An article in the UK Guardian raised a question that has been bugging me for awhile: just what exactly is Facebook’s value? I’m talking about real, tangible value, not the qualitative value that many get from connecting with friends, family, and others. Here’s the question the Guardian raised: “On Thursday, (there was) a surge in the valuation of Facebook, which climbed to more than $192bn in the wake of good first-quarter earnings… the social network is now worth more, at least on paper, than Toyota ($189bn), AT&T ($184bn), Coca-Cola ($180bn), Disney ($150bn) and even Bank of America ($164bn). How could that have happened? “

The article goes on to say that Facebook is worth approximately 128 times earnings, and that the reason behind that valuation is its reach — to 1.3 billion mobile users. So, just to put that in perspective, that’s 18% of the total population of the World. If that comparison doesn’t make the point, here are some others: Facebook has more mobile users than there are Roman Catholics in the World, 4X the population of the United States, 20X the population of the UK, and slightly more than all of the people in Africa.

Here’s where I get tangled up. The stock market’s assumption is that Facebook will be able to successfully advertise to all of those people, and that some large portion of them will respond by buying advertisers’ products and services. And to me at least, that defies both logic and experience.

Feeding the Consumption Economy, or Destroying It?

Back in August 2011, RSR partner Paula Rosenblum wrote a screed about the Groupon IPO called “Tiny Bubbles In The Air “. In the article, Paula said, “What we used to call the Industrialized World has actually turned into the Consumption World… Can’t we make anything in our once industrialized world?… And why do we care? Simply this: if people can’t buy what we (retailers) sell, we’re all in trouble. “

But that’s exactly what could happen. If we’ve in fact moved from a production based economy to a consumption based economy, mature economies like the U.S. and EU could be working themselves into a place where they can no longer do either, says media guru John Papola (who like Paula is a Forbes’ contributor, and CEO of Emergent Order, a creative media company). He put it this way: “There is a fundamental illogic to the notion that an economy can be grown by encouraging consumption. When a person consumes, by definition, they use things up. The very process leaves us with less than before. Growing the availability of valuable goods and services for society by using them up is not just an impossibility — it’s an absurdity. Consumption is the goal, but it is production that is the means. ” (Forbes.com, 1/30/2013).

Facebook, Digital Pokes, and Retail

Facebook has a lot of stockholders’ money to work with, without question. The general sentiment is that the Silicon Valley giant is maintaining a long view, and resisting falling into the trap of investing for short-term gain, as so many companies have done. A look at what they perceive as the long view shows that it’s all about the digital space — the company (so far at least) hasn’t put any money into the manufacture of things, instead showing a determination to “own ” the ability to target digital messages to consumers. But just how far can that go? At what point to people say, “too much! “?

Just because something can be done with technology doesn’t mean it needs to be done. I’m reminded of a story (I have to anonymize the details to protect the guilty) from the halcyon days of the late ‘90’s when companies were first discovering the power of technology to address individual consumers’ needs. One U.S. apparel company decided that they had discovered a way to make the perfect woman’s garment. The solution utilized a body scanner that took over 100 measurements in order to produce just the right product. The apparel company thought that they would be able to sell the resulting perfect fit garment at a huge markup. But the experiment was a perfect failure. Why? The company discovered that there were only less than 10 important measurements that needed to be considered to make a garment that was “perfect enough ” for its customers. The technology and the information it produced weren’t important enough to warrant the cost for anyone involved.

When it comes to consumer mobile techs, digital advertisers are treading on dangerous ground. Mobile devices aren’t so much a way for businesses to extend their reach to consumers as a tool for consumers to extend themselves. That’s not a subtle difference. And, consumers have repeatedly demonstrated that when it if comes to social media, mobile or otherwise, they want to talk to each other, not to be digitally poked and prodded by corporate entities. A 2013 Pew Research study of U.S. Facebook users revealed that the top reasons for using Facebook were

1. Staying in touch with current friends, 67%;
   
2. Staying in touch with family members, 64%; and
   
3. Connecting with old friends that you’ve lost touch with, 50%. Only 14% want to “connect with others with shared hobbies or interests. ”
   

So how do retailers feel about it? Given that Retail is never an industry that leads when it comes to technology adoption, it’s still instructive to see who retailers feel about social media’s impact on their businesses — because after all, the way consumers consume is by buying stuff from people who sell stuff. So here’s what we’re finding in a recent study we’re conducting on the state of omni-channel (to be published August 2014):

• Twenty-nine percent of retailers consider integration to social media like Facebook, Pinterest, etc. to be “very valuable “, while 42% feel there is “some value ” (in other words, retailers are hedging their bets);
• Forty-nine percent of retailers say that have some level of integration with social media in place now. But 19% say they have no plans to do so.
• Thirty four percent of retailers indicate that they have no plans to “sell ” via social media. The inference is that their interest in social media is purely for its ability to influence sales in other channels.

So what is Facebook worth, 128X earnings? We don’t ever give investment advice. But while reading the Guardian article, I remembered the words of the decidedly old-school co-founder of Longs Drugstores (where I worked for 20 years), Thomas Long, back in the 1980’s. He was admonishing the CFO when the company stock was getting close to 7X earnings (I paraphrase): “it’s too high — we shouldn’t let it get higher than 5X “.

That little bit of folksy wisdom remains “about right ” for companies today, except those that ride the current digital bubble. But sooner or later all bubbles burst. That’s my long view.