Can Facebook turn 800m users into a $100bn business?

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It's said that Facebook could be worth $100bn if, as widely predicted, it floats on the stock market next year.

That would make it as valuable as Amazon (in business since 1995) and McDonald's (1940) and twice as valuable as Tesco (1929). But Facebook was launched a mere seven years ago, by then college student Mark Zuckerberg and his Harvard friends.

Can a $100bn business have been created so fast? It may sound incredible, but there are reasons why Facebook just might be worth that much.

If you look after the pennies...

First, Google - now worth around $200bn - set a new model for Silicon Valley when it went public in 2004, the year Facebook was founded.

Sheryl Sandberg, Facebook's chief operating officer, talks about privacy, Mark Zuckerberg's lifestyle and how his vision for Facebook persuaded her to leave Google

It built a global audience before working out how to make money, proving that if you can attract a big enough audience, there will always be ways to "monetise". Ad revenue per user can be tiny and still add up to huge figures. So Facebook's current 800 million users are an extraordinarily valuable asset.

And Facebook has a couple of trump cards over Google.

It's the ultimate "sticky" site, with users spending much longer on it per session - about 30 minutes on average - than people do on Google. That's more time to see and respond to ads.

Everything Facebook is doing to develop as a business, such as the forthcoming personal Timelines, is designed to get people even more hooked.

Zuckerberg says its all about giving users better things to do. "We're not trying to make it so that people spend a lot more time on Facebook," he said. "We want to make it so the time you spend on Facebook is so valuable that you want to keep on coming back every day."

Knowing you

Start Quote

Facebook is probably the most valuable market research tool that's ever existed”

End Quote David Kirkpatrick Author, The Facebook Effect

Another key advantage is that while Google often doesn't know much about its users, Facebook is a treasure trove of personal information. Unlike Google, you can't use Facebook without logging on; and the only point of doing so is to talk about yourself and share your interests.

That makes it, in the words of Facebook chronicler David Kirkpatrick, "probably the most valuable market research tool that's ever existed".

It gives advertisers the chance to target exactly the kinds of people they want to reach. So if you're selling a product to women who are about to get married, when you place an ad you can click the "engaged" tag, and "women" and only show the ad to brides-to-be.

Zuckerberg himself has always been reluctant to allow intrusive ads - so much so that in the early days Facebook ads sat below a cheeky caption that read: "We don't like these either, but they pay the bills."

Today Facebook hopes that offering ads which users are more likely to be interested in will mitigate the intrusion. And when friends are drawn into the process with what Facebook calls "social ads", perhaps ads will become not just acceptable, but even welcome.

If it's a choice between a straight ad for a product, and a social ad that tells you that one of your friends likes the product, Zuckerberg asks, "which do you think people who use Facebook prefer? They want to learn about what their friends are doing."

Generating demand

Start Quote

Facebook is a social network, not a commercial network. And therefore you use it commercially at your peril”

End Quote Sir Martin Sorrell Chief executive, WPP

For Sheryl Sandberg, chief operating officer and effectively Zuckerberg's number two, Facebook has already found its own niche, avoiding direct competition for ad revenue with her former employer, Google.

Sandberg distinguishes between demand fulfilment ads - Google's speciality - and demand generation ads, which she sees as Facebook's strength. She cites TV ads as an example of the latter. You aren't asked to go and buy something immediately; rather you are introduced to new products and ideas.

"Part of the challenge in moving dollars online is that the demand generation dollars have not moved online as effectively," Ms Sandberg says, "and that is 90% of a $650bn industry."

Sir Martin Sorrell questions Facebook's value as an advertising medium

Commercial peril

Not everyone is convinced: Sir Martin Sorrell, chief executive of advertising giant WPP warns that Facebook is "a social network, not a commercial network. And therefore you use it commercially at your peril." Sir Martin sees Facebook as a good opportunity for public relations, rather than as "an in-your-face advertising medium".

Facebook's advertising revenue is rising fast, and is expected to top $3bn this year. But already half the population of Britain is on Facebook, with similar figures in other developed countries. No wonder that Zuckerberg sees future growth not in signing up new users, but more in making existing users even more attached to the site.

But as Fortune magazine technology writer Jessi Hempel jokes: "We do need time to eat, sleep, and interact with friends in real life, or we'll have nothing to photograph and post on Facebook. So there are natural limitations to that."

Charles Miller is the producer of Mark Zuckerberg: Inside Facebook, to be shown on BBC2 at 21:00 on Sunday, 4 December.

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