THIS POST IS REPRINTED FROM A RESEARCH REPORT PUBLISHED 2/28/10 ON THE RESEARCH SITE TRACK.COM, A SUBSCRIPTION SITE FEATURING THE WORK OF EX-WALL STREET ANALYSTS

Current trading price in private market: $38      Target price:     $100

Overview:

• Facebook is the most powerful website the world has known : With over 400 million reported users spending an average of 55 minutes per day on its site, Facebook is the most ubiquitous and transformative media company on the planet poised to create tremendous shareholder value as it begins to monetize its vast audience. Facebook already has ¾ the reach of Google and three times the average time spend per user, yielding Facebook double Google’s aggregate global time spent; and Facebook is on a dramatically steeper growth curve, growing its reach by 150%+ in 2009 vs. 40% growth for Google.
• Facebook already drives more traffic to the leading portals than Google: While Google has long been the major driver of traffic to the majority of websites in the world, “friendcasting” on Facebook (when a friend uploads a link to content and someone clicks on it) is already a larger driver of traffic to sites like Yahoo and MSN than Google, according to Compete.com. If Facebook successfully leverages its new relationship with Microsoft’s Bing, implements more social search tools, grows its fan pages, and enables the continued natural growth of “friendcasting”, Facebook should surpass Google as the largest driver of traffic globally later this year.
• Facebook is tracking to be a $100B company: Google has demonstrated how to monetize the time and data users give to the site daily. Facebook’s potential to monetize both time spent and data shared may be even greater than Google as it generates more time and significantly greater data on its users. Facebook also benefits from a network effect that doesn’t exist at Google. Each incremental user adds geometric value to the network. As Facebook achieves its goal of building the dominant global networked communications platform, it will begin to leverage its reach and earn its share of global advertising, ecommerce and payment revenues, possibly rivaling Google’s earnings potential. We estimate that Facebook will be worth more than $100 billion by 2015 using the same multiples on Facebook’s forecast 2015 EBITDA as Google is valued at today. More aggressive (but still reasonable) multiples and growth rates would yield values rivaling Google’s market cap of $140+ billion, ex cash.
• Facebook is worth $50B today: If Facebook is worth $100 billion in 2015, discounting that valuation back to today with a 15% discount rate, gives the company a current value of ~$50 billion. Regardless of the discount rate you use, Facebook offers a very compelling investment opportunity at current prices.
• Facebook is privately traded at 60%+ discount to its current value: Most investors don’t know you can buy Facebook shares today, pre-IPO. While the market for Facebook shares is not robust, there were millions of shares traded last year through private marketplace websites like Second Market.com, SharePost.com and others. Only accredited investors are allowed to participate. Currently, ask prices are about $38/share, implying a market cap for Facebook of ~$19 billion. Relative to the $50 billion fair market value we see in the company, this represents a 60%+ liquidity discount.
• Facebook only has to earn $7 per user in EBITDA to justify our valuation: Dividing our $50B target by Google’s current trading multiple of 18X EBITDA implies that Facebook currently has earnings power of $2.8B in EBITDA. Dividing the $2.8B by the current base of 400 million users implies $7 of EBITDA per Facebook user. Facebook will have far more than 400 million users in 2015, so this is a conservative estimate. Even at $7/user, our projection is that Facebook would earn significantly less per user than other major internet companies. Amazon earns $15/user; Google earns $20/user; and eBay earns $34/user. While each of these companies operates with different business models, they all rely on aggregating huge volumes of users to create value for their investors. Facebook will earn ad revenue like Google, commissions on transactions like Amazon and eBay, and fees on payment processing like eBay. In presenting this metric we are demonstrating that even if Facebook’s earnings power is significantly less per user than other major internet players, it would still command a $100B market cap.

