The Definitive Reason Why Facebook is Worth at Least $15 Billion

Note: The following post is based on conversations I have had with Microsoft employees and college graduates being recruited by Facebook. The conclusions I have come up with are based on the information they gave me along with many hours of independent research. Although the following is speculative in nature, it is based on fact.


On October 24th 2007, Microsoft won a bidding war against Google for a small stake in the social networking site Facebook.com. The result was that Microsoft spent $240 million for a measly 1.6% share of Facebook, Inc. This figure sets Facebook's valuation at a whopping $15 billion.

To try to grasp how much money 15 billion really is, here are the dimensions of a standard United States one dollar bill.
Standard US One Dollar Bill


If you pile 3,000 of those together you get a pile that looks like this:
Three Thousand Dollars


Now it gets interesting. Here is a pile the size of Facebook's founder Mark Zuckerberg:
Zuckerberg Stacked


Lastly, the 15 billion one dollar bills that represent the valuation of Facebook:

15 billion dollars
See the person in the bottom right? That is Mark Zuckerberg with a huge freaking smile on his face.

Why would the brilliant businessmen at Microsoft buy a share of Facebook for that ridiculous amount of money? The answer lays on Facebook's potential to dominate Microsoft's current advertising competition.

Traditional media advertisers prioritize ads based on how much companies are willing to pay. The advertisers focus on distracting the customer using a pretty face or funny jingle in order to embed a product or idea in the potential customer's brain. The likelihood that the customer will ever need the product or service is barely a consideration. The result is that many billions of dollars are spent annually on advertising products to people who will never need them (ex. Tampon ads seen by men).

Online advertisers make up for this limitation by taking potential customers' intentions into consideration. Modern search engines deliver ads based on search queries and the content the user is currently viewing. The basic idea is that online users only see ads related to what they are intending to find online. Thus, these ads are much more relevant to the user and on a per ad ratio sell more products.

Facebook has the potential to create a system much better than either of the above mentioned systems. The problem is it is very difficult for outsiders to realize the potential (the reason everyone is confused about Facebook's valuation) and even more difficult for insiders to accomplish (the reason other social networks are not worth as much).

On Facebook, people interact with their friends online. They discuss whom is dating whom, what movies are good, and attempt to retrace their previous inebriated night using photos taken by friends. Those aspects are no different than the other countless social networks. Facebook is different because of the value of its data. It tracks and records all the conversations, actions, and relationships of its users. If this data were fed into the proper advertising platform, the outcome would have the potential to dramatically increase the amount of products sold per ad.

Imagine if all the conversations on Facebook were fed through natural language interpreters in order to understand users' likes and dislikes. Take this a step further and imagine if all of the users' photos were fed through image interpreters to find commercial products. In theory, a system could be created that is sophisticated enough to identify the clothing brand of a person featured in an image, determine who is influenced by this person, and use this information to market to specific targets. Think about the impact on a high-schooler who sees an ad delivered on Facebook featuring the beautiful cheerleader at his school with a Pepsi can in the background. This system could work equally well for co-workers, family members, and significant others. The possibilities for 'relationship driven advertising' are practically endless.

This kind of system would enable companies to stop spending millions for a celebrity endorsement and start buying a guaranteed recommendation from an influencer of a potential buyer for a fraction of the cost.

If a company could be the sole provider of this superior advertising system, they would be positioned to serve a majority of ads online and lead the movement of dollars spent offline to their service online. Microsoft realizes this and subsequently views the potential value of Facebook and its data at $15 billion.

To make this a reality, Facebook will need the help of some of the smartest people in the world. Together they will need to build an advertisement platform capable of understanding users at a level never before achieved with technology. They will need to write software far superior to the current data interpreters, and they will need to work on a much larger scale. This advertising platform will first work with text and eventually start working with images and videos. Currently, the major search engines are the only systems in the public sector capable of anything remotely like what Facebook needs.

This is precisely why Facebook is working so hard to get people from Google. Trusted sources report that top employees are switching from Google at a rate of two to four a month. In addition, Facebook is targeting major universities and employees from Yahoo and Microsoft. They are using the reputation of their company to attract the best and brightest from all around the world.

Only time will tell if they will succeed. So far, Zuckerberg's execution of monetizing ads has failed miserably. He continues to lead his company with a cautionary style of making big changes and then panicking quickly after launch. (e.g., photos, News Feed, Beacon, and, most notably, Facebook's Platform). He has chosen the risky path of refusing the appointment of a more experienced CEO and subsequently has made many basic mistakes. The current path the company is taking is leading some Facebook users to become frustrated by spam and start looking at alternative social networks. Right now this is a small trickle, but if left unresolved it could lead to major issues for Facebook in the future.

Facebook Spam
Facebook Spam

Facebook has the potential to revolutionize the advertising industry. It has a strong foundation of tens of millions of users and all the money it needs. With all the pieces in place, Facebook's success will rely solely on how well it executes its extraordinary plan. To Facebook and Mark Zuckerberg, I wish you the best of luck--you are going to need it.