Fabrice Grinda

Mois : octobre 2007

Facebook: the next Google?

I was in San Francisco for CTIA this week and took advantage of the opportunity to catch up with my Internet friends. It’s incredible how much buzz Facebook is generating.

There is no denying that the site is growing extremely fast. I can attest by the ever growing number of friend requests I get. It’s also the first consumer facing social networking site that I find truly useful. Its news feed is brilliant – at a glance I can see what all my friends are up to and contact them if appropriate.

Even my traditionally contrarian friends are bullish on the site. I pointed out to one of them the rapidly changing nature of the Internet: only 5 of the top 50 sites of August 2001 had increased their market share by August 2007 (see: Internet: we are still at the beginning!). Many completely fell of the map. Not too long ago MySpace was the “new new thing” and now it is poised to be displaced by Facebook in the next 2 years.

As one of my friends said: “What you say was also true for search engines until Google came along. Google was good enough and no one has been able to replace it since. The same thinks looks like it’s true for Facebook. You can’t underestimate the value of the controlling the social graph.”

Many have become true believers – witness Microsoft’s $240 million investment on a $15 billion valuation. There are rumors that Facebook is about to raise another $260 million on the same valuation from private equity investors and/or hedge funds.

I truly love Facebook. I probably spend 30 minutes every day on the site, but the contrarian in me feels that something is amiss about the story. My concerns are on sustainability and potential value.

1. Sustainability:

I have no doubt that social networks are here to stay. Throughout history humans have wanted to communicate with each other, express themselves and socialize. Social networks are just one modern incantation of this age old need.

I also have no doubt that Facebook has plenty of growth ahead of it as it reaches to both older and younger demographics and expands internationally.

I also believe that Facebook is the best social networking site in the market today and that it will overtake MySpace within two years.

What worries me is the fickle nature of Internet audiences today. Even if the site dominated for the next 5-10 years, does the next generation really want to be on the same site their parents are on? Could the very attempt at going mass market threaten the very basis for the site?

I am sure that the site will introduce features that will allow you to segment your “friends” in buckets with smartly predefined options: “Close friends” “Family” “Colleagues” “Random people who friended me on Facebook” etc., but it might still eventually lose its “new new thing” element if the next generation moved on.

2. Value:

Even if Facebook is sustainable, I am having a hard time seeing it having as much potential value as an advertising platform as Google.

On Google, the ads are extremely targeted and valuable. The users are expressing intentions by typing their search queries and the ads are directly related to that query and thus valuable to viewer and advertiser alike.

On Facebook the targeting is based on information users entered in their profile and the ads displayed are not related to the activity of the user and hence mere annoyances to be ignored.

As such, I have a hard time believing that over the long run Facebook’s eCPMs could come close to Google’s eCPMs.

The Economist seems to agree: There’s less to Facebook and other social networks than meets the eye

Non-sequitur: What should Facebook do now?

My instinct is that Facebook thinks it can defeat all the other social networks on its own and therefore does not need to buy them. As a result it will use its war chest to buy complementary products and technologies either to provide a better user experience or better monetization.

I think it should do both. With its cash and inflated price, it could probably buy Hi5, Bebo, Friendster, Tagged and One for $1 billion. They could probably buy StudiVz from the company that acquired it for a few hundred million as well. Those six acquisitions would all but guarantee temporary global domination in the social networking landscape. Facebook might catch up on its own, but it might not and the small dilution required to make the acquisitions would be highly justified given the decrease in risk and increase in scale.

Similarly I recommended Google buy Yandex (Russia) and Baidu (China) when it had the chance. Google thought it could win on its own and now finds itself a distant player in both markets.

Conclusion:

Mark Zuckerberg and Facebook are going to be a case study at HBS no matter what. He is clearly extremely smart and was right to turn down Yahoo’s $1 billion offer when I am sure many were pressuring for a sale.

The question is how will it all end? It will either be the amazing success story of the people who had the foresight to see how big a company they were building and wisely turned down offers for billions of dollars or a cautionary tale of people who over extended themselves.

I don’t know the terms of the Facebook fund raising, but if there is any liquidation preference and if the growth in profitability is not as high as they expect and hence the valuation in a few years much lower than the current $15 billion, such a large raise on such a high valuation might come back to haunt them. If the bidding war meant it’s all common stock you can ignore this comment and I applaud the move 🙂

What do you think?

A Different Perspective on the Global Economy

Last February I blogged about how excess petrodollar liquidity was creating bubbles all around the world and how I was pessimistic in the short and medium term for the US economy (Macro Perspectives on Global Liquidity). Similarly, last September I wrote how every indicator was suggesting that renting made a lot more economic sense than buying real estate (Rent … unless you want to buy).