Quick Facts (according to Facebook , Alexa.com and Compete.com):

• #2 website globally in total page views behind Google; should pass Google in first half of 2010.
• At 30%, Facebook has the same global reach that Google had 1 year ago.
• Both Google and Facebook should have global reach of ~50% by end of 2010.
• 2 years ago Facebook’s global reach was just 6%.
• Internet users spend 3x as much time on a Facebook page as they spend on a Google page.
• Over 700mm pieces of content are uploaded on Facebook daily (eg. 100mm photos daily).
• Average user spends 55 minutes/day (~23% of total time online) on Facebook, 50% of users log on daily.
• 67% of US online users are on Facebook.
• ~70% of Facebook users live outside the US.
• Among top 36 countries: Facebook’s page view rank is #1 in 4 countries; #2 in 23 countries; #3 in 9 countries.
• Facebook just received approval for patenting its news feed, the core functionality of its website.

Investment Thesis:

Facebook is already the world’s dominant website

• However you measure it, Facebook’s global scale and growth are astounding. Of its reported 400+ million users, ~120 million are in the US. That’s 120 million out of ~180 million US internet users (according to Commscore); indicating that about two-thirds of all US internet users are now on Facebook. Facebook says the average user is on Facebook 55 minutes per day, out of a total average of four hours per day of total internet usage by the average US internet user. Those statistics are consistent with recent research based on Compete.com statistics indicating that Facebook now accounts for 25% of total US internet page views and 15% of page views in the UK. As a result of its dramatic surge in uniques and page views, Facebook is now directing more traffic to major portals like Yahoo and MSN than Google through “friendcasting” – the name given to the process of clicking on a link your friends post in their Facebook newsfeed. In this report we want to discuss two implications of Facebook’s dramatic growth.

Facebook has blown by MySpace in social networking and is poised to pass Google in 2010 in directed traffic

• The world of television presented us with about 10 channels in the 70’s, which grew to 500 channels as digital proliferated in the late 90’s. The internet now brings us hundreds of millions of channels (i.e. websites, Facebook profile pages, blogs, etc.), which we have only been able to navigate with search. Yahoo dominated search in the early days, but they were passed by Google when Google came up with a better algorithm presented in a simpler design. Because they are the dominant search engine, Google emerged in the early part of the last decade as the dominant source of traffic for most sites.
• MySpace was the early dominant “social network”, but the users weren’t really networked. We had to surf MySpace or hope someone came to our MySpace page to get any real value, and significant technical improvements were glacial.
• Facebook’s improvements were simple but monumental. They used basic newsfeed technology to enable us to know what our friends are doing, thinking, buying, playing, or posting, simply by going to our own newsfeed. They also opened up their platform to third party developers, who quickly provided the Facebook community with a wide array of incredibly popular applications like Farmville, which has over 80 million players. In fact, Facebook states that there are more then 250 applications that have more then 1 million active users. While many of us used to go to Google to find the latest news, or would surf major or minor news sites to see what was going on in our world, our news and information is increasingly brought to us by friends who post news of interest to them or about them, which appears in our newsfeed. Friendcasting on Facebook will be complimented by Facebook’s increasingly deep integration of Bing’s search tools on Facebook, as well as by other social search applications on Facebook that let us mine the behavior and opinions of our friends. We believe Facebook will pass Google in terms of traffic generation to other websites in 2010.
• Because we tell Facebook so much about ourselves, and because we spend so much time on Facebook, Facebook knows dramatically more about us than any other website in history, and Facebook’s willingness to share this data makes them an incredibly attractive partner to websites who like user data (which is almost every website). The question now is: how will Facebook leverage its powerful position to generate revenue and profits for their shareholders?

