Mark Zuckerberg, the 25-year-old chief executive officer and founder of Facebook, speaks at the World Economic Forum in Davos, Switzerland, in January. Bloomberg News

SAN FRANCISCO: Facebook Inc's latest funding deal, valuing the company at $10 billion, has renewed debate over how much social-networking companies are worth.

Russia's Digital Sky Technologies said this week it paid $200 million for less than 2 percent of Palo Alto, California- based Facebook, a five-year-old startup.

"There is a very high level of future expectation built into that valuation," said Bob Ackerman, co-founder and managing director at Allegis Capital, a Palo Alto-based venture capital firm. "The fundamental challenge for all of these social network companies is: How do they convert traffic and consumer interest into revenue and earnings? The jury is still out."

The question is whether Facebook and its rivals Twitter Inc and News Corp's MySpace will match the profits of their Internet predecessors: Google Inc and Yahoo! Inc.

Facebook and MySpace may have $820 million in combined sales this year, a fraction of the $45.7 billion online advertising market, according to New York-based research firm EMarketer Inc.

"Every year, we've been waiting for social-networking advertising to be a real business," said Debra Aho Williamson, an analyst at EMarketer. "It's going slower than we expected."

About 70 percent of marketers surveyed by Forrester Research Inc plan to increase spending on social-networking sites. Still, 75 percent of those surveyed will spend only about $100,000 a year or less.

Digital Sky agreed to the $10 billion valuation because it expects Facebook to lure more big brand-name advertisers, helping boost sales, said Alexander Tamas, a partner in the investment firm's London office.

"Facebook has essentially doubled in size in the last six months," Tamas said. "Brands are realizing that there are so many people on the social networks and they can use the networks to build their brands."

"The price was suitable," Digital Sky CEO Yuri Milner said. "We did substantial due diligence. Globally, there are not that many successful social networks."

Digital Sky, partly owned by Russian billionaire Alisher Usmanov, has invested in five social-networking sites in 13 Russian-speaking countries. In those countries, younger Internet users skipped e-mail and went directly to social networking, a trend that may happen in the US, said Tamas.

There was a lot of interest from investors, Facebook Chief Operating Officer Sheryl Sandberg said.

The current valuation for Facebook is 33 percent less than the $15 billion value that Microsoft Corp attached to the company when it made a $240 million investment in 2007. The new amount reflects the broader decline in the value of technology companies during the economic slump, said Venkat Venkatraman, a professor at Boston University's School of Management.

Business model

Facebook, founded by Mark Zuckerberg in 2004 as a social-networking service for his Harvard University classmates, generates sales through advertising. The company expects revenue to climb 70 percent this year.

Facebook made money before interest, taxes, depreciation and amortization, or EBITDA, in the past five quarters, a person familiar with the matter said in March. Facebook expects to be cash-flow positive in 2010, the person said.

The site's US users stood at 67.5 million in April, research firm ComScore Inc.

Zuckerberg, 25, said at the All Things D conference last year that he had no plans to sell the company.

There are also no plans for Facebook to go public, Yu said. Zuckerberg wasn't available for an interview.

Twitter, based in San Francisco, is also figuring out how to attract more users and make money. The company, whose website lets people post 140-character messages to their friends, plans to double its employees to 90 by the end of this year, co- founder Biz Stone said. Twitter is continually approached by suitors, he said.

Twitter's US users rose to 17 million in April, from about half a million a year earlier, according to ComScore.

"The company is trying to become ubiquitous," said George Zachary, a general partner at Charles River Ventures in Menlo Park, California.

Digital Sky's Tamas said comparing Facebook to Twitter is inappropriate.

"Twitter is interesting and they can do a lot of things, but Facebook is in a different league," he said. "Twitter will have to work very hard to justify all of the attention they are getting."

For MySpace, the challenge is to turn around a site that faces mounting competition from Facebook. News Corp CEO Rupert Murdoch purchased MySpace's parent company in 2005 for $580 million.

Two months ago, he hired former AOL chief Jonathan Miller to oversee the company's digital media businesses. A few weeks later, Chris DeWolfe stepped down as head of MySpace, replaced by former Facebook executive Owen Van Natta.

"The social Web is not a winner-take-all proposition," Van Natta said. "There's going to be a lot of winners in this space."

AOL's struggles

For a tale of a once-mighty Internet giant that has seen its position erode drastically, Facebook need only look at the case of AOL.

Eight years after the Internet service linked up with Time Warner Inc in a $124 billion merger, AOL is now worth half as much as Facebook and less than 5 percent of Google.

AOL may fetch about $6 billion following its spinoff from Time Warner, according to analysts.

AOL, a pioneer in allowing consumers to access the Internet over phone lines, has been usurped by the upstarts.

"It's gone from the only game in town to an also-ran," Andy Baker, an equity strategist at Jefferies Group Inc in New York, said of AOL.

When it bought Time Warner in 2001, "they were a giant dialup Internet provider with huge, growing revenue."

Bloomberg News

(China Daily 06/01/2009 page11)