The Facebook Stat No One Is Considering

There are two things that are important in any Internet business: the number of users (NOU) and the revenue per user (RPU).

We are obsessed with NOU and NOU growth rates, and fundamentally uninterested in RPU. We do talk about CPMs as a kind of proxy for RPU but it is not. CPM is interesting, but it does not factor in how many actual ads it may be possible to sell. So if your CPM is $1000, but you can only sell one add a month and that advertiser only wants 1000 impressions that is only $1000 per month. If you had one million users that would not be an impressive RPU.

The other thing that is interesting about RPU is that it covers businesses that actually charge customers money as opposed to just businesses that sell ads. So I would suggest that RPU is the more interesting number, because it is likely easier to scale NOU than RPU. This is certainly historically true.

In any case, people always assume that lots of users means lots of revenue -- or lots of potential revenue. The most fascinating example of this is Facebook. Recently Henry Blodget has been suggesting that it might not be silly for Microsoft to buy Facebook for 15 - 20 billion dollars. Others have recently been suggesting that this is in fact Microsoft's plan.

I think the idea is ridiculous. Why?

Because as of today, we have no idea whether Facebook can get to any kind of a sustainable reasonable RPU. It is just assumed, and I think it is a *horrible* assumption.

The fact is in the last 10 years we have proven that it is relatively easy to get to a high NOU and *exceedingly* difficult to get to a really good RPU. Facebook has not proved that they have the magic to do it -- smart as Zuckerberg may be. I am not saying that they can't, but betting 20 billion dollars on the assumption that they can seems incredibly foolish. May I remind everybody that even for Microsoft, 20 billion is *a lot* of money!

The primary problem with Facebook is it is primarily a communications platform. And communications platforms are notorious for quickly scaling to high NOU while generating incredibly low RPUs. People don't want to pay for Internet communications, and they don't want ads in their communications streams. Even when they accept them, they tend to not pay attention and they have little ability to capture and leverage momentary intent in the way that search does.

I suspect strongly that the fundamental RPU of the social network model may be very very low, because the social network relationships that we are capturing are not economically valuable to us as users. This may be very different for LinkedIn -- particularly for recruiters and job seekers. But overall, I do not see anything that Facebook is doing that is likely to be really financially valuable to anybody. To assume they can just somehow get to a 20 billion dollar justifying RPU is unreasonable.

And so I suggest, whether its Facebook in specific, or Internet businesses in general, that we need to start looking seriously at the RPUs for businesses we talk about. High NOUs does not equal high RPUs. And one without the other just doesn't amount to much.