The Huge Canary in The Internet Coal Mine

Facebook’s stuttering IPO has the doomsday drums beating. They will fail. The model won’t hold. The stock will collapse.

It’s all about Facebook and its stock price.

But, there is a bigger story here – one that we wrote about back in 2009 – the Chaos Scenario, Bob Garfield’s theory that the price of advertising would continue to drop online as the available ad inventory exploded while demand grew more slowly than supply. In other words, anyone who is building a model based on exponential ad growth online is unlikely to make it work.

And, Facebook needs exponential growth to make it work.

It’s almost laughable how much growth they need. Unless you are a professor of finance at NYU and you simply ‘assume’ that Facebook will grow advertising at 40% a year for the next five years. In other words from $4 billion today to $15.3 billion.

Based on that assumption, professor Aswath Damodaran, writes that Facebook is ‘only’ worth $70 billion. There’s only one problem with his ‘low’ valuation. It assumes that Facebook knows how to earn $15 billion a year from a customer base who are too disinterested to click on its ads, don’t use Facebook for search, and don’t even trust the company and its founder.

However, the valuation of Facebook may be moot. Because tech finance expert, Michael Wolff, presents a different doomsday scenario about Faceook in the MIT Technology Review - one where Facebook literally brings down the internet advertising model.

It all starts with the incredible growth necessary to keep Facebook stock price up, just as Aswath Damodoran assumes it must.

Woolf says that this will destabilize the ad market online, with negative results. He suggests …

“In its Herculean efforts to maintain its overall growth, Facebook will continue to lower its per-user revenues, which, given its vast inventory, will force the rest of the ad-driven Web to lower its costs. The low-level panic the owners of every mass-traffic website feel about the ever-downward movement of the cost of a thousand ad impressions (or CPM) is turning to dread, as some big sites observed as much as a 25 percent decrease in the last quarter, following Facebook’s own attempt to book more revenue.

You see where this is going. As Facebook gluts an already glutted market, the fallacy of the Web as a profitable ad medium can no longer be overlooked. The crash will come. And Facebook—that putative transformer of worlds, which is, in reality, only an ad-driven site—will fall with everybody else.”

If Aswath Damodoran is right, there will be no collapse. Facebook will be worth a mere $70 billion and Mark Zuckerberg will live happily ever after.

If Bob Garfield and Michael Wolff are right, there is a mighty shake-out coming online, that might be precipitated by Facebook’s massive inventory grab. Which Google and others won’t give up without a serious fight.

We’re watching the Facebook canary very carefully.


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