Now that the real estate bubble and finance bubble have burst, it’s a good time to take stock regarding where we stand in the global economy. In essence we have three countervailing forces:

  • An inflationary force driven by emerging market growth
  • A deflationary force driven by the bursting of the real estate bubble in the US
  • A deflationary force driven by the bursting of the finance bubble in the US

The consensus seems to be that these forces will mostly balance out: the US economy will slow down somewhat, but the world economy will continue to do well, driven by emerging market growth.

It’s a nice story and I actually hope that it happens, but I find this scenario extremely unrealistic. The inflationary and deflationary forces are huge on both sides, and I find it hard to believe that they will essentially perfectly balance each other. There are a number of scenarios that could easily tilt the balance in one direction or the other.

Scenario 1: inflationary tilt

The decrease in US short rates, the continuing growth of the money supply, emerging market growth and continued excess liquidity created by petro dollar recycling could easily tilt the world in an inflationary mode, despite the decreasing growth in the United States.

To some extent, the market seem to be expecting this tilt as yield curves have steepened and equity markets have recovered as the money had to go somewhere and several asset classes have disappeared with the real estate and finance bubble bursting.

Scenario 2: a breaking of the Chinese and Saudi lead to a global recession

US politicians have been clamoring for China to revalue its currency. In an article last February (What’s going on in China: An introduction to macroeconomics), I argued China should let its currency float in its own interest: to take control of its monetary policy and fight inflation.

As things currently stand, 1 year US rates are around 4%, Chinese rates are 6% below the US rates given the expected 6% appreciation of the RMB. Therefore the implied forward interest rate on the RMB is around -2% on a 1 year basis. With inflation at 7% in China, real rates in China are essentially -9%. Likewise, in Saudi Arabia, real interest rates are essentially -4%. This is extremely inflationary and has driven the rush to borrow as much as possible to buy real assets.

Every decrease in US interest rates makes rates even more negative in China and Saudi Arabia and increases the probability that they break their dollar pegs.

If China breaks its peg, the move will likely be driven by an increase in the price of oil. Oil is China’s primary import and is priced in dollars. If China broke its peg, Saudi Arabia would be compelled to revalue its currency as well. Interestingly enough many of the smaller countries are starting to break their pegs: Syria broke its peg, Kuwait is shifting away from its peg and Vietnam has indicated it would like to break its peg.

If the pegs broke the following things would happen:

  • Real interest rates would increase dramatically in China and the Middle East and investors in those countries would no longer need to recycle their cash in stocks, real estate, Euros, the Pound and Swiss Francs.
  • As a result, the breaking of the pegs should lead to large declines in equities in emerging markets.
  • Seemingly paradoxically the dollar would rise significantly against the Pound, the Euro and Swiss Francs.
  • Yield curves would flatten.

This is a scenario that almost no one is considering and would have dire economic consequences in the US, Europe and most emerging market countries.

Conclusion:

As it currently stands the inflationary scenario remains much more likely, but every decrease in US interest rates and lowering of the dollar creates a strong incentive for China and Saudi Arabia to revalue their currencies and cause about the very deflationary scenario to happen. Likewise, every increase in the price of oil increases the probability that China breaks its peg, leading Saudi Arabia and others to break their peg, leading to the deflationary scenario.

Interestingly enough, what I think is the least likely scenario is the current consensus “goldilocks” scenario where we have neither inflation nor deflation and where the world economy continues to do well despite a slowing of the US economy.

Once again, I hope I am wrong!

Great Teddy Roosevelt Quote

It is not the critic who counts; not the man who points out how the strong man stumbles, or where the doer of deeds could have done them better. The credit belongs to the man who is actually in the arena, whose face is marred by dust and sweat and blood; who strives valiantly; who errs, who comes short again and again, because there is no effort without error and shortcoming; but who does actually strive to do the deeds; who knows great enthusiasms, the great devotions; who spends himself in a worthy cause; who at the best knows in the end the triumph of high achievement, and who at the worst, if he fails, at least fails while daring greatly, so that his place shall never be with those cold and timid souls who neither know victory nor defeat.

Internet: we are still at the beginning!

Many people worry that they missed the opportunity to participate in the Internet revolution. I have often heard that most of the opportunities are already taken and that the incumbents are set to win.

I could not disagree more. This reminds me of 1998 when people were dismissing Google because people were already using Alta Vista and Yahoo. We cannot fathom how much the Internet will be transformed by ever increasing processor power, storage and bandwidth. We are still at the very beginning of the Internet revolution and things are still evolving extremely rapidly.

