Blaming the coming 2.0 bubble on Facebook

Some time ago, a social network called Facebook raised 500$ million from Goldman Sachs (450 million) and Russian firm Digital Sky Technologies (50 million). This operation valuated Facebook at an astonishing 50$ billion. This is more than other well-established digital firms like eBay or Yahoo and double the market cap of Sony. Yes, I know Facebook has 600 million users or 'potential clients' (in business terms), but until now it has failed to monetize them. Its main source of revenue is advertising, and according to reports Facebook's success in it is far lower than the rest of the web. Its users have a clear objective in mind, communicating with friends, thus they do not pay attention to banners. Brands however, have found in Facebook the perfect channel to communicate with their clients; but Facebook itself is not seeing any money from this... In marketing, having a large audience and knowing a lot of information about said audience is key for success; but until know Facebook has been unable to use this at full power (conspiracy theories of Facebook selling user's personal data to other companies aside) so the 50$ billion market cap comes basically from estimations of the company's potential.

Valuating a company based just on its potential is a tricky thing to do, as subjectivity comes to play. In the example of Facebook, maybe it has the necessary ingredients to earn lots of money, but nobody is cooking them into an edible product as of now. This takes us to the point where some very risky bets are done based purely on instinct, not real-world results or prospections. But investors around the world, sad with the absence of  'bulls' to ride on the way to market recovery did not mind that. They began to salivate on the thought of being part of the rise of a new giant, the social internet companies (commonly called 2.0). As such, when the invitation to the party appeared in the form of the LinkedIn IPO, and later the Yandex (the leading search engine in Russia) IPO the market was all-in. 

LinkedIn IPO craziness. A new giant? Or the start of a 2.0 bubble?

Yesterday's (19th of May) session at Wall Street was a much anticipated one. It was the day LinkedIn, dubbed the 'professional social network' went public. Initially valued at 43.5$ per title, which would have roughly added to a $4.1 billion valuation, it was already a high enough price for some. But the demand for the stock was overwhelming and it astonishingly skyrocketed during its first session, reaching a peak of +160% during the day, to finally end the session at almost +110%. That left LinkedIn valued at 94.25$ per share (NYSE:LNKD), or if you prefer it, a total market cap of $8.91 billion!

The behavior of the LinkedIn stock on its first session ever shows a renewed appetite for tech companies, which is good for the market, but honestly I find it to be a quite unrealistic performance. It says more about traders looking for some lonesome bulls in the middle of the last week's reigning uncertainty, than about the real short-term prospection of the company. But do not let the stock price fool you into thinking LinkedIn is a one-day flower, its future looks bright, with a first quarter 2011 revenue of $94 million, more than doubling the same period of 2010 ($44.7 million), and having surpassed the 100 million registered users milestone. 

LinkedIn has shown that social networks can truly be monetized, something Facebook and Twitter have been unable to do, and the main reason why both of them are not still publicly traded. Although you can count on them going public in a not-so-far away future... 

LinkedIn (LNKD) graph from 1st day on NYSE. Credit: Google Finance

They say knowledge is power, and there is no doubt that social networks have an enormous wealth in the form of personal information and other data, but there is no direct formula to turn this knowledge into money. LinkedIn, thanks to its professional incline, seems to have found the magic formula and just so you know it is the following: 33% revenue comes from advertising, 21% comes from selling premium subscriptions and the rest comes from services to companies and headhunters.

My doubts do not come from LinkedIn's future, but from the reaction of the market to its IPO and the precedent it creates given the late eagerness to invest in internet firms like Twitter, Groupon, Baidu, Yandex, Facebook... regardless of them being viable companies economically or not.

Microsoft's impulse buy. Expect buyer's remorse soon...

The net is still shocked by Microsoft's buyout of Skype for $8.5 billion. The adjectives whopping, astonishing, unbelievable, incredible, crazy and stupid are among the most repeated when describing the price Microsoft paid for the VoIP company. People do not forget that when eBay purchased Skype in 2005 it did so for $2.5 billion. That price also seemed very high at that time, people were still remembering the excesses of the dotcom era. However back in 2005 when eBay bought it, Skype was still a promise, a young and innovative company with lots of room to grow and lots of potential for doing so. 

While Skype is still young and innovative it can not be considered a promise anymore, but a fully mature company. Its earning reports matter like any other company's and the last one showed a $7 million loss. It has a user base of more than 663 million but as of now, Skype is making a slender profit of approximately 1.30$ per user. These are some numbers that do not help justify the price Microsoft has paid.

But Microsoft knows this, its is impossible to justify the price paid based on the numbers, so they are focusing on the intangible instead. Microsoft talks about seamless integration with its Xbox360 network, about the synergies between Skype and Facebook (which was thought to be a bidder for Skype too and has a partnership with Microsoft) and about integrating it with its latest Windows Phone 7 mobile phone OS.

All of these look like legit reasons for Microsoft to buy Skype; but seriously: who does think these synergies are going to compensate the price paid? Not even in the long term... 

For me, the real reason for Microsoft to purchase Skype is mainly: