Why is Facebook worth more then Ford and AMD combined

When couple of months ago Microsoft bought 1.6% of Facebook for $240 Million it gave the world the idea what is Facebook really worth. Simple math gives you a figure of $15 Billion. About the same day the entire market capitalization of Ford was worth $13 Billion.

We have a 100 year old company, which gave automotive industry more then any other company in the world, which has immensely long tradition, huge number of factories and employees on one side. We have 4 years old company run by couple of guys, no one being older then 30, on the other side. And Facebook is worth more then Ford. I leave you to contemplate on that for a moment.

Maybe Ford is a representative of a slow moving, automotive industry. Then take AMD, world's second largest processor manufacturer. AMD and Intel have been fighting for processor lead in the past several years taking and losing the number one position. They have been hiring some of the world's most brilliant people and build some of the most high-tech factories in the world. AMD's worth is "just" $4 Billion or about 4 times less then Facebook. Since this was all happening about 6 months ago, one could guess that Facebook's worth today surpasses the combined worth of these two giants. Pretty amazing, huh?

Why is Facebook so successful

I think the main reason this is happening, the open design. If we compare Facebook with a modern Ford we can find a key to the success of any future venture (and clearly it is not exclusive to Web 2.0 sites only).

  • Expandability - When you get a Ford you get a finished product that you can not change. When you sign in on Facebook you get a working shell that you use to expand with functionalities you wan.
  • Communication - When you add something cool to Facebook, all your friends hear about it automatically. It helps spread good ideas around. When you add something cool to your Ford you need to go out to the street and brag about it, usually being called names in the process.
  • Outsourcing - What made Facebook successful is tons of applications. Best thing of all, they did not cost Facebook a cent, they were all developed by third parties with their own research and development money. On the other hand Ford and other auto companies spend billions of dollars for R&D, because that is the only way they know how to do things. And at the end we still have cars that just look alike the same. Can you see the difference?
  • Feedback - Facebook closely monitors what their millions of users are doing, on every day basis. What they like and what they don't like and make changes to their product accordingly. Ford? Changes a car every few years. Adds sat -nav when everyone else also does it. Changes engine design when the sale of the previous one justified the R&D costs. (read about Wankel Rotary Engine for a good example in this topic).

Need to exercise caution

However Facebook people need to learn few lessons from the old guys of Ford too. It is hard to keep a company successful for 100 years. There is a lot more to running a business then having a great idea.

I have noticed Facebook started adding more and more ads. Applications are now filled with ads too. To me that is bad for the business model. I know it brings enormous amounts of money every day but at the end people will get tired of it. Imagine turning on your Ford tomorrow and on the sat nav screen you start seeing ads (I bet someone somewhere is already working on this).

The problem is, couple of kids in their early twenties might be working on a next Facebook killer in their parent's basement right now. Facebook might get burned just like Google did Yahoo in late 1990's. Knowing that, would you pay $15 Billion now for a 4 year old company heading that direction?

At the end here is a video, picture speaks more then thousand words.


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4 Comments

  1. pierre
    Oct 10th, 2010 7:28 AM

    Interesting article... But please, then ≠ than

  2. Apr 24th, 2010 3:07 PM

    I think this is an inaccurate view of the companies true market capitalization and valuation. It's not just a simple linear extrapolation from a purchase of a small share of preferred stock options which receive higher valuation because of their attached priveledges. Valuation fluctuates, and the company has never actually hit the valuation that M$ paid for, although its come close recently, it has stayed far below that. Also when stock converts from preferred to common after an IPO, that will usually send the valuation downward.

  3. Dec 21st, 2009 6:57 PM

    Wow.. scary situation man... Wonder how these things really get value .. I mean something that is a free venture that relies on user stats tracking and advertising for it's revenue source.. I mean there is quite a bit of user information/demographics, but is that really worth that price tag? I didn't know advertising was that lucrative..

  4. Ben
    Mar 26th, 2008 10:40 AM

    I liked this perspective, good job.