Facebook's Changing Fortunes

The social-networking site could have sold for upwards of $1 billion, but declining traffic numbers may have potential buyers waiting for a discount

It's crunch time, as they say in college, for Facebook founder and CEO Mark Zuckerberg. He created the online social-networking site two years ago with the help of two Harvard classmates and saw it become wildly popular with students at colleges across the U.S., who used it to communicate via home pages laden with photos and messages.

Now Zuckerberg, 22, who dropped out of school to work full-time on Facebook, aims to turn the site into a major business—and he's taking the hard road. Zuckerberg could have sold the company at several points during the past year to suitors such as Viacom (VIA) or Yahoo! (YHOO). BusinessWeek.com reported in March that Zuckerberg was hoping to net $2 billion for the company, which operates from Palo Alto, Calif. (see BusinessWeek.com, 3/28/06, "Facebook's on the Block").

Maverick Reputation

While a lofty figure, to be sure, Yahoo was willing to pony up about $800 million for the company late this summer, according to people familiar with the discussions. And earlier this year, Zuckerberg could have personally netted several hundred million dollars by selling the company, according to one banker familiar with the matter. "We begged him to take the money, if not from us, then from someone," another person familiar with the issue said.

Now, however, with traffic that may be declining alongside the always-elusive "cool factor" among fickle collegians, potential buyers are more inclined to wait in the hope that Facebook's price may drop. For his part, Zuckerberg appears to be in no rush to make a quick exit to the bank. "We're focused on building the business," says marketing director Melanie Deitch. "We're doing extremely well and we're having fun."

Zuckerberg, who wasn't available to comment for this story, has a reputation as a maverick. While at Harvard, he created a Facebook precursor called Facemash. The site allowed Harvard students to rate photographs of one another. His access to the school computer network was revoked, and he was brought before the Harvard University Administrative Board, which said he had broken into private files. Zuckerberg argued that the information should have been free to the public.

Controversial Features

Facebook confronts its future with some powerful assets. Many advertisers and marketers view the site as a potential gold mine. It's smaller than rival MySpace, but the tone isn't as freewheeling. That's mostly because the site requires users to confirm their identity through submission of a valid e-mail address. That helps limit the more egregious exercise of free expression, the sort that can scare advertisers. It also generates demographic data that helps advertisers and marketers target their campaigns. DaimlerChrysler's (DCX) Jeep brand maintains a profile on Facebook, as well as a presence on other social-networking sites.

There are challenges, though. The introduction of new features that create news feeds with the latest material from Facebook pages was too much for some members, who rebelled. Deitch says the rebellion has calmed down, and that the new features are turning out to be successful, but the episode turned into a significant PR problem, to say the least. Zuckerberg is said to have stayed up all night personally working on a response to the crisis.

Ratings Rift

Facebook is currently locked in a dispute with rating services such as comScore Networks, which measure Web traffic and usage. The latest publicly available comScore data, issued for September, show a decline in the number of Facebook's unique visitors. comScore says the number of "uniques" dropped 10% to 13.3 million at the end of September from 14.8 million at the end of August. It says the number of page views rose 11% to 7.1 billion, from 6.5 billion in August. That's a huge gain, making Facebook the seventh most heavily viewed site on the Web, behind a handful of behemoths such as No. 1 Yahoo and No. 2 MySpace, which had 35 billion views. Yahoo had about 40 billion page views.

Facebook says it's doing much better than the comScore statistics suggest. Its review of page views shows 30% growth over the same period, to 16.5 billion hits. The huge difference between the comScore and Facebook numbers may stem from differences in the way college networks are measured and in the weight they receive. comScore is sticking by its data and methodology.

Facebook also says its total registered users, which include anyone who has signed up for the service, grew 9% to 11 million in September. Deitch says "more than half" of registered users use Facebook every day. But it doesn't track "active users" the way comScore does. That number, which is less encouraging, counts the number of people who enter Facebook from outside the network in any given month.

Skyrocketing Valuations

It may seem like an arcane dispute, but it matters a lot when it comes to valuing a company that has been in play. Such issues are often resolved by examining the number of users, the volume of traffic, and their potential worth to advertisers over a period of years. Facebook was in talks with Yahoo several weeks ago, but those discussions broke down over a number of issues, including price.

Facebook has made a flurry of changes in recent months. In addition to the news feeds, it expanded its membership from college students and alumni to the general public. On Oct. 31, it launched a new feature that will allow people who view pages at other sites to press a button to "share" the content with other Facebook users. The content also will appear on the Facebook profile of the person who initiated the share. Facebook has teamed up with a long list of "share" partners, such as Barron's, Sports Illustrated, Marketwatch, The New York Times, The Wall Street Journal, PhotoBucket, People, and The Onion. "People share interesting content on the Web and on Facebook all the time. Now we're making the sharing process more efficient by giving people a simple structure to do it in," Zuckerberg said in a statement.

The valuation of Web sites is taking off. Google (GOOG) is paying $1.65 billion for YouTube (see BusinessWeek.com, 10/23/06, "Ballmer: They Paid How Much for That?"). Analyst Jordan Rohan of RBC Capital Markets created a stir a few weeks ago when he said News Corp.'s (NWS) MySpace could be worth $15 billion within three years (see BusinessWeek.com, 10/2/06, "Why Online Video Sites Are Hot Targets"). If Facebook lives up to its potential, it could someday be worth a fortune. But if not, that nine-figure payday would look awfully good in retrospect.

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