Arbitraging Twitter vs Facebook

   The Faceoff between the Interest Graph and the Social Graph

In February of 2009 I mentioned to Fred Wilson ( that I wished it were possible to arbitrage the stock of private companies, specifically Twitter and Facebook. At the time Twitter was valued at $250 million and Facebook at $10 billion. The trade would have been; long 40 units of Twitter and short 1 unit of Facebook (40/1) to make it $10 billion against $10 billion (or fractions thereof). The most current valuations are $80 Billion for Facebook and $10 Billion for Twitter, or 8/1. So far the hypothetical trade has been hugely profitable. But the trade isn't completely played out yet, not by a long shot. Here's why:

IMO Twitter will eventually eclipse Facebook in terms of market capitalization. It's not a matter of if, but when - and the reasons are pretty straightforward. The Social Graph is far less monetizable than the Interest Graph, and symmetrical relationships don't represent the complexity or richness of real life like asymmetrical relationships do. This isn't good news for Facebook, because Facebook = Social / Symmetrical, and Twitter = Interest / Asymmetrical.

Don't get me wrong; I think Facebook will continue to be a very large and important player. But its revenue generating potential will ultimately be constrained by the nature of the relationships it was built to facilitate. As Judy Shapiro wrote in December of 2010; "Commerce happens in communities of interest - not social networks." Because of this and other factors, I fully expect that Facebook's "One Identity", increasingly AOL circa 1998 platform will eventually cede its leadership position to Twitter, both in users and revenues.

Update December 13th 2012: Facebook has a current market cap of ~ $68 billion, Twitter $12 billion. Expect the valuations to continue to converge in earnest throughh 2013.

Update November 4th 2013: Twitter is about to go pubic on November 7 and its valuation is expected to be in the $15 - $20 billion range while Facebook's current valuation is approximately $118 billion. That means the ratio between the two has narrowed only marginally in 2+ years, which I attribute to the fact that Twitter is still struggling to create more utility for its users, especially new users. Onboarding for new users is still a complete mess and deep media integration created to increase advertising revenue will take the platform only so far. Twitter still has a chance to become the most used and most valuable social network ever created, but unless and until they start concentrating on becoming a true information utility (rather than a media/advertising company) they will drastically limit their potential and unnecessarily leave themselves open to competitors and disruption.

The Probability of Facebook Acquiring Twitter is Exactly 0.0%

The WSJ ran a piece yesterday entitled 'Twitter as Tech Bubble Barometer' in which they reported executives at both Google and Facebook have had "low level talks" with executives at Twitter about a potential acquisition of Twitter. In the very next sentence they state that "the talks have so far gone nowhere". Ok let me get this straight: Low level talks that went nowhere - wow, that's quite a scoop! Their fascination though was on the rumored $8 - $10 billion dollar valuation of Twitter and on whether Twitter would be more likely to end up with Facebook or Google. Well let me answer that question, at least partially: 

The probability of Facebook acquiring Twitter is exactly 0.0%.

The only thing that Facebook and Twitter really have in common is the status update. However, the respective environments in which these updates are created, exchanged, and acted upon are radically different. Twitter is a public space and Facebook is a private (or semi-private) space. It's almost incomprehensible to imagine how a combined entity would resolve these two spaces in to anything that would provide any real value to its users. In short, a Twitter/Facebook combination would be a functional / experiential train wreck.

An acquisition by Google on the other hand is an entirely different matter. Twitter's orientation around the "Interest Graph" makes it ultimately much more monetizable over time than does Facebook's Social Graph, and it dovetails quite nicely with Google's subject-matter / intent-based value proposition. Twitter and Google are in this sense highly complimentary. No such synergistic relationships exist between Twitter and Facebook.

If Twitter ever figures out that its primary value proposition is in its broadcast / notification capabilities and starts to re-orient its product around the channel metaphor as outlined by Joshua Kerievsky at Industrial Logic, they (Twitter) have the opportunity to ultimately become substantially more valuable than Facebook. Unfortunately the Twitter product has essentially drifted sideways for the last two years. Until they get someone on board who has a strong vision toward driving the product (and revenue) beyond the "Promoted" suite of ad products, they risk falling disappointingly short of realizing their full potential value.