Facebook will be worth over $100 billion

• Facebook will generate revenue from advertising, both display ads and through increasingly integrated search tools. Microsoft’s Bing, as the search provider on Facebook worldwide, compliments Facebook’s powerful “friendcasting”. Rather than merely offering links, the Bing integration will present more of the features available on the search engine itself. For display advertising, Facebook will increasingly be presenting ad formats that feature social actions. Social integrated ads perform better and provide a better user experience since they are consistent with the context and feel of Facebook. Facebook ads will also be increasingly targeted to people based on the information they provide Facebook. This combination of targeting and social relevance will drive enhanced performance and rates for Facebook display ads.
• Global internet advertising is poised to grow to $96 billion in 2015 (according to Magna), a 10.5% five year CAGR. Traditionally in media, companies with scale are able to grab outsize share of ad spend. Therefore, as Facebook has the most global scale, its safe to assume that Facebook will attract its fair share of the market. While Facebook is still growing rapidly, we assume in our valuation thesis that they account for only 15% of total internet traffic in 2015. According to Drake Direct, based on Compete.com data, Facebook is already at 15% in the UK, and they are at ~25% in the US. We believe 15% is a conservative view of Facebook’s page view and time spend share in 2015, given its current trajectory. We estimate that Facebook’s 15% share of the global internet audience yields them a 15% share of the global internet advertising market, yielding a forecast of $14.5 billion in advertising revenue in 2015. Today this may seem like an aggressive assumption based on the fact that Facebook currently does not command a comparable CPM to many other websites for their display ads. But Facebook has just really begun to monetize their traffic and weave in targeting and social relevance, and they haven’t even begun monetizing social search. Where Google offers advertisers strong targeting for purchase intent, Facebook is the holy grail of targeted brand advertising, and is posed to make significant headway in search.
• Facebook Connect is another powerful platform for Facebook to leverage and eventually monetize its user data. Facebook Connect is quickly becoming a de facto registration platform on the net. Currently, over 80,000 sites have already implemented Facebook Connect, including many large sites like CNN. Facebook Connect is emerging as the internet “passport” that enables people to enter any website, as well as interact with their friends who are also on that website. This will likely become another significant revenue platform, as Facebook could potentially harness Facebook Connect to create a leading ad network, leveraging their deep relationships with advertisers and their mountains of user data. For purposes of this analysis, we’ll assume they derive zero revenue from Facebook Connect in 2015. Therefore, in our analysis, investors are getting a free call on this massive business opportunity.
• Next up, and just as interesting, is Facebook’s recently introduced payment system. Initial testing on Facebook indicates Facebook consumers prefer Facebook’s system to the other payment systems available on Facebook. Facebook is charging a whopping 30% fee to the publishers selling virtual goods (similar to Apple’s 30% take on applications sold on its iPhone platform). The system includes many other benefits for publishers (e.g. preferred placement in the gaming directory, better advertising rates) that only Facebook can provide. Analysts estimate that Facebook’s payment system will grab more then 50% share of payments on Facebook and generate $200 million this year based on projected sales well north of $1 billion in virtual goods in 2010. But payments on Facebook will be just the beginning for the payment system. Facebook Payments is well positioned to take meaningful share from PayPal all over the internet as users will increasingly be using Facebook Connect on ecommerce sites around the net. Paypal is expected to generate $3.3 billion in revenue on a base of 88mm active accounts in 2010. We believe Facebook Payments could grow to a $2 billion dollar business by 2015.
• Given the simple analysis above, we project Facebook will drive $16.5 billion in revenue in 2015. While this is a big number, it is just over 1/3 of what Google would be projected to generate in 2015 if Google grew revenue at a 12% CAGR (about ½ it’s recent revenue CAGR of 20%). For ease, we assume Facebook achieves the same 35% EBITDA margin as Google is currently experiencing. Let’s similarly assume that Facebook, as a public company, would be valued using the same EBITDA multiple as Google is valued at today, which is 18X 2009 EBITDA. The math above implies a value of $103 billion based on 2015 projections.

