Facebook App Acquired for US$3m…… …… …… …… …… ….. NOT!!!

Just last week, InsideFacebook reported that the Facebook App, TripAdvisor was sold for US$3m. Apparently that was just a rumor. Brian Payea from TripAdvisor then left a comment at the post saying that, “This is untrue. Beyond that, we do not have any comment.”

Oh well, looks like the long anticipated “mega” Facebook Acquisition has yet to occur. But this incident has indeed thrown up some speculation of what kind of valuations are reasonable for Facebook Apps. I thought I could share some of my thoughts with you:

Based on the supposed $3m valuation of “Where I’ve Been”, the value per user would have been $1.30. If you read the post on InsideFacebook, Lee Lorenzen added a comment saying,

$1.30 per user is right in line with my post about Facebook apps being worth between $1.00 and $10.00 per user. As Naval pointed out at the App Dev Con, one type of liquidity event is when a Web 1.0 company realizes they need to jump into Facebook and either can’t waste time trying to build a #1 app in their category or can layer on a monetization strategy to an engaged set of users and make the acquisition almost instantly accretive.

The bottom line is app developers should be renting out their ad real estate to make enough money to have a nice lifestyle business and hold on for the bigger paydays to come.

Looks like the value proposition for the purchase of FaceBook apps would be:

• Lead Generation
• Increasing User Base

The potential acquirers of Facebook Apps would likely be 1.0 companies with established business models and the cash to spend.

In general, this is essentially an arbitrage strategy. Since most top performing websites can command valuations upwards of $15/user at least, this leaves some room for the buyer to convert only a portion of the ‘users’ in a newly purchased Facebook App.

At this moment, I’m still doubtful if apps should really be commanding such high valutions even. $1 may seem low vis-a-vis the purchase of an investment in another application, yet it can also be a significant purchase due to a few other factors:

• FaceBook Apps are Faddish. Like it or not, people install it because they see their friends adopting it. It will come a point when people uninstall them and the uninstallation could be viral too! (Like all my friends who berate the number of applications that I have on my profile)
• Most FaceBook Apps do not have a high engagement factor. Most FB apps simply get stuck on a profile and people forget about them. Only a couple of them are really useful and are worth “maintaining” or are fun enough to use on a consistent basis i.e. “texas hold’em poker”.
• Buyers of Facebook Apps still need to convert users. Buying an app may mean being able to add the users to your balance sheet but it doesnt add real ‘engaged’ users to it immediately. Users will take time to understand the new parent brand and substantive effort needs to be deployed to ‘convert’ users. Hence real costs may easily exceed that $1.30 you pay per user. (Factor for user drop out, add additional conversion costs).

On the other hand, acquring a FaceBook app early (within the next few months) does have a few advantages:

• Media/Blogger Attention: The public’s attention is now on Facebook Apps and every acquisition in the next coming months would be accompanied by loads of free PR.
• Valuations are in its exploratory stage: As it is still considered early days for the FB Apps market, nobody really knows the range of pricing. Buyers maybe be able to get it cheaper. i.e. Newscorp buying Myspace early and AOL buying Weblogs Inc early.
• Companies like TripAdvisor can immediately plug into a social network. Social networks are one of the hardest things to build on the web. Especially good quality ones. Facebook has essentially captured the market and will be a gorilla, it’s pointless trying to revinvent another social network for your own niche. Just buy into an app like “Where I’ve Been” and save the trouble of building one. In fact if this strategy is adopted, it makes real sense as the cost of acquiring a social network user is way way way higher than $1.30 per user.
• Companies with good CPA business models already on the web should consider purchasing complementary apps. TripAdvisor generates leads for travel companies and the revenue generated from leads should easily pay for the acqusition. The information that people store into apps like “Where I’ve Been” may seem inconsequential but is really useful. Essentially TripAdvisor can ask this question to every user: Where he/she has been and where he/she would like to go?” Wouldn’t that help it sell more trips through better targeted ads?

I’ve been tracking developments in this space for some time now ever since API was launched last year. But haven’t really had time to put my thoughts down in writing but since I had some time this evening, thought I would share it with all of you. Let me know what you think ok? Have a great week ahead :)