Google, Facebook, Microsoft, etc...

by Krzysztof  Samberger

Sunday, 29th August 2010

So many people are commenting on Google, Microsoft, Facebook.  Who is worth what, who makes more money, who has the edge, who will make it and so on.

As I write this

   - Microsoft has the market cap of USD 207bn

   - Google has the market cap of USD 145bn

   - some number cruncher predicts that Facebook would be worth USD 25bn (link below),  though personally i do not agree with this valuation, as to me Facebook has a much higher value, as with 500mln unique users, and most unique hits per day... they are very well positioned right now for the future.


Big Picture

However at Vision Finance we focus on the Big Picture, so for the moment lets not look at the cash flows, cash balances, and revenues.  Its still early to predict how the world will look in 20 years, as only 10 years ago Google we all used Yahoo, and Mark Zuckenberg was only six years older than my son is now, and I myself worked as an intern at CSFB, meeting Frank Quatronne in the canteen and discussing how high the valuations will get, and yet - who predicted the phenomenon of Facebook and Google?  Not many of us for sure.

Nonetheless with the emergence of Facebook, and 10 further years of internet experience, it is now becoming increasingly clear to identify what all these firms are actually fighting for.  It is my believe, that what we are indeed observing, is simply the battle for "the internet world domination"  - (sounds very scary).  These companies (and others too - though Apple et al with their gadgets and consumer products do not really in my view stand the chance  - where is Nokia?) are all fighting to be your home page, your igoogle, your face, your window to the world.  They all want to make you dependent on their websites, on your messages, contacts with your friends, phonecalls, groceries, chat lines and girlfriends, etc.  The technology is there to truly revolutionize our lives (voice control, full integration, virtual servers, distance learning, etc) so yes the industry is certainly right.  In summary, these companies are fighting to control you, and more importantly to control how you spend your average disposable income, of lets say USD20,000 per year.  To add to the complexity of the issue, it is now increasingly clear that there can be only one winner in this battle, as only one firm will achieve big enough united mass, making the other ones at best isolated and with time redundant niche players.  Look at facebook!   The growth rate that it experienced recently is astonishing.  The destruction of other local social networks is also astonishing.  It now seems that if you are not on Facebook you do not exist at all!  Its not about a geek world anymore, but its totally mainstream.

Market Values

So now that we identified what these companies are fighting for,  lets attempt to estimate how much this market is actually worth.  To do this we have two elementary assumptions:

  1) world GDP today is some  60 trillion USD (source wikipedia :) ), and using the rule of the thumb of 80 / 20,  I will guestimate that these companies are fighting to control some 50 trillion usd of it (doubt that North Korea will open anytime soon).


  b)   using US as a proxy, it has USD15trillion economy and  USD150bn advertising market (of which today only USD22bn is internet based).  We can hence calculate that advertising revenues to represent some 1% of the GDP- totally respectable if you ask me.

Extrapolating (a) and (b) to the world, we can roughly estimate that whoever wins the battle to dominate the internet, can make the revenues of upto USD500bn a year (say net USD250bn), and with PE multiples of stable and mature 5, they would be worth USD 1.25trillion.

Of course I do not include growth forecasts, changes in consumer behaviour, and admitingly I ignore the fact that today, internet advertising is only 1/7th of total advertising space (as I believe that with growing internet; tv, radio, press - we will see that internet will actually control vast majority of advertising space).

So in summary, combining the market cap of MS / Google and FB - say USD400bn, is actually fairly cheap, though we still do not know who will win the race, and if there are no other horses who are yet to enter  (i have strong believe in at least one: "ladies and gentlemen please welcome the big brother, the government").

A quick big picture analysis of each player

Microsoft:  clearly a company which unless it manages to turn things around, and do iso quickly, it will in 10 years share the fate of VHS video tapes.  Yes, there might be some need for Windows and operating software overall (doubtful), but sure as hell they will lose the revenues from its main source, ms office, and unless they do something, they will slowly watch the google apps, or similar solutions, takes this market share over from them.

