Is Facebook really worth US$50 bil?

There's more than 500 million Facebook members worldwide, of which about nine million of them are Malaysians (quite a staggering figure). With such impressive reach, it's no wonder the tech and investment world are going gaga over Facebook.

But the recent news that its valuation is now at US$50 billion still came as a shock to many people. Can a company that doesn't actually manufacture anything physical really be worth that much? Apparently so.

Famed investment bankers, Goldman Sachs and a Russian private investor, Digital Sky Technologies, invested a total of US$500 million in Facebook, based on a valuation of US$50 billion.

To give you a sense of how much US$50 billion is, it makes Facebook bigger than News Corp (US$40 billion), The Washington Post (US$4 billion) and AOL (US$3 billion). No doubt, it's still far behind tech giants like Apple (US$302 billion), Microsoft (US$239 billion) and Google (US$193 billion). But still it's quite an achievement for Facebook to get this kind of valuation.

Contrary to what some people might believe, Facebook is making money. It's estimated that last year it made something like US$2 billion, largely from advertising.

So, the company is not hurting for cash. But this latest investment round provides a mountain of extra cash for it to invest in things such as new data centres and for acquiring other tech start ups. It gives it fuel for further growth without the hassle of listing its shares so soon.

For the main investor Goldman Sachs, it's a good deal from many respects. Firstly, Facebook's shares no doubt will continue to rise as it heads towards an IPO, perhaps in 2012, so there's some gains to be made when the listing happens.

Goldman Sachs is also planning to set up a fund that will pump up to US$1.5 billion more from wealthy investors into Facebook. It'll make money managing that fund.

 Advertising revenue

The natural question on everybody's mind is whether Facebook can actually make that much money from advertising to justify its lofty valuation (and loftier valuations to come). What excites investors is its potential, because of the sheer size of the community and the fact that it can target its ads.

Many people post a lot of detailed information about themselves on Facebook because they are comforted by the fact that their Facebook profile page is protected and hidden from prying eyes. Only the friends in their network can see such details. But they forget that Facebook can see all the details and use it for targeted advertising purposes.

It should be highlighted that Facebook doesn't allow advertisers to see people's profiles and advertisers cannot target individuals. But they can target people by location, interests, age group, gender and so on. In many ways, it's more targeted than Google AdWords can be.

We've seen tech companies peak and decline. This certainly happened in the search sector. First there was Alta Vista, then Yahoo! and then Google came along. A common question is whether some other social networking site can come along and eat Facebook's lunch.

Of course it's not impossible but the social networking sites fading away are Facebook rivals. Look at Friendster and MySpace. If we are to use analogies, these are like the Alta Vistas and Yahoos of yesteryear. It looks more and more like Facebook is the Google of its sector.

Twitter is a rising star in the social media space and it recently raised US$200 million on a valuation of about US$3.7 billion. This is remarkable as it achieved this with hardly any revenue. But Twitter is not a direct rival to Facebook in the way that Friendster and MySpace are.

Twitter's functionality is really very different so rather than being a challenger to Facebook, it will live side by side with it. It's not uncommon for people to be active on both Facebook and Twitter. It's much rarer to see people active on both Facebook and say, Friendster.

Professional networking site, LinkedIn, is another one that is not a direct rival and thus can survive and thrive. In fact, it will probably get listed sometime this year, ahead of Facebook, although its valuation will undoubtedly be smaller.

A macro question that many people wonder about is whether there is now a social media bubble reminiscent of the dotcom bubble days of 2000.

Back then, people were crazily investing in all kinds of dotcom. As long as it was a dotcom, it got investors excited. And out of the tons of dotcoms the emerged, a handful survived and thrived. EBay, Google, Amazon are the obvious ones.

That's not the case today with social media. People are not interested in just any social networking site. They are interested in only a handful, namely Facebook, Twitter and Linked. So, it really isn't a bubble situation.

OON YEOH's new social media book 'Like Me, Follow Me' is published by MPH. You can connect with him via Facebook and Twitter.