Facebook is worth $50 billion today

• If we discount $103 billion back by 15% per year, we get a price target of $51 billion today. This implies a value that is more than two-and-a-half times the $19 billion value Facebook shares are currently trading at on secondary private marketplaces. The table below looks at how our valuation would vary depending on various multiples and discount rates. Even at a 21% discount rate, Facebook would be worth more than 2x the current share price.

• Another way to value Facebook helps put our target in to perspective. Based on current membership levels, we are valuing Facebook at $125 a member. If Facebook were valued on an 18X multiple of EBITDA today, that implies that Facebook has the power to generate $7 in EBITDA on average off its members, or $20 on average per member in revenue (assuming 35% margins). Neither number appears a stretch. Amazon earns $15/user in EBITDA, Google currently earns $20/user, and EBAY earns $34/user. We recognize these companies all have different business models, but we think it is helpful to put some context around our $7 EBITDA per Facebook user projection.
• Is a 15% discount rate too low given that we’ve seen other social networks appear and then fade, most recently MySpace? We’ve seen other internet leaders founder – is Facebook like Yahoo? Is it possible Facebook is just a fad, as some argue? Our thesis is that Facebook is already deeply ingrained in our daily lives, and this is just the beginning. There are many reasons why the switching costs are significant, and Facebook keeps adding new ones – most recently Facebook was granted a patent on “the feed”, a core feature of Facebook’s functionality. Facebook is averaging over 100 million photos uploaded per day. People don’t like to leave those behind. With an average of 130 friends per user, almost everyone has many connections that only exist on Facebook. The average person is a member of 13 groups. As we increasingly move to mobile, we are bringing Facebook with us. The Facebook iPhone app has been downloaded by over 28 million people. In addition, every wireless operator is advertising the availability of Facebook apps on their phones.
• Maybe our estimates are too conservative? 15% share of online ad revenue and 35% operating margins could prove too low. The data table below shows that each 1 percentage point of share of the online ad market for Facebook is worth $3 billion present value at a 35% margin. With 30% reach of global internet usage today, it is conceivable that Facebook ad share could be well over 15%.

Facebook shares are available for accredited investors to buy and sell, and the current value is $19 billion

• There is a secondary private market for Facebook shares on sites like Sharepost.com and SecondMarket.com that make markets in shares of dozens of private firms, enabling employees to monetize some of their options.
• After proving you’re an accredited investor, the transaction is papered, with the seller paying transaction costs.
• While Facebook enables employees to sell their shares, the buyers of these common shares are prohibited from subsequently trading their shares until Facebook goes public or is acquired.
• Right now, shares are being offered at $36-$38 per share, implying a market cap of $19 billion.

Catalysts:

• With only $600 million in rumored revenue in 2009, Facebook has done little to monetize its vast reach. As Facebook revenue generating initiatives start to scale, private market values should increase.
• When the company goes public, the liquidity discount will evaporate and prices will rise to fair value.

Risks:

• Shares bought in the secondary private market are not liquid and do not entitle the owner to the information usually provided by public companies to their investors.
• Another competitor could arise and take market share from Facebook. In fact, to the degree that Facebook attracts 15%+ of all internet time, every other website on average is generating 15% less traffic. So it’s easy to imagine other sites working together to try and thwart Facebook. But like Google, other websites will increasingly see Facebook as a “frenemy”, a strong competitor for the mindshare of internet users but also a driver of massive traffic.
• Facebook either may not be capable of or may not be concerned with generating massive revenue or going public. This is unlikely since history has shown that once eyeballs are assembled, advertising and other monetization opportunities present themselves. Some people thought no one would advertise on MySpace, and they were proven wrong. And Facebook is far more advertising friendly than MySpace as pages are much less free form. While a few companies (most notably CraigsList) appear uninterested in maximizing revenue, Facebook’s significant VC investors will help drive both monetization and an eventual liquidity event. In addition, like Google, Facebook will need to generate cash to help finance its increasing spend on R&D to drive innovation.
• Privacy remains a significant concern of internet users globally, and with all the data Facebook aggregates and make available, they are walking a fine line. Facebook has clearly had some missteps in the past, most notably its Beacon information sharing product in 2007 that caused an outcry from privacy groups. They have also had technical glitches, one as recent as last week where messages were misrouted. As a result of these lapses, Facebook is acutely aware of the privacy issue and they appear to be thoughtful in their approach. Google also struggles with privacy, as evidenced by their recent bungling of the introduction of Google Buzz.
• Given Facebook’s increasing stranglehold on internet usage, governments in the U.S. and elsewhere could step in and, in some way, break up the near natural monopoly on social networking that Facebook will have. Google is already starting to face serious antitrust issues in Europe.

