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The value of a ‘like’

Grace Concelman | Wednesday, February 1, 2012

What is a “like” worth?

It’s nice to get the occasional personal validation. When one of your friends “likes” your post on Facebook, he or she is telling the world that they, too, agree that you are incredibly witty/beautiful/raising an important social issue.

It feels good to be liked.

You could say “likes” are priceless because they relieve the remnants of our middle school insecurities. But any good economist knows nothing is priceless, and pretty soon we’ll get to find out what all of those “likes” are worth in cold hard cash.

On Wednesday, Facebook filed for an initial public offering (IPO), to take place later this spring. An IPO is the first time a private company sells stock to the public, thereby becoming a publicly traded company. Since public companies have to submit financial statements to the Securities and Exchange Commission, we’re about to get a little more information about our beloved social network.

IPOs happen almost every day without any fanfare, but not this one.

The first time the general public actually started caring about IPOs was in the late 1990s. We were finishing up elementary school, busy trading pastel gel pens and Pokémon cards while the “adults” were going wild buying stock in any company that had “technology” or “internet” in the description, regardless of whether that company earned profits or had a proven business model.

Of course, the dot-com bubble burst long ago, but investors still flock to revolutionary technologies like Facebook. The Facebook IPO is expected to raise at least $5 billion, which would place it within the top ten U.S. IPOs.

That would value the company between $75 and $100 billion. As a comparison, McDonalds and Anheuser-Busch are both currently worth about $100 billion, and Amazon is valued at about $82 billion. Sounds reasonable, right?

But McDonalds sells Big Macs, Anheuser-Busch sells beer and Amazon sells everything except Big Macs and beer. These companies have products, services, plants, customers and, most importantly, profits.

What does Facebook have? Data.

Facebook has 800 million users who have created a profile and made friends and tell those friends about all of the cool stuff they do. Every day 400 million users log on to upload 250 million photos, share the latest viral videos and “check up on” friends from the past. Most importantly, though, each user is connected to an average of 80 pages, groups or events that mimic his or her real-life social interactions.

What do all those “likes” add up to?

Right now they add up to an advertiser’s dream. Not only do advertisers have people “liking” their pages, they know whom those people interact with. If your friend likes something, odds are that you will, too, and since you both spend so much time on the site, odds are also pretty high that you’ll see an ad and click through.

To justify a $100 billion valuation, however, the Facebook model has to be good for more than advertising. The market, at least, thinks it is.

Facebook began as a pioneer in the communication revolution, but its real value is its use of the information it has gathered through fostering communication and networking of its users.

Facebook continues to develop technology to aggregate and analyze the massive amount of data generated each day on the site — data about you and me. Tag suggestions? Location check-ins? Facebook knows where you are, what you’re doing and whom you’re with. It knows the ebb and flow of your high school relationships and which restaurants are gaining popularity in your town, all because you and 800 billion people are willing to share.

If you think about it, there’s a lot that Facebook could glean from this data. People’s locations could predict traffic patterns or the spread of disease. The types of pages they link to could indicate political leanings, intelligence or even credit worthiness. At the most extreme, the possibilities bring a whole new meaning to creeping on someone.

Of course the key question moving forward is whether all of this data will add up to long-term profits for Facebook. If it does, investors are going to have a whole lot to “like.”

Grace Concelman is a senior majoring in finance and philosophy. She can be reached at [email protected]

The views expressed in this column are those of the author and not necessarily those of The Observer.