1. At what valuation would you invest in Facebook?
2. Why is your number so different from that of people who have a lot more information than you? Are you that much smarter?
2 - Do they have more information than us? They might have concrete operating costs, revenue, etc, but I'm convinced that many analysts haven't a clue how the internet works.
Historical perspective also works too: remember the last dotcom crash? Those companies were being valued in the billions by a large number of analysts who "know a lot more" than the average joe. Hell, kicking and screaming against ridiculously absurd valuations at the time was a minority voice.
1 - I wouldn't invest in a company unless it needs a road for profitability.
2 - I grew up on the internet and I have no clue how the internet works. I have no clue how advertising works, but I'm probably unique against normal people that advertising doesn't make me buy a single thing. (Anecdotal example: My reason for buying an Xbox 360 was because it can push 720p to a HDTV and was cheaper than a new PC. I was never told it could do this through advertising, I found it out myself.)
I understand how Real Estate works, how all functions of commerce and trade works. I just do not get advertising. Does Coke advertising make me buy it over Pepsi? No, Pepsi is too sweet. Do all the dozen adult-phone services make me call them? No, these didn't even work when I was twelve.
The only place I've noticed advertisements to ever work on me is for movies, however I regularly go to apple trailers so I generally see the advert before I see it on TV or in the Cinema, which negates the point of advertising; IE you can't make me buy something I'm already trying to buy. This, however, doesn't extend to the crap they used to put on VHS's and now DVD's, which I find offensive and disgusting. I pay $30 for a movie, I don't expect there to be 20 minutes of trailers, just like when I go to eat my cereal I don't want fifty advertisements for other cereals.
Two example priming studies:
Gladwell mentions the study of two Dutch researchers who had several groups of students each answer forty-two Trivial Pursuit questions. Half were asked to take five minutes to think about what it would mean to be a professor and write it down, while the other half were asked to do the same with soccer hooligan in place of professor. The students who thought about professors ended up getting 55.6 percent of the questions correct, while the soccer group got 42.6 percent correct.
and
In a separate study, when African-American students were asked to identify their race on a pre-test questioner, the simple act of checking the box next to African American was enough to prime them with negative cultural stereotypes associated with African Americans and academic achievement. The number of items they got right was cut in HALF. Malcolm Gladwell makes a strong point that priming is a powerful thing. Personally I think this has incredible implications in our society. If ‘smart’ is really just a frame of mind, these social cues (such as African American=less intelligent) are shaping not only the results of standardized tests, but the way we interact with each other in business and other professional fields.
How do you think priming effects your buying decisions? How about your research decisions when pondering a purchase? How do you think it effects jury trials?
Of course, you like to think you're above such manipulation-- so does everyone else.
When I was in comp sci tutes, I'd spend almost all my time helping other students. I got the very strong impression that my confidence was the crucial difference.
Although I did have much more prior experience (in a different language), and lots of evidence that I was smart, the way I helped them solve problems that they couldn't solve, was by looking - whereas they didn't look. My extra experience really only helped in the sense of knowing to look at all places for the bug (not just where you think it is). What operationally made the difference in practice, was the confidence to look.
Of course, this is not scientific: maybe I just knew more and was smarter. But my impression does fit with the scientific study you cite.
Priming has similar effects as hypnosis, and is increasingly believed to be linked. 1/3 of people react negatively to priming and hypnosis, something that is rarely mentioned. Hypnosis research has repeatedly shown that you cannot get someone to believe something they don't want to, or to do something they don't want to. There's a very nice scene in Mythbusters where a researcher clearly refuses a hypnotic suggestion, and then quickly comes out of the hypnosis. Earlier in the episode they tried it on one of the main cast members who knew they were being implanted with a suggestion (to slap someone or jump up and down, depending on the cue) and he broke out in a laughing fit.
Also if you want to see priming in the extreme, read about the Milgram Experiment and then about the Strip Search Prank Call Scam.
Also I know I'm one of the 1/3 who doesn't react to hypnosis. I'm unsure about hypnotic flooding, but its effects are less certain than normal hypnosis due to the fact that it perverts the results. Incidentally I'm one of the (about 10% of people) who react negatively to sleep meds, they wire me like the energizer bunny.
The true effects of priming are the country and state flags sat in the court rooms (this is especially bad in death-penalty cases as national pride usually ups the pro-death vote). What about seeing a guy accused of cop-killing being marched to the stand by two cops?
We have to be careful of the unconscious effects of priming we place all around ourselves, because the conscious use of priming in wide civilization will likely have the opposite effect of what we desire.
> Of course, you like to think you're above such manipulation-- so does everyone else.
I do, as you say everyone does. It's just a mere fact that 1/3 of people are. So you, me and a random person means one of us is above such manipulation.
> Priming has similar effects as hypnosis, and is increasingly believed to be linked.
I don't know if there is any link between priming and susceptibility to hypnosis (do you have a source for that?). Even if there is, it certainly isn't a solid enough link to say that people who are resistant to hypnosis are always immune to priming. I have a degree in psychology-- but it's admittedly dated.
