socialmediocrity

With new figures showing Facebook overtaking MySpace in the US we’ve begun thinking again about Facebook’s ad revenue model. Of course a recession is always going to cause trouble and concern for ad revenue business models, but with a public platform available, we can begin to get a feel for their actual income.

According to Compete.com, the US user base has just exceeded MySpace’s for the first time, with 59.7 million unique visitors, versus MySpace’s 59.5 million. Google’s AdPlanner appears to show MySpace barely holding on to it’s lead, but it clearly won’t be long before they too will be proclaiming the beginning fo the end for MySpace too.

Of course there’s been constant speculation about the real value of the business ever since the Microsoft investment, which was rumoured to value it at a remarkable $15 billion. Leaked memo’s, emails, and recounted conversations since have reportedly shown that even some shareholders placed some more realistic valuations of $3-5 billion on it.

Heck, we’ve even had the valuation estimated on the Whopper Sacrifice application, placing a tongue-in-cheek $1.8 billion valuation on the community. Before Facebook banned it , of course. And not for the low valuation it appeared to place on the business either.

But whilst I might be over-simplifying things enormously, there’s enough information in the public domain to make an educated estimate.

Google AdPlanner tells us that, worldwide, and to the nearest billion, Facebook attracts 29 billion page views per month, and this is rising steadily.

We also know that, whilst it may vary from country to country and page to page, there are normally 2-3 ads on each page viewed on Facebook. Some pages have no ads on them at all.  So for the purposes of a non-scientific estimate it is probably safe to assume an average of 2.5 thoughout.

That gives us an ad inventory estimate of 72.5 billion ad impressions. every month. And rising.

Of course all the page views in the world (and let’s face it, they do seem to have most of them) are only valuable if you can secure advertising for them all, and at high enough rates. So where would we find out the rates Facebook are receiving for their inventory?

OK, no more rhetorical questions. Although the ad platform shows lower figures rates right now, they do vary, and of coruse much of the ads are not placed through the public platform, but in guaranteed delivery deals. What we can see is that at an average CPM rate of $0.50, if that is what they were achieving around the world on average, would give them ad revenues in 12 months of $435 million. Even if the user base continues to double every 12 months, the next year will generate approximately $630 million.

Of course if they’re not attracting those CPM rates, and let’s be clear that these are not the rates quoted at the time of writing for any markets on the public ad platform, then revenues will be significantly lower, and the same goes for the growth estimates. Sooner or later the rate of growth has to slow down, even for Facebook.

So with an ad revenue income estimate of $630 million, the valuation becomes clear once you determine whether you cup is half-full or half-empty. And of course which version of their costs you are prepared to believe. Alternative income streams should not be ignored entirely, siuch as sponsorship deals, and broader content deals, but with renewed prominence of the virtual gifts business that generates c. $40m per year income, Facebook could be generating $700m in 2009 if they get it right, the vast majority still coming from ad revenues.

Let’s assume costs of $250 million per year, leaving $450 earnings, then a $4.5 billion valuation would not be so obscene. $15 billion, even now, would be.

The key to moving forwards however will be in attracting advertisers, and finding ways to deliver excellent ROI for those clients in order to keep the ad dollars rolling in, at a time when advertisers are looking to reduce costs and slash marketing budgets.

Can advertising on Facebook standup to dominant low cost channels such as paid-for Search, and begin to make itself a regular feature on a marketer’s media plan? The smaller advertisers and marketers are making it work, but not until the larger worldwide agency groups find their way, and bring their clients to the party will Facebook see any great acceleration in it’s ad revenues, and until then their valuation will be debated and speculated over repeatedly.