$2 Billion for Facebook?

This week's BusinessWeek report that Facebook, the online networking site, could fetch up to $2 billion in a sale doesn't seem to have raised enough eyebrows--and that has me worried. The proposed sale to a media giant like Viacom seems to me to be yet another example of "Old Economy" types paying outrageous sums for "New Economy" technology and companies they don't really understand.

Yes, Facebook is enormously popular. In little over two years, www.facebook.com has become the 7th most visited site on the Internet. For those not in the know, Facebook is an online directory and networking site for college students (the site also recently expanded to high schools). There isn't a college student in America who hasn't heard of Facebook, and virtually all off them are users of the site. Facebook has transcended noun status to become a verb as well. On campuses, to "Facebook" someone is easily as common as the verb "Google" is in popular culture.

But for those of you above the age of 30 and not in the know, Facebook allows users at each school to post profiles and link to friends, classmates, and people with shared interests. My profile, for example (see right), has a picture of me along with details like my major (finance), contact info, clubs and jobs, and favorite music ("hip hop, classic rock"), books, movies, etc.

All this makes the company sound like a worthwhile investment. Rupert Murdoch certainly thought so. Last year, his News Corp. paid $580 million for MySpace, an online journal site which has been in the news lately because some people on the Internet--gasp!--publish lewd content or misrepresent themselves or prey on underage children. None of this has hurt MySpace, and Murdoch has been lauded for his forward-thinking. (Reuters CEO Tom Gloceg called the acquisition a "turning point", adding "Sites like MySpace are rebuilding our world.")

Yet I've heard no one propose any avenues for Facebook's continued growth over the years. Right now, its revenue comes from the advertisements on the site. I think, however, that advertisers will find that most high schoolers (and middle- and elementary- schoolers if Facebook goes down that route of Kids Without Credit Cards) aren't exactly the type to buy products online. Currently the site gets a lot of page views from its college students, but now that its presence is established, growth will level off.

All things considered, I just don't like the idea of a company which makes its money exclusively through advertisements. Google may seem to defy this notion, but at least that company has tremendous room for expansion. Even then, I thought Google CFO George Reyes delivered a long overdue announcement last month when he announced "Our growth rates are slowing... We are going to have to find new ways to monetize the business." Shareholders didn't like to hear that news, but I'm glad management is confronting a future challenge.

I've told college friends in the past that Facebook, were the company to ever go public, would be the perfect IPO to get in on and ride for the short term. When even people like David Brooks give inches in their newspaper column trying to understand this online fad (he declared Facebook "rollicking but respectable"), you know the company has drawn a lot of attention. But "fad" is a good keyword here. I can't identify a sound fundamental reason why it'd be a good idea to pay an outrageous sum of money to own this company. Facebook, for its command of the young demographic alone, is worth something, but my figure would be a fraction of that $2 billion. Sumner Redstone, consider this your warning!