facebook and Amazon which are going to demand organisations and consumers make a choice on who they will align with.

    That decision is going to be painful for a lot of business; each empire is going to take a cut in one way or another with Apple’s iStore charges being the most obvious.

    For those who choose to go the non-aligned path – develop in HTML5 and other open web standards things will be rocky and sometimes tough. At least those on the open net won’t have to contend with a “business partner” whose objectives may often be different to their own.

    Over time, we’ll see the winners and losers but for the moment businesses, particularly big corporations and publishers should have no doubt that the choices they make today on things as seemingly trivial things like reader comments may have serious ramifications in a few years time.

    Consumers aren’t immune from this either; those purchases through iTunes, Amazon or Google are often locked to that service for a reason.

    Probably the development that we should watch closest right now is Apple’s push into education publishing; those governments, universities and schools that lock into the iPad platform are making a commitment on behalf of tax payers, faculty and students that will affect all of them for many years.

    For many, it might be worthwhile hedging the bets and sticking to open standards. A decision to join one or two of the big Internet empires is something that shouldn’t be made lightly.

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  • Book review: The Information Diet

    Book review: The Information Diet

    We all know a diet of fast food can cause obesity, but can consuming junk information damage our mental fitness and critical faculties?

    In The Information Diet, Clay A. Johnson builds the case for being more selective in what we read, watch and listen to. In it, Clay describes how we have reached the stage of intellectual obesity, what constitutes a poor diet and suggests strategies to improve the quality of the information we consume.

    The Information Diet is based upon a simple premise, that just as balanced food diet is important for physical health so too is a diverse intake of news and information necessary for a healthy understanding of the world.

    Clay A. Johnson came to this view after seeing a protestor holding up a placard reading “Keep your government hands off my Medicare.” Could an unbalanced information diet cause a kind of intellectual obesity that warps otherwise intelligent peoples’ perspectives?

    The analogy is well explored by Clay as he looks at how we can go about creating a form of “infoveganism” that favours selecting information that comes as close from the source as possible

    Just as fast food replaces fibre and nutrients with fat, sugars and salt to appeal to our tastes, media organisations process information to appeal to our own perceived biases and beliefs.

    Clay doesn’t just accuse the right wing of politics in this – he is as scathing of those who consider the DailyKos, Huffington Post or Keith Olbermann as their primary sources as those who do likewise with Fox News or Bill O’Reilly.

    The rise of opinion driven media – something that pre-dates the web – has been because the industrial production of processed information is quicker and more profitable that the higher cost, slower alternatives; which is the same reason for the rise of the fast food industry.

    For society, this has meant our political discourse has become flabbier as voters base decisions and opinions upon information that has had the facts and reality processed out of it in an attempt to attract eyeballs and paying advertisers.

    In many ways, Clay has identified the fundamental problem facing mass media today; as the advertising driven model requires viewers’ and readers’ attention, producers and editors are forced to become more sensationalist and selective. This in turn is damaging the credibility of these outlets.

    Unspoken in Clay’s book is the challenge for traditional media –their processing of information has long since stopped adding value and now strips out the useful data, at best dumbing down the news into a “he said, she said” argument and at worse deliberately distorting events to attract an audience.

    While traditional media is suffering from its own “filter failure”, the new media information empires of Google, Facebook, Apple and Amazon are developing even stronger feedback loops as our own friends on social media filter the news rather than a newsroom editor or producer.

    As our primary sources of information have become more filtered and processed, societal and political structures have themselves become flabby and obese. Clay describes how the skills required to be elected in such a system almost certainly exclude those best suited to lead a diverse democracy and economy.

    Clay’s strategies for improving the quality of the information we consume are basic, obvious and clever. The book is a valuable look at how we can equip ourselves to deal with the flood of data we call have to deal with every day.

    Probably the most important message from The Information Diet is that we need to identify our biases, challenge our beliefs and look outside the boxes we’ve chosen for ourselves. Doing that will help us deal with the opportunities of the 21st Century.

    Clay A. Johnson’s The Information Diet is published by O’Reilly. A complimentary copy was provided as part of the publisher’s blogger review program.

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  • The end of the PC era

    The end of the PC era

    This morning a graph appeared on the web from analytics site Asymco showing the stalling of PC sales and the rapid catch up of Android and Apple iOS systems.

    Such graphs starkly illustrate how the industry is changing as people start using tablet and smartphones instead of their PCs but there are some caveats with making blanket comments about the death of the Windows based computer.

    Sales are still huge

    One important thing about the chart shown is it has a logrithmic scale – a doubling in height indicates ten times the sales.

    That point alone shows just how massive the lead Windows had over 15 years from the mid-1990s, something that is shown in a previous Asymco chart.

    Despite Gartner’s reported 1.4% fall in PC sales – the basis of the Asymco graphs – there are still 92 million personal computers sold each quarter so it is still a massive market.

    Tethered devices

    One of the weaknesses with smartphones and tablet computers is they are still tethered to the desktop. If you want to get the best experience from your phone or iPad you have to synch it with your home or office computer.

    For the moment that’s going to continue for most users, but not forever and the extended life of PCs means customers are using older computers to connect.

    Extended life cycles

    A bigger problem for the PC manufacturers is the extended life cycle of personal computers.

    Since the failure of Microsoft Vista, PC users have been weaned off the idea of replacing computers every three to five years and nearly half the market is using systems that are more than ten years old.

    On its own that indicates fundamental problems with the Windows and PC markets for Microsoft and their manufacturing partners.

    The irrelevant operating system

    One of the effects of increased computer life cycles is that the operating system has become irrelevant. Customers no longer care about what they are using as long as it works.

    This is one of Microsoft’s problems; the virus epidemic of last decade and various clunky versions of Windows Phones has left customers perceiving PC and Windows software as being clunky and buggy.

    Not yet dead

    While the PC market is now shrinking, it’s far from dead. There’s still a huge demand to cater for although the big growth days are over.

    For manufacturers whose business model has been based on fighting for market share in a growing sector, they now have a problem. They have to identify profitable niches and generate innovative products.

    Unfortunately for the PC industry, the market has moved on. Apple have captured the bulk of the high margin computer sector and the industry’s response of pushing “ultrabooks” to capture the MacBook Air customers isn’t going to resonate with consumers trained to buy cheap systems.

    Watching the PC industry over the next five years will be fascinating. Some companies will adapt, others will reinvent themselves and many will fade away as they cling to a declining business model.

    Despite the personal computer industry only being 30 years old, it’s already in decline which is something older industries should ponder upon.

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