“A million people walk into a bar in Silicon Valley. Nobody buys anything. The bar is declared a huge success.”

That tweet doing the rounds this week sums up precisely the logic by which Facebook is supposedly worth $86 billion.

Facebook’s IPO Roadshow, 30 minutes of video Kool-Aid that you can’t fast forward, contains all the usual elements of Silicon Valley hype. You may find Business Insider‘s summary more palatable, especially if you’re allergic to self-aggrandising Americans accompanied by ethereal synth chords.

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There’s the usual big numbers taken out of context: 2 billion likes per day, and 1 billion comments per day.

Remember, folks, to put these numbers into context you need to divide them by at least 525 million, the number of Facebook users visiting the site daily. Suddenly it’s less impressive.

There’s the cherry-picked success stories featuring well-recognised brands: The Guardian saw a 400% traffic increase overnight after connecting to Facebook’s open graph, and for every dollar spent on Facebook marketing ice-cream company Ben & Jerry’s picked up $3 in revenue.

But remember that in February Bloomberg reported that major brands were closing their Facebook storefronts because they weren’t working, including such competent retailers as Gap, J C Penney, Nordstrom and Gamestop.

There’s the usual series of over-simplified graphs that go up and to the right, sprinkled with the words “exponential” and “skyrocketed”.

Remember that every graph you’ll ever see in an IPO prospectus goes up and to the right.

And there’s the compulsory Biggest Bullshit of All, the slide that tells you that the online advertising market is $68 billion out of a total global advertising market of around $600 billion — leaving you with the impression, without ever actually saying it of course, that all this could be yours.

At least Facebook has actual revenue and, indeed, actual profit.

In 2011 Facebook generated $3.7 billion in revenue, the vast majority from advertising, giving it an operating profit of $1.8 billion. That’s a decent profit margin, but it does mean than most of Facebook’s $86 billion valuation is based on the company’s future earning potential.

Compare that with Google’s current market capitalisation of $200 billion. Google’s 2011 revenue was nearly $38 billion, ten times Facebook’s, and their profit $9.7 billion, some five times Facebook’s.

However, we did point out last year that Facebook gets far more eyeball time than Google — on average 350 minutes per month per user compared with Google’s 220 minutes a year ago — and it’s continuing to grow. In February 2012 Facebook was up to 405 minutes a month.

Yet Facebook’s own figures show that it makes just $4.34 per user from advertising. Google’s makes more than $30 per user.

Facebook’s $86 billion valuation is in the right order of magnitude, perhaps. Its user base will presumably continue to grow in rich western nations — Facebook claims that 65% of Australian internet users have an account — and elsewhere. The challenge will be getting that revenue well above its current levels.

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Peter Fray
Peter Fray
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