There has been a ton of buzz the last two days over Microsoft’s rumored $500M investment in Facebook (according to the Wall Street Journal). This investment would suggest Facebook’s valuation is now $10 Billion, a number Peter Thiel suggested earlier, but now may think is too low. The media has also been suggesting that logically MySpace, with momentarily more users than Facebook, must then be worth more than $10 Billion. This logic is flawed because from a valuation perspective (discounting forward looking future earnings) these platforms are mutually exclusive plays. The issue as I see it is that with social network platforms (which both MySpace and Facebook are) there can only be one ultimate winner.
For example, Facebook doesn’t want to be a player in the social Internet space ’â€œ they want to be the player – hence the openness, messaging, applications, etc. Like we have seen with Yahoo and Google in search, once one firm truly exerts itself as the market leader, the other can only watch as its market share deteriorates. Thus, if Facebook’s target market is really everyone, and Facebook is the presumed future winner, and Microsoft would pay $500M for 5%, then we cannot have two companies with the same valuation.
Unlike say gas stations, which are exact substitutes for one another but successfully coexist due to geographical constraints, the Internet doesn’t have such issues. People will use MySpace, or they will use Facebook, but I see no value in having two accounts in the very near future.
Currently it could be argued that the two platforms are different enough (feature sets, interface customability, etc) that holding two accounts is a good idea. However, two years from now, I don’t foresee this being the case. Perhaps owning a Platform account plus several niche social networks accounts (all aggregating to one feed) will be the norm, but those niche networks will populate into your SN platform of choice. In terms of SN platforms, there can only be one winner and thus, only one sky-high valuation.
Who’s going to argue with me?