About the authors:

Lou Kerner (lou.kerner@track.com) 310-710-2271

Before becoming an internet executive in 2000, Lou was an equity analyst following media and internet related companies for Goldman Sachs and Merrill Lynch. Lou’s started his internet career as CEO of The .tv Corporation, which licensed the top level domain .tv from the tiny island nation of Tuvalu. .tv was acquired by Verisign in 2001. Subsequently, Lou acquired one of the early leaders in social networking, Bolt Media, which grew to over 20 million monthly uniques under his three years of leadership. Lou currently runs a portfolio of parked domain names and is COO of Gamers Media, an ad network for online casual gaming sites. Lou has a BA in Economics from UCLA and an MBA from Stanford University.

Eli Halliwell (eli.halliwell@track.com) 212-361-9515

Eli started his career in sell-side equity research for Sanford Bernstein, covering big box retailers, before transitioning to founding, running and investing in consumer and internet companies. He has served as the President and CEO of Jurlique International (a global skincare brand), the General Manager of Bumble and bumble (a division of Estee Lauder Companies), and the Co-Founder/Chief Strategy Officer of iMotors (an online retailer of used cars that raised $142mm in equity and earned $100mm in revenue). Currently, he is the Founder of VotaVox (www.votavox.com), a direct democracy website, and he is researching and writing investment reports for his own investments as well as for publication on Track.com. Eli has an AB from Princeton University in Public and Int’l Policy and an MBA from Stanford University.

Written by Lou Kerner on Wednesday, February 3rd 2010

Back when I was an equity analyst at Goldman Sachs following media companies, the question I got asked most often was “What’s more important, which is king, content or distribution”.  It’s an age old question, which I always answered the same way.  Depending on the day, one might seem more important then the other, but over the long run they were Ying and Yang.  You can’t have one without the other.  They were co-Kings.   Let me state very clearly, I was wrong.

In fact, the question is no longer relevant, because as we all know, the internet is commoditizing distribution.  Commscore estimates that more then 12 billion videos were streamed over Youtube in December 2009, more then triple the combined streams of the next 10 sites combined.   Many of the top videos were shot by amateurs (my favorite last year being bicyclist Danny MacAskill, check it out).   I’m in the camp that believes that Comcast bought NBC Universal to further diversify away from distribution, to get more content, most notably cable channels.   So in a world of commoditized distribution, does that leave content as King?  Is all that matters now having compelling content (e.g. Avatar) or developing a platform for user generated content (e.g. Facebook)?  I posit two thoughts below in my construct for new media.  The first is that monetization is replacing distribution in the value chain.  The second is that the way to think about content  is rapidly changing, moving from the search for “franchises” (NBC’s been searching for another Friends for 10 years) to the search for “enduring” content models.

The world in which grew up had 3 channels.  Each one had a major sales force that monetized the audience in similar ways, through advertising.  The focus was on ratings, as everyone monetized the audience at similar rates.  Monetization was a commodity.  Then we moved to 500 channels, and the cable channel fees were added to the monetization mix.  Now we find ourselves in the 500,000,000 channel universe (350,000,000 alone are on Facebook), and that has many implications.

