

A Wrench in Silicon Valley's Wealth Machine - nickb
http://www.businessweek.com/magazine/content/08_52/b4114082618241.htm

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mdasen
We go through cycles. Right now we're in a slump so bad that things with real
value and profits look bad. Before, we had been in a boom that thought value
was limitless for crap.

Trying to look at Digg objectively. They don't make money with their current
number of staff people and revenues. Maybe their readership will increase to a
point that they will make money (assuming they don't need more staff as
readership increases). Maybe they'll be able to cut staff and slow down
"product growth". Of course, that risks a competitor out-doing them.

Likewise, Facebook hasn't found a way to be popular. Their userbase keeps
increasing, but they're at a level where the scaling problems get real bad and
require lots of staff. They're also adding users from places advertisers don't
pay as much for (while they cost Facebook more in terms of things like
bandwidth).

The question really is whether these companies can become profitable and
whether they can become profitable to the extent required by their valuations.
For example, assuming a yearly profit of $100,000,000 and an opportunity cost
per year of 10% (investing in something else) and a 100 year lifetime,
Facebook would be worth less than $1B. And that's assuming they're able to
make $100M per year for 100 years.

Even if you say they're going to make a billion per year for 100 years from
this date, they're still worth less than $10B. And why should we assume
they'll be around in 10 years never mind 100. Friendster of 2002 is (6 years
later) a has been.

I'm not saying that Facebook is bad, but 100 years is a lot of staying power.
Heck, what technology firm can claim such a thing. Venerable IBM will hit 100
in a few years. But IBM is not the dominant company many people invested in
over the years. They don't even have a PC business anymore.

Many technology firms go under because they aren't able to produce efficiently
enough to stay afloat. Unlike Microsoft, Facebook can't just raise prices
because their paying customers (advertisers, not users) can go somewhere else
unlike Microsoft's lock-in. They can't charge users because the value they
have is based on having so many users and the competition would love if
Facebook gave them such an in.

Many of these things are cool, but there's a big question as to how much money
they can make. With high valuations, it's not just about making money, but
enough money to justify that valuation. I think investors are looking at that
now rather than thinking, well, this is really popular therefore has a lot of
value.

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cstejerean
I don't fully understand how the math works out, particularly how the
opportunity cost factors in. What does an opportunity cost of 10% mean and how
does that factor in to the valuation equation?

~~~
mdasen
So, opportunity cost is what you could get doing something else. For example,
if I put $15B into an S&P500 index fund, I'd probably get returns around 10%
per year. Since Facebook is a risk greater than an index fund, 10% is
definitely fair.

So, if I just took that money and suck it in a stock index fund, in 100 years
I'd have over $206trillion at the end. So, it's not enough for Facebook (or
anyone) to make money off of money invested. It must make more money off that
investment than the investment could get at a standard investment rate. If
Facebook is worth $100trillion in 100 years, it doesn't justify a $15B
valuation because that $15B would become over $200trillion in average stocks.

Specifically, the math is: sigma[1,100,$profit/1.1^k]

Sorry for the notation. In plain English, for year 1 through 100, add the
profit for that year ($profit) divided by 1.1 raised to the year number.

In python: value = 0 proft = 100000000 for i in range(1,100): value +=
(profit/pow(1.1, i)) print value

To summarize: Facebook needs to be able to beat a blind investment by their
valuation in order to justify that price.

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ojbyrne
Digg just needs a new leadership team. Kevin and Jay spend so much time
promoting themselves ("parallel entrepreneurs" hasn't worked out all that well
for anyone) that they've done significant damage to the business. They need to
go.

Even this article is full of half-truths. Employees are "committed for the
long term" yet the bulk of them have been hired during the last six months,
and 40% of the early employees have left.

~~~
brandnewlow
I don't get how "promoting themselves" has done significant damage to the
company. I mean, Kevin is the company. The company is Kevin. When Digg had a
town hall meeting in Chicago, people were there to meet Kevin and have him
sign their iPhones. He's gotta be out there as much as possible.

I concede having no knowledge on any of these other fronts, but I don't
understand how all the good PR that comes from Rose's ubiquity in tech media
can be anything but crucial to Digg's success.

~~~
ojbyrne
I think you've answered the question. Kevin is the company. It was not always
so - in fact in the early days he downplayed his role in the company, and it
had massive momentum. Instead of concentrating on making a better product, a
lot of energy went into the "web 2.0 poster boy" campaign as a marketing
strategy. I don't think it worked.

~~~
brandnewlow
Ok. I understand your point of view much better now. Thanks.

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jwesley
Digg has always been overrated. People voting on news stories was never a
great business and the quality of the user base has significantly deteriorated
over time. The smart people have moved on and the site is dominated by
spammers and trolls. No legitimate brand is interested in being associated
with that level of maturity, so Digg is stuck with bottom of the barrel
advertising.

I just wonder how they blew through so much cash. All the new features have
sucked. I guess it all goes to biz dev guys...

On the bright side, maybe the founders will silently pass into obscurity.

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ig1
Digg need to take a page from Google's book and realize they need to fix their
ad system.

At the moment it's showing me adverts for women's weightloss products, digg
really should be able to figure out I'm male.

Worse yet it's showing me US only adverts (when I'm in Europe). Half of Digg's
userbase is outside the US (quantcast data) - they're wasting 50% of their
inventory. By setting up ip geolocation targeted advertising they could
significantly improve their CTR.

~~~
brandnewlow
They list links.

Google search lists links.

Digg should sell content placement at the top of their lists of links and
content placement in the sidebars like Google does and Techmeme as well.

This way, instead of hiring a team of 4 people to game Digg like the Chicago
Tribune did, they can just pay the money straight to Digg for front page
placement and call it a day. Everyone's happier and you get fewer marketers
spamming the site night and day.

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puzzle-out
I downloaded a relatively successful IT company's accounts today. Been going
for 12 years, profitable for 11, innovated product (now ecommerce platform
developer) and brand, creating stable employment - 68 staff, doing 12million
sterling turnover and two million profit after tax. Respect.

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indigoviolet
that article used the word Facebook exactly once.

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mattmaroon
Someone should fix the title.

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fallentimes
It's dividend time.

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ardit33
on what? loses?

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fallentimes
Exactly.

From profits that real businesses should have.

