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Is Facebook really worth $15bn?

Microsoft has just paid $240m for a 1.6% stake in social networking site, Facebook. Eight years on from the tech bubble, Merryn Somerset Webb thinks markets are being taken in by a good story once again.

Tidying out a few drawers of papers with the help of some toddlers at the weekend I came across a fascinating piece of paper. It was the notes to go with the invitation to the Paribas (now BNP Paribas) Christmas party in 1999, when I was working there as a stockbroker. There are all sorts of interesting bits and bobs in the memo, but the thing that really struck me was the list of prizes on offer in the grand prize draw (to be held after the dinner at the Grosvenor House hotel).

The top prize was a "personal fax machine worth £600". Think about that for a second. The memo was issued in November 1999. That was when the tech bubble was reaching its absolute peak internet stocks rose more than 60% from October 1999 to March 2000 alone.

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And what was the core story behind this bubble? That the internet would entirely change the way we operated, that the paperless office was on the verge of becoming reality, that letters and faxes were to be made redundant by e-mail and that the new paradigm of evolving technology would create a productivity revolution that would change the economic world.

Yet in the middle of all this excitement, the top raffle prize at the Grosvenor was to be a £600 fax machine. If I had been a more cynical person then (the kind I am now, perhaps) I'd have considered the prize list, noted that the memo in question had not arrived by e-mail but on a bit of paper placed on every desk at Paribas, realised that the internet world was more theory than reality and likely to remain so for some years to come, and then sold every single one of the overpriced technology shares in my portfolio.

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Instead, like everyone else, I bought raffle tickets, then lost money in the carnage of the tech crash five months later.

Fast forward to today and the predictions of 1999 have come true: e-mail has transformed the way we communicate and whoever won that fax machine won't have used it for a good few years (I bet they never got £600 worth of value out of it).

But the one thing that hasn't changed at all is the ability of markets to get taken in by a good story. Take the case of "social networking site" Facebook. Microsoft has just paid $240m (£117m) for a 1.6% stake in the company, set up, as loss-making internet companies traditionally are, in a "dorm room" on a university campus in America, in this case by Mark Zuckerberg.

As a result of the deal this 23-year-old Harvard drop-out is now the main shareholder (he has just over 20%) in a company valued at an insane $15 billion. That's about £120 per user.

Microsoft thinks it was worth paying this much it fought off bids from Google to get its prize and justifies it by saying that Facebook has the potential to get to 200m-300m users. "Monetise" that, said the chief executive, and the valuation might make sense. Sounds good, but then so did the paperless office in 1999 and so did 1,000 bubble business models that, despite much brainstorming, no-one ever figured out how to "monetise".

In this case, Microsoft's plan focuses on advertising. Facebook is free to use (and no-one would use it if it were not), so Microsoft will make it earn its living by selling banner ads. Again this sounds like an excellent idea all those young affluent people glued to their computers appear to be the perfect target audience.

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But I suspect it all comes with a flaw: most of Facebook's 50m users are unlikely to ever look at the ads. I'm one of them. But I'm not really a user in the sense that Microsoft would like to think I am. I signed up because my teenage sister told me it would be a good way to sell more copies of my book. So I built a profile and created (with intense instruction from the underthirties in the office) an online group for people who want to talk about women and money (and who might buy books) to join.

For a week or so this was quite interesting. Some people joined. Lots of trying people that I'd lost touch with after university (generally for good reason) asked to be my friend, as did some people I've never heard of. And some people I am already friends with sent me messages via Facebook instead of my usual e-mail.

That was two months ago. I still get the occasional e-mail but after the initial excitement most of my social group appear to have agreed that we don't need Facebook to middleman us: we've gone back to using our usual e-mail accounts. And when we really want to communicate we spend our money in the same way we always have on the phone or in bricks and mortar locations (pubs and restaurants).

The price Microsoft has paid represents a colossal gamble that users will spend more time, and more intense time, on Facebook. But what if they don't? What if Facebook is just a fad, less a long-term money making social networking venue than a toy for bored teenagers? Let's not forget that it has yet to turn a profit.

Ordinary investors aren't getting the chance to lose money on the social network story directly yet, but there is talk that Facebook is being prepared for a float. It will be fascinating to see what price that comes at, if it comes. At the very least, I suspect Microsoft will soon regret valuing my contribution to Facebook's coffers and those of other thirysomethings at £120.

First published in The Sunday Times 28/10/07

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