While the significant majority of channels, namely most user generated channels, are not looking to get compensated for their content, there are tens of millions of content providers who are looking to monetize their efforts, and 99%+ of them will never achieve a scale to have an internal sales force to sell branded ads.  So what do they do?  First, not surprisingly, they almost all use Google to some degree.  It’s estimated that 50% of Google searches come from searches and text links on sites other then Google.  There are millions of people who make their living off of generating traffic and monetizing it through Google text links. Google is a godsend for these people because they are so good at what they do.  The downside is, Google’s growing market share is leaving it a virtual monopoly, so well positioned that it is taking an ever increasing percentage of the revenue generated through its text links and searches generated by other sites.

The other way that the vast majority of web sites monetize their traffic is through ad networks.  Ad networks aggregate tens of millions of unique visitors across tens of thousands of sites, and sell them to advertisers en masse, generally through their own sales forces.   There are about 20 ad networks that reach over  100 million uniques a month in the U.S.  including Platform-A (owned by AOL), Specific Media (which raised $100 million in 2007), ValueClick (Public, VCLK), and Tribal Fusion.  There are also many niche advertising networks that target specific audiences (e.g. Jumpstart for automotive sites, Glam for females…).   There are ad networks for social media (RockYou).  There are ad networks for applications on social media (e.g. AppSavvy).   There are ad networks for blogs (e.g. BlogAds).  There are mobile ad networks (e.g. AdMob currently being acquired by Google for $750 million).  Cox Enterprises is one of the few large media companies to get in to the game in a big way with its $300mm purchase of Adify, a platform for others to build ad networks (e.g. MarthasCircle, an ad network of lifestyle sites and blogs started by Martha Stewart).  MTV started a comedy ad network, Comedy Tribe, which includes its own sites like Comedy Central and other sites like JibJab.  There are ad exchanges like Right Media (acquired by Yahoo for $680 million) where buyers and sellers of audiences are matched through technology.  There are ad network optimizers like PubMatic that enable publishers to optimize their ad inventory through real time analysis of all the ad network that a given publisher has relationships with.   While many have written about the eventual commoditization of ad networks for years, they continue to evolve, adding value to publishers and to their shareholders.

There are literally hundreds of other monetization models.  An example being Vibrant Media’s double green underline in the text of content on many sites that acts as a text link to advertisers.

My point is that there is a massive market for companies with the ability to monetize audiences that have been aggregated by others.  Big media companies have their own sales forces that sell branded ads, but even the vast majority of large sites use ad networks to monetize their unsold inventory.  They almost all use Google search boxes and text links to add incremental revenue.  It is increasingly the ability to monetize an audience that is becoming the Ying to content Yang in the value chain of media value creation.  My second point is that the construct of content is simultaneously changing.

In a three channel universe that lasted for 30 years, the audience simply shifted in moderate increments from one channel to the next over time depending on the quality of the broadcast network’s slate of shows.  The name of the game was to build hits that could last for years, and often birth spinoffs (e.g. All In The Family ran for 9 seasons, was #1 for five years and spawned five spinoffs including The Jeffersons and Maude, which then spun off Good Times).  With the emergence of cable and the 500 channel universe, the audience began to splinter, and the networks have found themselves on a never ending treadmill of audience erosion and splintering that they can no longer offset with higher pricing.  But large media just shifted the audience between their 3 channels to their 500 channels.  And in the process, they created the second stream of revenue, cable channel fees, and industry profits continued to mushroom through the 90’s and well in to the new millennium.  Now we can see that the end of that game is in sight.

The network model is already in tatters, and with the emergence of Hulu and other sites, TV shows are increasingly being watched over the internet.  As that happens, cable will become like land line telephones.  Consumers have long been forced to pay for dozens of cable channels they don’t watch, because they had no other way to get the channels they wanted.  It’s like if I went to the local grocery store to get eggs and cereal, and they made me buy dozens of other things like cheese (I’m lactose intolerant)  and tampons (I’m male).  If there were no alternatives for food I’d suck it up and pay for the cheese, but I’d certainly like to avoid it.  So the cable model, as we know it today, is eventually toast.  What about cable channels ?  They are eventually toast as well.  With 500,000,000 million channels, they are also on the audience splintering treadmill.  So what’s the new construct?  I call it “Enduring Content”, by which I mean content models that don’t get splintered.

