Oct 31, 2003

thinking through friendster's numbers

Herewith, a quick, dirty, and ultimately fruitless look at Friendster and its bubblet. Caveat lector.

Since I need a frame of reference, here’s a comparison of Friendster and eBay. Why? Because both by a not-very-painful stretch of the imagination are in the “social software” business, both rely on the economics of large user bases, and at some point Friendster will need to capitalize on the connections between its users like eBay does. Oh, and in the New New New Economy, everyone’s compared to eBay.

  • Friendster. Close to $0 revenue, $53,000,000 market cap, 1,500,000 registered users. Close to $0 revenue per registered user, $35.33 market value per registered user.
  • eBay. $2.1 billion expected revenue in 2003, $36.1 billion market cap, 85.5 million registered users. $24.56 revenue per registered user, $422.46 market cap per registered user.

Now, market cap per registered user isn’t by any stretch of the imagination a reasonable metric to be using to value or compare anything. In a perfect world, market cap reflects the market’s belief in the firm’s ability to generate future free cash flow (discounted back to current dollars, of course). But hey – the numbers are there for the comparing, and this is a weblog, not a corporate finance classroom.

Assume investors want a 10x return on their investment by the time they exit. Simply put – $53mm valuation today, $530mm valuation at exit. Next, we’ll be extremely generous and grant Friendster eBay’s very healthy valuation measures: price/sales (ttm) of 18.9, and a price/earnings (ttm) of 93.9. To earn a $530mm valuation, they’d need to be generating $28mm in revenue, clearing $5.6mm. Being a shade more realistic and cutting the price/sales ratio in half (earnings? who needs earnings?), and you’re at $56mm in revenue.

Leaving aside for a moment that to date Friendster has barely proven its ability to insert Doubleclick tags in its pages (468x60s? Please.) -- much less generate transaction or subscription revenues – $56mm from 5mm users isn’t impossible to envision. At 5,000,000 users (not impossible given their current 1.5mm user base), that’s about $1 per month per user. But given that pesky “future free cash flow” thing, a $56mm run rate isn’t enough – they’d need to be demonstrating their ability to generate significantly more revenue from significantly more users in the future. (eBay doesn’t have a p/e ratio of 94 because of their current operations, but because of the promise of their future operations.)

And I just don’t see that future potential. I can see 5,000,000 users paying $1 a month, but I can’t see beyond it. Maybe it’s my Missouri upbringing, but I’ll be the first to admit that I just don’t get Friendster. Tribe at least adds a layer of group organization, and Tickle-nee-eMode has their personality quiz for matchmaking; but after the initial thrill of finding your two- or three-dozen first degree friends, what’s the point? What is it that will keep me – and a dramatically growing base of 5,000,000 others – engaged enough to spend upwards of $12 per year of attention or cash with Friendster?

For me, all of this just confirms that folks must be looking at Friendster not as a standalone business, but as some sort of platform that could enhance another online businesses. That the exit isn’t a public offering of Friendster, but, like the spurned Google offer, a purchase by a bigger player. Which begs the question: if not Google, who? The big players online already have the userbase; the addition of any deduped Friendster customers would be minimal at best. Take away the users and you’re left with functionality (there are no other assets to speak of at this point – certainly not any significant revenue stream), and who in their right mind amongst the Yahoo, Amazon’s, Microsoft’s and eBay’s of the world would be willing to pay in excess of half a billion dollars for a social networking application, when your local team of geniuses could probably string one together for you for about a million bucks, and integrate it into your existing services for another million?

Am I looking at this all wrong? If so, enlighten me.