Yahoo should have paid dearly for Facebook and was silly for worrying about little things like valuation. Yahoo's inability to Facebook is especially troublesome since the social networking has blown past Yahoo's initial assumptions.
That's the thesis of a report by Needham analyst Mark May. Isn't hindsight fun? Not if you're Yahoo, which seems to get hit by hindsight by every critic/blogger/pundit/VC/person on the street. It's stunning how many armchair CEOs there are for Yahoo (see blog focus). Whether its search or something else Yahoo mistakes are easily found.
In a research note, May says:
"Based on press reports and our industry contacts, Yahoo! made attempts last year to purchase leading social networking site Facebook. These negotiations failed in part due to valuation, according to these sources. It appears that since then Facebook has far exceeded the assumptions Yahoo! supposedly used to value Facebook. We believe Yahoo! must take steps to gain a more meaningful leadership position in social networking or risk not participating in what could be one of the fastest growth segments in the consumer Internet sector over the next five-plus years."
May then adds that Facebook has recently surpassed 21 million registered users and generates 1.5 billion page views a day. May's argument is that Yahoo will rue the day it didn't pay $750 million to $1.6 billion for Facebook.
In a nutshell, Yahoo may have missed a MySpace-ian opportunity based on docs leaked to TechCrunch in December. The message: Yahoo failed to buy Google in its early days and blew Facebook too. May writes:
"Facebook is no doubt one of the most important Internet companies to have been created in the last five years. In just three years since launch the property has attracted 21 million registered users. More phenomenal, however, is that an estimated 93% of those 21 million users are “active”, or log on at least once a month, 85% at least once a week and 60% at least once a day. In addition, average daily usage is reported to be nearly 20 minutes per day per user. According to comScore, Facebook.com ranked as the 36th most-visited site on the Web in February 2007 with 16.7 million unique visitors, and was also the second-most “engaging” site with 23.6 average visits per visitor during the month. Facebook has also been ranked as the number one site for photos, ahead of Yahoo!’s Flickr, with over 6 million photos uploaded daily. In a survey conducted last month, eMarketer found that Facebook was the most viewed site by females in the United States (69%) ages 17-25 and also the most viewed website by males (56%). In a survey conducted last year by Student Monitor, Facebook was named the second most "in" thing among undergraduates, tied with beer and after only the iPod."
OK, fine. Now time for a reality check.
- If News Corp. still can't figure out how to monetize MySpace (it's getting there) how can Facebook be profitable enough to justify a big valuation? My hindsight indicates that Facebook should have taken Yahoo's dough and ran. It's one thing to build an audience it's quite another to make money from it.
- Facebook is the "in" thing for now. Let's follow May's logic and assume Yahoo did pull the trigger on a Facebook purchase (of course we'd all pick that apart too.) Guess what would happen when Yahoo bought Facebook? It would be an "out" thing. Consumers are a fickle bunch and will leave in a second. Suddenly that valuation doesn't look so hot.
- Is social media really all that? I know it's heresy to think that social media may not be the second coming of the Web boom, but there are a few areas of concern. Perhaps Mozilla's social media meets browser effort hurts traffic at MySpace and Facebook. Perhaps someone cooks up a technology that allows you to take your profile--and all of your friends--somewhere else easily. Bottom line: We don't know how much money social media can make. 24/7 Wall Street is also having trouble making sense of the Facebook valuation math.
Yahoo allegedly isn't a social media titan, but sure seems to be doing a lot of social things such as citizen journalism and spreading it throughout the network. Meanwhile, Flickr seems to be doing well and at last check folks were using del.icio.us. It’s quite possible social media is a feature not a business.
May acknowledges that this whole social media thing is in its infancy and may not be able to be monetized. That's what makes all of this speculation so much fun. We don't know what Facebook's business looks like until it goes public (and it will probably try.) If Facebook goes public we'll find out whether Yahoo made a good move or not. Another bonus if Facebook goes public: Wall Street will finally be able to short Web 2.0 directly.