The most obvious examples of “Enduring Content” are platforms for other people’s content or applications.  Facebook is the champ here. It seems everyone on the planet will be providing them with content soon, and the page views from their user generated content that are only surpassed by page views generated from use of all the applications written for their platform.  It’s estimated that Facebook accounts for 25% of all page views on the internet.  Youtube is another great example of a platform.  It seems every piece of video ever shot on the planet will be posted there some day.  I love DeviantArt.com, a platform for artists, and one of the top 100 sites in the U.S..  However, platforms are just one example of “enduring” content.

Google is another amazing example of “enduring content”.  They have the best search engine which they continue to iterate and improve.  Every day there is a massive amounts of new content “on” Google (or indexed by Google), produced by others.   Their share of internet audience continues to grow.

One of the most ingenious “Enduring Content” models is being built by Demand Media (who’s founder Richard Rosenblatt was the CEO of the parent company that founded MySpace).  Their main site is eHow.com (videos on “how to do about everything”).  Check out their traffic growth chart on Alexa.com, It’s really impressive.  eHow is now one of the top 50 sites in the U.S..  eHow’s model is ingenious.  They mine Google and other data sources to understand what people are searching for, what content they “demand”.  Richard uses the example of “Where can I donate a car in Dallas”.  Their algorithm showed that their were numerous people were looking for an answer to that question, and that the audience for that content could be well monetized.  The next step is the creation of the content.  eHow posts a request for the demanded content to their site, where they state that they will pay one of their thousands of approved videographers $10, $20, or $30 to shoot a video about the topic (they currently have about 30,000 requests posted).  When the video is submitted, it’s reviewed and posted.  The video is optimized for Google, so when the topic is typed in to a Google search box, the video will hopefully appear as the first or second algorithmic result (in other words the resulting click is free).  When someone clicks on the Google search result, the corresponding video on eHow is monetized through a  pre-roll video commercial, Google text links, and other monetization tools.  If Demands algorithms are right, they are assured of making more money off the video then they paid the videographer.   About 3,000-4,000 new videos are added a day to eHow’s library every single day.  The content model is “enduring” because it constantly adds new content and gains audience share.  It’s a machine.  That’s why eHow is growing like a weed.

Interestingly, there are lots of content plays that are dubbed “new media”, and given huge valuations, that are old school.  Most notably of late is Zynga, the leading provider of games on Facebook (their largest by far being Farmville with over 60 million registered users).  Zynga recently raised $180 million at a valuation widely reported to be in excess of $1.5 billion.  While Farmville is wildly successful, there is nothing “enduring” about game.  People will get tired of it over time, and usage will drop.  They will need to come up with new games.  Zynga’s model is no different from EA’s model, and that model appears broken.  In fact, EA just paid $300 million for Facebook game developer Playfish.  To me, the more impressive thing then the reach of Farmville, is the monetization through the selling of virtual goods.  While not public, speculation is rampant that Zynga generated more then $100 million in revenue in 2009, largely off virtual goods.  That’s a lot of dough.  But where will Zynga be in 5 years?  Other then Pixar, I can’t think of a single old school content creator that has maintained an ability to steadily create one hit after another.  While I can’t tell you what Pixar’s secret is, I feel confident that that Zynga is unlikely to be the Pixar of online gaming.

I’ll finish this diatribe with the premise that a company’s ability to create lasting value in the emerging world of New Media depends on staking out the right territory in the two-by-two matrix below (you want to go up and to the right….Google and Facebook are the big winner so far).