If you take a look at the top 50 sites by attention in August 2001 versus August 2007, only 5 have increased their market share, with Google increasing the most. Many have completely fallen off the map and the most successful sites of the past few years did not even exist then: MySpace, Facebook, Youtube…

Moreover, the environment is continuing to shift. Two years ago, MySpace seemed to have the social networking category locked up. Facebook is now threatening that hold and now seems impregnable – but who knows, things evolve extremely rapidly on the Internet. In addition, the online advertising market is finally significant enough that advertising based business models are increasingly challenging paid models. The future is going to be interesting!

This is a great time to be a risk taking entrepreneur. Let’s take full advantage of it!

Effortless, informal writing :)

It’s interesting how much effort we actually put in appearing effortless and informal in our writing.

I was a groomsman at one of my best friend’s weddings yesterday. I gave a funny toast/roast. The speech only lasted a few minutes, but the writing process was very similar to the one you will see on the video below.

The context is different, but it’s spot on!

Great Craigslist Post and Reply

Funnily enough several of my friends thought I had posted the reply you will read below 🙂

What am I doing wrong?

Okay, I’m tired of beating around the bush. I’m a beautiful
(spectacularly beautiful) 25 year old girl. I’m articulate and classy.
I’m not from New York. I’m looking to get married to a guy who makes at
least half a million a year. I know how that sounds, but keep in mind
that a million a year is middle class in New York City, so I don’t think
I’m overreaching at all.

Are there any guys who make 500K or more on this board? Any wives? Could
you send me some tips? I dated a business man who makes average around
200 – 250. But that’s where I seem to hit a roadblock. 250,000 won’t get
me to central park west. I know a woman in my yoga class who was married
to an investment banker and lives in Tribeca, and she’s not as pretty as
I am, nor is she a great genius. So what is she doing right? How do I
get to her level?

Here are my questions specifically:

– Where do you single rich men hang out? Give me specifics- bars,
restaurants, gyms

-What are you looking for in a mate? Be honest guys, you won’t hurt my
feelings

-Is there an age range I should be targeting (I’m 25)?

– Why are some of the women living lavish lifestyles on the upper east
side so plain? I’ve seen really ‘plain jane’ boring types who have
nothing to offer married to incredibly wealthy guys. I’ve seen drop dead
gorgeous girls in singles bars in the east village. What’s the story
there?

– Jobs I should look out for? Everyone knows – lawyer, investment
banker, doctor. How much do those guys really make? And where do they
hang out? Where do the hedge fund guys hang out?

– How you decide marriage vs. just a girlfriend? I am looking for
MARRIAGE ONLY

Please hold your insults – I’m putting myself out there in an honest
way. Most beautiful women are superficial; at least I’m being up front
about it. I wouldn’t be searching for these kind of guys if I wasn’t
able to match them – in looks, culture, sophistication, and keeping a
nice home and hearth.

PostingID: 432279810

THE ANSWER:

Dear Pers-431649184:

I read your posting with great interest and have thought meaningfully
about your dilemma. I offer the following analysis of your predicament.
Firstly, I’m not wasting your time, I qualify as a guy who fits your
bill; that is I make more than $500K per year. That said here’s how I
see it.

Your offer, from the prospective of a guy like me, is plain and simple a
cr@ppy business deal. Here’s why. Cutting through all the B.S., what you
suggest is a simple trade: you bring your looks to the party and I bring
my money. Fine, simple. But here’s the rub, your looks will fade and my
money will likely continue into perpetuity…in fact, it is very likely
that my income increases but it is an absolute certainty that you won’t
be getting any more beautiful!

So, in economic terms you are a depreciating asset and I am an earning
asset. Not only are you a depreciating asset, your depreciation
accelerates! Let me explain, you’re 25 now and will likely stay pretty
hot for the next 5 years, but less so each year. Then the fade begins in
earnest. By 35 stick a fork in you!

So in Wall Street terms, we would call you a trading position, not a buy
and hold…hence the rub…marriage. It doesn’t make good business sense
to « buy you » (which is what you’re asking) so I’d rather lease. In case
you think I’m being cruel, I would say the following. If my money were
to go away, so would you, so when your beauty fades I need an out. It’s
as simple as that. So a deal that makes sense is dating, not marriage.

Separately, I was taught early in my career about efficient markets. So,
I wonder why a girl as « articulate, classy and spectacularly beautiful »
as you has been unable to find your sugar daddy. I find it hard to
believe that if you are as gorgeous as you say you are that the $500K
hasn’t found you, if not only for a tryout.

By the way, you could always find a way to make your own money and then
we wouldn’t need to have this difficult conversation.

With all that said, I must say you’re going about it the right way.
Classic « pump and dump. »

I hope this is helpful, and if you want to enter into some sort of
lease, let me know.

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