The Wall Street Journal recently (Thursday July 14, 2011) published an article in the Marketplace section where various analysts reported valuing the company at $100 billion and upwards. Redpoint Venures’ Geoff Yang notes that Facebook created a new ecosystem – the ‘social web’. His valuation was based on a $25BB market in online ad revenue with Facebook having a 27% share. In 2015 that $25BB will grow to $45BB and Facebook’s share translates to $7BB in revenue. Add in the local advertising market today estimated at $133BB and project that to the future for $150BB. With the Internet taking 20% and Facebook 20% of that, add $6BB in revenue. Add in international revenue and the estimated 2015 revenue goes to $19BB. With a P/E of 25, Facebook is worth $140BB in 2015. The high end of the scale in the report was $240BB valuation. Some of the higher P/Es are undoubtedly because Facebook is still a private company, lots of investor want in, and the law of supply and demand is active.

Going back to Geoff Yang’s comment about a new ecosystem, the thing about ecosystems is that they contain lots of niches, some beneficial and some not so beneficial. Looking at Facebook as a social media, people automatically assume that Facebook is about communications. This couldn’t be farther from the truth. In fact, Facebook has the ‘potential’ to be a communications tool but to be specific, one has to remember that, as Claude Shannon established, communications requires three elements: a sender, a channel and a receiver. Social media over the Internet is clearly the channel and the millions of members participating are senders. I am not so certain about the receivers.

Facebook is a means for participants to throw out to the world (dare I say ‘vomit’) pithy comments about life, mostly as a means to assuage their egos and establish that their thoughts are somehow worthy of publication. Admittedly, blog writers succumb to the same predisposition, as do contributors to refereed journals. In our case as well as the case with journals, we impose some sort of peer review.

The problem comes when participants believe and expect that Facebook is, in fact, a means of communication, when it typically is not. Personally, being inoculated by Inter-relay Chat (IRC) in earlier days, I know enough to not assess my self-worth by a post or response to a post that comes flying my way, and do not participate in “flame wars”. There are lots of people out there using Facebook with less unassailable egos, fragile personalities and low self-esteem. When these persons become involved in Facebook interactions; and the inevitable trolls and digital demagogues line up like sharks at a chumming, the potential for damage is high.

In verbal communications, most people learn quickly that a self-imposed delay between thinking and speaking is a survival trait. Facebook provides minimal feedback to reinforce an equivalent delay between thought and post. This is not a new concept – books have been written on email etiquette. What is new is that email did not have the potential to impact participants to the same degree. Technology has provided enablers: streams of friend’s posts requires bandwidth; computational power; and storage – all of which have made significant improvements over the last ten years. The result of which is a much more rapid and wider dissemination of accidental stupidity and intentional cruelty.

A 2009 report showed that 1 in 5 divorces are attributed to Facebook. Verbal bullying on Facebook has been reported and is increasing. Blackmail related to Facebook posting of photos is noted. Some interesting work on the phenomena is found here.

Returning to Facebook’s valuation, an infelicitous confluence of factors – high valuations, widespread usage and the potential for material damage (psychological – resulting in treatment costs; suicides, etc.) make Facebook an obvious target for tort lawyers. Expect novel theories of liability to emerge directly in proportion to Facebook’s rising valuation.

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