> We have to be careful of the unconscious effects of priming we place all around ourselves, because the conscious use of priming in wide civilization will likely have the opposite effect of what we desire.
Well, the REST of us do. You don't, due to your special mind powers. ;-)
What do you mean "how the internet works"?
IMO, companies that are experiencing huge growth are better off reinvesting all of their income into the business even if it makes it look like they are not profitable. Granted at some point dumping more money into the company is not going to help growth but maximize growth and then cut costs is a reasonable approach.
PS: When you see Facebook cut 5k jobs expect great things on next years balance sheet.
Hardware is usually not a significant data center cost, at least not in relationship to the power/cooling/floorspace costs. Wholesale bandwidth has dropped over the last several years from about $100/Mb/Mo to $35/Mb/Mo. I don't know how much lower that can reasonably go. But, let's say it becomes 1/3 the price again (down to $10/Mb/Mo) over the NEXT 5 years. That's a long time to wait when you're losing $20MM/Mo (using the speculative numbers quoted elsewhere for that). And the net cost savings probably don't yield more than a few $MM/mo.
Anyway, I think they are basically treading water and not just burning 20mill / month at this point in time. So their revenue is 300 million / year and there costs are close to that. Most of there money seems to be spent on infrastructure and people to support said infrastructure. So, if the cost of their infrastructure drops to 1/3 then their total costs should drop by ~1/2 as they still need people, and they would be making ~10million a month which is worth around 1 billion. However, I expect they can increase their revenue though optimizations and growth so they are probably worth in the 2 - 10 billion dollar range.
PS: Would need to look at their actual costs to get a better Idea.
#2: The biggest reason here is likely because I am thinking about it in terms of MY money. Most VCs are working with somebody elses money, and I think this can affect a persons judgement and cause them to take chances they wouldn't ordinarily take.
I would invest $0 of my money in FaceBook. But, I'd gladly invest $10M of YOUR money. And I could talk it up in a manner that made you think I was doing you a great favor. If I turn out to be right, then I look like a visionary. If I turn out to be wrong then we were both fooled by them, or snookered by the economy, etc.
More information does not always enable you to make better decisions...
2) Like those people who invested in the bonds backed by subprime mortgages? Or the people who invested big in the first bubble? Or the people who are really just playing with other people's money? What makes the group of people who think Facebook is somehow worth billions smarter than those groups? Only time will tell. It's a big gamble on either A) Facebook monetizing their traffic to the tune of a few billion dollars or B) finding BIGGER suckers down the road to buy/merge/invest in/buy the stock of/etc... A is imho a big gamble, and B is imho both a gamble and a poor way to do business (not poor $ wise, but banking on big suckers seems unethical to me somehow). All of it is unattractive as a way for me to wager my money.
I also don't bet on boxing or horse races. Am I that much smarter than people who do? Hard to say.
People who are a lot smarter and had much better information than me thought that loaning $300,000 to a minimum wage immigrant (one anecdote among hundreds of thousands) was a highly profitable business, too. For eight of the last ten years they were looking pretty prescient now weren't they.
If that's all that you did then you'd be fine (everyone else is of course another story but business is business).
It may be "reasonable" to engage in fraud when the government is enabling it - but its not honest. Hopefully our country can come to a point in the future where being honest is viewed as the "reasonable" thing to do.
Apply your same reasoning to pets.com in 1999 and it does not fare very well.
Does facebook have value, yeah I think so. Does it have an intrinsic value in the billions? I think skepticism is warranted.
2. Because there are some people that are willing to wager their money on a 1% chance that their money will become 10x larger. It's a terrible bet, but people make it all the time. I mean, if you are investing in Facebook at $15B, really someone has to buy it for a lot more than $15B for it to have been worth the risk and I don't see Facebook selling in the $50-$100B range. The fact is that Facebook is a much riskier investment than a company that has already been in the black. It could potentially just flop as a business. Google might not become as profitable as you expect, but it isn't just going to flop. So, Facebook is this really risky investment that can never sell high enough to justify the valuations they seek. At best, Facebook continues along nicely and makes some money. They aren't the next Google.
Seriously, what are the odds that Facebook is going to sell for a lot of money? If you place it at 50%, then you really need to be thinking it will sell for $30B to justify buying in at a $15B valuation. If you place it at 25%, you really need to think it will sell for $60B eventually. And how likely do you think that is?
Facebook is more like a YouTube than it is like a Google and what Facebook wants its valuation to be just can't be justified by what it has going for it. Companies will buy popular things just because they're popular in the sub $1B range - sometimes even slightly over that in the YouTube case. But they won't spend the $30B that would justify a buyout to the VC who have invested at a $15B valuation. I mean, those VCs don't just want to break even on their investment. Unless Facebook can find a way to be profitable - and hugely profitable - it just won't be bought for such a substantial amount. A $30B buy would put Facebook at a third of a Google and it just isn't that.
Oh, come on. I'd put down 50K for 51 percent of the whole. How's that? Obviously, a one-sided bid is pointless.