Facebook is NOT a Media Company

Andrew Chen's got an interesting analysis of MySpace vs. Facebook, where he concludes:

• MySpace leads in the major market (the US) but is losing ground overseas
• The overseas losses are material losses - not just random non-revenue countries
• The major losses all occurred in the mid/late 2007 timeframe
• Several markets are plateauing in traffic, meaning that the social network market is starting to mature - consider that MySpace+Facebook uniques, duplicated, is over 90M active users, which is a huge percentage of the online audience in the US
• How strong are the network effects of social sites, if incumbents can be displaced? Maybe it's not so strong after all

I'd agree with most of his points, but still believe that it's a misguided comparison:  MySpace and Facebook is apples and oranges.

Dan Frommer at SAI takes a similar approach when commenting on Techcrunch's comparison of social netwrok valuations, but offers two caveats:

• The data he uses to establish the average Internet ad spend per person factors in all Internet advertising -- not just the social networking sector, which is relatively cheap ad inventory. We assume that's the best data he could get for all of the countries he analyzed. (We don't know if it varies enough by country to make much of a directional difference, anyway.)
  
• The two most lucrative valuation comps -- LinkedIn and Facebook -- should both come with big asterisks. The first one, which Mike acknowledges, is that LinkedIn's employed professionals should be worth much more per eyeball than any other social network user base. The second one, which he doesn't really spell out, is that no one really believes Facebook's $15 billion valuation, and that it's really the product of Microsoft's (MSFT) desperation to beat out Google (GOOG) for an investment bake-off.

Both Arrington's and Frommer's approaches are useful and largely valid.  However, I still think they miss a very central distinction.  All three analyses of social networks' values focus on media metrics:  audience size, engagement and demographics.  These work for most of the properties we are dealing with, including MySpace, but it does not work for Facebook.

Facebook is an infrastructure company.  They are building an identity layer on top of the internet.  They called this the social graph and tried to differentiate their jargon from that of the internet media world. However, the pressures created by the $15b valuation must be felt, so they came up with a smart, if somewhat early model to monetize, using a media monetization tactic called advertising, Beacon. They should not have - they are not a media company. (I wonder what Seth Goldstein would think about this, given his recent Social Banners post.)

It now looks like Beacon is not working well.  I really don't think this matters.  Facebook is a technology company that is going to own a critical layer of the internet.  There will be a way to generate economic value out of this.

Going back to valuations, I have heard that Facebook shares are privately changing hands at around the $9b mark.  This is above the $2-4b range mentioned by stone in the Frommer's post's comments.  At either level, I remain a strong buy.