If you think the recent valuation of technology companies is crazy, just remember what you're valuing: completely new ways for the world to be. These values are significant because they aren't valuations of the companies themselves, but big bets on the radical transformations they’ll potentially bring to the world.
The game-changing ability of technology to render established industries obsolete, to broker new business models, and to usher in a new era of useful services seems unstoppable: What Skype did to international long distance calling. What Netflix did to Blockbuster. What iTunes did to CDs. And what Spotify might do to both iTunes and radio.
It’s an exciting time, where from Silicon Valley to Stockholm anything feels possible, and often comes free. But is it good business? And how do we put a value on these newly created categories? Share price is one way. It provides an easy index for media and investors to grapple with these new giants. But it’s also incredibly limiting. Is Facebook worth US$104 billion? Is Apple worth US$500+ billion?
that it will, and possibly sooner than you think."
that it will, and possibly sooner than you think."
It’s easy to get obsessed with what’s “new,” especially new money. A 28-year-old twenty-time billionaire? It’s the investor’s dream. And they want a piece of that new wealth too.
Perhaps justifiably though, in Facebook’s case, it’s not the investors who’ve gotten rich quick, but the young Facebook staff, who at an average age of 27, have built the company and sold their stock. For now, the share-price-surfers who bought at IPO, with no connection to the product, are the ones down on their investment.
The world’s obsession with Facebook’s fluctuating share price is largely disconnected from the company’s true value, which lies in its ability to create usefulness for its users. As brand and business strategists assess the value of great and often new technology companies, we need to lead with a new criteria for valuation. A game-changing criteria. The businesses of the future are built with a different DNA from those that went (and expired) before them.
In valuing technology companies, the lead criteria I’d argue for is usefulness. That is, how well can they understand and increase the role they play in customers’ lives? This school of thought is completely different from the current discourse on technology. Is it a bubble? Get rich quick or bust. Usefulness is a different paradigm. It creates value and that value produces results in the long term: financial gains, intellectual property and talent.
So the real measure of Facebook’s value is user activity—a measure that might elude the average investor, who buys quickly to sell at a higher price. And it’s not just about the number of users, but rather, what they do: daily active users; time on site; and the number and breadth of their interactions. For enlightened investors these will be the real predictors of lasting value. Every moment on Facebook creates rich data. And that’s not only useful to Facebook, but also to a whole new generation of data-aware businesses that will continue to find intelligent ways to optimise and monetise their relationships with users.
Facebook shares have fallen further recently, with Morgan Stanley downgrading its forecasts because “daily active mobile users is increasing faster than the number of ads they can deliver.” This is a short-term problem. Ads are only one way to generate revenue. The bigger story is that Facebook is improving its usefulness in mobile, something that positions the company very well for the future.
Apple’s situation is similar: Share price seems to overshadow its game-changing utility. Apple’s success has made it so large, 12% of the Nasdaq, that the company’s share price now fluctuates due to forces completely outside of Apple’s control. While commentators obsess about the size of Apple’s cash reserves, comparing them to whole national economies, the company’s true value lies in the ecosystem of connected products it’s created.
With iTunes and then iOS, Apple built an ecosystem of usefulness that took them from niche to mass, driving the uses that make it the preferred way people engage with content and digital services. Yet despite their clear leadership in hardware, it's harder to forecast Apple's future as the tech world shifts from a product to service focus. Will customers continue to download music to their iPhone or will they increasingly stream it from Spotify? Will they continue to buy bespoke iPhone apps where Apple takes a cut, or, simply bookmark a new generation of HTML 5 web-apps where all revenue goes to the publisher?
It’s become increasingly important for technology companies to understand and expand the role they play in customers’ lives.
Traditional marketing and legal teams would advise against a brand name becoming part of the common vernacular. Kleenex, Hoover or Rollerblades did the job of creating brand awareness, but in a retail environment customers would often defer to an alternative, predominately based on price. But in an online environment, where search and social recommendations are the primary modes of customer acquisition, being synonymous with a use is a transformational advantage.
Online, competing products don’t appear side by side on a shelf, but buried far down search listings or lost in the news feed. In a landscape where many services are free to the user, long-term success is based on user retention and engagement. Users, not customers, reward those businesses that help them to do things better and do them more often.
It is this utility that will enable technology businesses to show their investors the money too. The good news for investors is that technology doesn't move at a linear rate; it moves exponentially. Facebook isn't making it rain yet. But its big-data is an indicator that it will, and possibly sooner than you think. It took Apple 36 years to get where it is today. Google 14. Facebook 8. Tech companies are evolving quicker and steeper. Yes they're big bets, but they come with even bigger world-changing returns.
Useful is a different way to look at business. A view that feels particularly relevant for technology companies. And finally, a much more likely guide to future success than today’s share price.