I don’t know what “econophysicists” are, but according to Technology Review, they think Facebook is vastly overvalued. The argument seems to be a pretty good one:  user growth is already slowing as it approaches its the natural limit – the number of people worldwide with access to the internet. They think that within five years the extreme maximum number of users will be 1.8 billion. Then the key metric for valuing the company is working out how much profit it can make per user. Apparently over the past five years this has been about $1 a year – although it’s actually falling. Some further calculations (which are obscured in the write-up) suggest that the maximum valuation for Facebook should be $33bn – way below the $65-100bn widely estimated (and endorsed by the likes of Goldman Sachs, which valued Facebook at about $50bn when it invested in January).

Of course, as the article notes, much depends on how much Facebook can exploit its users to get cash out of them. What amazes me is this low figure of $1 profit, because when I was curious about how internet companies made their money a while back, I did a search on Quora and found this: a discussion on how much Google would have to charge users for an ad-free web search service. The key facts (or possibly opinions) were a) that Google’s revenues are $80-100 per user per year, and b) that Google will never offer a paid service because the rate at which it can increase its ad revenue per user is greater than the rate at which people would be prepared to increase their subscription fees. So in relation to Facebook, a) I’m sure Google’s profit on that $80-100 revenue is higher than $1, which makes me doubt this $1 per user thing on Facebook, and b) I would be very surprised if Facebook is not able to increase its revenue per user in a similar way.

Anyway! Internet companies. I like their free services, but I am suspicious of their advertising-based business models. A company that relies for revenues on other companies’ need to sell their stuff is just… kind of weak?

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