Google:  the more I use it, the more I love it, though objectively they are not doing anything particularly amazing,  something that to me does not compare in novelty power of Microsoft Office back in the 1990s, but through hard smart work, piece by piece, Google is making something integrated,  simple and overall a solution that works very well in 2010.  Anyone who has used Google Docs, Sites, Apps will tell you that it works very well. Add to this gmail, calendar, google talk, goolge voice, translator, sites, picassa of course, and all the other solutions that are still in the labs, and you will see why so many people are betting on Google to win this road to "internet world domination".

Facebook:  with 500million users, more hits then even might Google, and an almost unmeasurable power of its social networking monopoly power (ie people only needs and want one social networking site - but one with all their friends), Facebook to me represents a major major threat to Google.  True, Facebook today does not offer any of the services that it should (email, docs, apps, mobile, sites, etc), and frankly, it neither has the time nor the money to actually develop these services, yet it has this army of 500 million people who use it everyday to manage their friends, their networks, their events, and I think that if right now Facebook was in position to offer the same products as Google does - no doubt it would be able to obtain not only 170m accounts as with gmail, but with all 500m, if not 1bn users.  The power of social networking platform is so great, as it totally disarms the other social networks, search engines, docs, making it the ideal platform to dominate the world.

Other threats:  of course new entrants at this stage are still possible, but in my view one stands out above all others, one although today it is weak and almost asleep in terms of internet, one day soon it will wake up and will make an attempt to take internet over.  This player is the government, who with the ability to control the law, your taxes, your travel docs, passports and school applications, and almost every area of your life, these guys are totally supremely well positioned to offer its citizens everything that google, facebook and microsoft does, and to legally force them to use it.  Yes its the concept of controlled society, chips under the skin, eye scanners and invisible barcodes on our necks - but who dares to disagree that this is not the future?

So where is the game plan for the companies?

Microsoft...  buy out Facebook and using it, develop your own online apps.  Yes, you will destroy your current cashflow, yet frankly speaking the change that is happening is unavoidable, and this cash flow will go away anyway, and your valuation will show this.   A merger with Facebook will offer you what you badly need, and what I recognize to be a single most important element in the attempt to have this "internet world domination".  Furthermore, in some way they need you too (read below).  If you do not want to merge... apply the strategy that I am proposing to Google... though this could mean blood both to both you and google.  Its a classic prisoner's dilema.

Facebook.... yes, you can do it alone... or you can sell out to Microsoft, or you can sell out to Google (though Google will feel that they are stronger and will not pay as much as Microsoft).  Your main competitor today is of course Google, and frankly speaking, if I were you I would rather merge forces with Microsoft and have a chance of winning the quest, than not merge and hope for google to make a mistake so that you can have the needed time to develop your platform to compete (you are simply out of time).  You also have a chance, that by going alone you will force Microsoft and Google into some form of war, which might destroy them financially, but who said that this will make you a winner?  Furthermore if you do want to do it alone, you need to have these apps, emails, docs, sites, available very very soon.

Google... clearly in terms of product you are the best positioned site, already producing cashflow, understanding the model, the pricing, yet without the successful social networking site, a model that is at major risk from Facebook.  First of all how many people out there know what google apps are? :)  Google needs to spend more time, and more money to establish its own social networking site, and it needs to do this via one of two methods:

Route A:  buy Facebook

Route B:  organic

   - establishing a product that at least today could be seen as more superior to that of Facebook, offering voice services, email, document sharing, etc (though Facebook will catch up with time) what frankly you are alrady well positioned to do

   - pay people money for being popular! for having friends, for being active members of the e-society.

In my view, Google should allocate some USD50bn - USD100bn of its cash, debt and equity, to literally pay people to use its social networking site.  Assuming 250m users, this is 400usd per person  (most will get 20 usd, some will get 10,000 usd), not much - but some of it will be reclaimed back via advertising (perhaps USD15bn per year).  In some ways, Google can also make people understand that free docs, free mail, free picassa, also has value.  It is a better service no doubt... so all you need is 250m active users... and you are there.


The battle to become a USD 1.25 trillion company of the future continues, and although it is likely that the winner will be government probed, investigated, or simply outlawed (how hard would this be), the participants should not worry about this at this stage, and if anything they should prepare for this by closely working with the governments, establishing services of national importance, and by paying local national taxes where they are due - as no doubt the French will not like it if their coffins are not filled in with some portion of these USD500 bn that one day we expect this supercompany to be making year after year.

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