For the time being I don't see Twitter entertaining any acquisition overtures. They have $300 million in the bank which gives them plenty of runway to figure some things out. If they can re-orient the product in the next year like I hope they will, they'll have no problem getting to an IPO. And remember, neither Twitter's current nor former CEO are especially fond of Google - both had their companies acquired by Google (Evan Williams with Blogger / Dick Costolo with Feedburner) only to watch Google essentially bleed them to death.

The only way that Twitter sells to anyone is if Dick can't get the revenue machine cranking on all cylinders within the next 12 - 24 months. If he can't, I think the board takes it out of his hand and takes an offer from Google at between $15 - $25 Billion dollars. My bet (and hope) however is that Twitter eventually finds its groove and goes it alone. 

UPDATE: Felix Salmon from Reuters wrote an excellent piece today entitled "Understanding Twitter's Valuation". I highly recommend it, especially if you've wondered how a rational person could value a company with relatively meager revenues of less than $50M at an enterprise valuation of $10 Billion dollars.

The Inevitability of Facebook, and other Fairy Tales

I don't believe in the "inevitability" of Facebook or Jack in the BeanStalk, although they're both great stories. To me Facebook is simply AOL circa 1998 dressed up in new Web 2.0 clothes. Don't get me wrong, I do think they'll end up being a very profitable company - just not as profitable and all-encompassing as many believe. Here's why....

What's happening now is the money-making limitations of being a Social Graph hub are being exposed, and Facebook has been forced to bastardize it's privacy policy and perform emergency business model surgery because of it. The hockey stick expectations of Facebook's future revenues need to be adjusted to reflect these limitations. In fact, if it were possible to arb Twitter against Facebook (Long Twitter at $1.5B and Short Facebook at $15B) I would do it immediately. Long 10 units of Twitter against short 1 unit of Facebook at current valuations to make $15B against $15B. It's the ultimate bet that the Interest Graph oriented platform monetizes better than the Social Graph oriented platform over the long term - and that Twitter's management is superior to that of Facebook's.

And therein lies the irony of Personal Graph monetization (I'm defining the Personal Graph as the combination of one's Social and Interest Graphs): People wont pay to communicate with people they already know, but they will pay (in one form or another) to connect and interact with people and content they're interested in but not currently unaware of, or are hard to find. You see, Facebook's decision to initially orient around a user's social graph is what will ultimately constrain it's ability to monetize at scale. At a certain point your symmetric "friends and family" Social Graph constrains your expression and exploration in a way that asymmetric, distributed Interest Graphs do not.

With that as a backdrop I wanted to pass along Loren Feldman's post on his decision to quit Facebook. I know a lot of people feel like Loren does - that Facebook is redundant and/or of little use outside of  keeping in touch with friends and relatives. BTW, there's nothing wrong with keeping in touch. It just doesn't make Facebook the $100 billion dollar company that many predict it will inevitably be.

Anyway, I'll have much more to say on this going forward. For now, here's Loren's post:

1938 Media / Report #17

I Quit Facebook

So I quit Facebook. I did it for a few reasons. None of them particularly "heavy".  I spoke about them on my site. I'll explain a little more here.

I never used it. I really never did. It was just too much. I have time to spit out bullshit to twitter in between other shit. It's easier.

It was impossible to figure out how to use whenever I did try and use it. Simply the worst interface ever. All the different fucking settings and walls and pages and profiles. Is it all cross posting? What's the difference with all this shit anyway? It was impossible to figure out.

I don't trust them. It's well documented how umm maybe less than honorable with people's data and privacy Mark Zuckerberg really is. Do a quick search on the matter if you are unfamiliar. His sister Randi is Julia Allison's best friend, need I say more?

It's not going to hurt my business one bit. It's not. I'm bigger than Facebook. I don't mean that arrogantly I'm just saying that I think my brand is established and I have a really cool site that I control. It's where my AUDIENCE and COMMUNITY is. I am Loren Feldman of I am not
So that's basically it. No big deal really. What is a big deal though is this newsletter. I've been enjoying writing lately and I'm going to do more of it here. 
As always thanks for the support.
Best Regards,