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AT&T and T-Mobile Merger: Its Good For You!

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Written and Edited by Gregory Bartolomei
In recent news, AT&T Inc. (AT&T) announced that it planned to buy T-Mobile USA Inc. (T-Mobile) in a purchase that would amount to thirty-nine billion dollars in cash and stock swaps. AT&T is in the American communication services industry and is currently one of four firms [the other three being Verizon Communications Inc., T-Mobile, and the Sprint-Nextel Corporation] that offers national coverage to American consumers. The merger would be the largest in the industry and one of the largest mergers in recent business. The move would increase AT&T’s network density and signal strength with the infrastructure gained from the merger. The increase to the infrastructure, which would happen over five years, would be significantly faster than if AT&T was to build the infrastructure independently. Also, AT&T would gain all of T-Mobile’s customers putting their market share to almost 1/3 more then its largest competitor Verizon. Sprint-Nextel will come far behind in third.Upon the announcement for this purchase, American government regulators -namely the Federal Communications Commission (FCC)- contested the legality of the purchase. The FCC is concerned that the purchase will result in a duopoly in the industry and that this duopoly will result in a price war hurting consumers. Based on a similar case the FCC looked at in 2007, the merger of Sirius Satellite Radio Inc. and XM Satellite Radio Holdings Inc, (which changed a market from a duopoly to a monopoly) it can be expected that the FCC will allow the merger of AT&T and T-Mobile. Also, because AT&T and T-Mobile made their deal public, risking market reactions in both firms’ stock prices which could potentially change the value of the deal, the firms are clearly confident that the merger will be executed. Also, in the American State of the Union Address February 11th, 2011, President Obama called for a National Wireless Initiative that would bring wireless technology to 98% of Americans. He also stated that a national wireless network would promote student learning, business growth, and security across America. Given the prior ruling of the FCC, the public announcement of the deal, and President Obama’s initiative, AT&T should be allowed to execute the merger.

Regardless of the FCC’s decision on AT&T’s and T-Mobile’s merger, the move shows wisdom from AT&T’s management both tactically and strategically. Given the way the communications market has developed in recent years, any firm in communications should be interested in capturing as must infrastructure as possible. Doing so will prevent competition from having infrastructure, from allowing them to improve their current services, and from expanding their abilities to reach more consumers. However, the most important advantage AT&T can gain from this merger is due to the size of its network; the company will be a target for R&D firms trying to sell their new technology. As a target, these firms will be on the leading edge of developing the technology, which is an important position that would allow AT&T to capture any and all possible competitive advantages from future technologies.

AT&T was already able to capture a competitive advantage in leading edge technological development when Apple Inc. (a producer of consumer electronics with products such as Macs, iPhones, iPods, and recently the iPad) selected AT&T to be the sole carrier of its smartphone, the iPhone, when Apple first rolled out the product. This allowed AT&T to dominate the smartphone market (the iPhone was, and still is, the market leader) and grow the firm.

The concern of the FCC and many consumers in the market that AT&T will use monopoly pricing is justified. Wireless technology is not substitutable and it is clear AT&T will be the market leader. However, there are many local (city or regional) wireless providers that can compete with AT&T. For example, SafeLink Inc. in Miami, Florida competes for consumers. The presences of this firm and many others like it around America preclude AT&T from becoming a monopoly.

All things being equal, there seems to be a general trend in the market towards wireless communications. With the American government encouraging the development of wireless technology, AT&T poised to eliminate a competitor, and every consumer electronic product produced in recent years having connectivity to wireless, perhaps now is a good time to buy stock in AT&T or evaluate an index in communications services?

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**Due to technical difficulties we recently had to switch domains and transfer all of our website content.  Please keep in mind that while we have been publishing articles for two years, the published dates shown may not reflect the initial publish date.

Half On

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Written by Gregory Bartolomei
Edited by Daniel Kilkelly

In Pittsburgh, Pennsylvania less than two weeks ago a new business and its website was launched; the business, Half-On, runs the website www.halfonpgh.com. Half-On’s business is to offer college students in Pittsburgh discounted deals from local eateries. With the large number of daily discount firms entering the market this business plan appears to be a classic example of a leapfrog product trying to gain market share. While this is a typical if not heuristic business plan, this analysis will show that Half-On has been poorly executed and designed based upon the environment in which Half-On plans to operate. Half-On is attempting to leapfrog, and in doing so, trying to carve out a niche market for itself. However, it seems not to have analyzed its marketing, its competitors, the power of substitute products, or its consumer’s desires. This lack of analysis resulted in its poor design.Consider the website that Half-On is currently running. The concept of a web-based business is not a new concept to the average consumer; many consumers interact with them every day. However, web-based businesses have begun to recognize that their websites are the only element of their business that can be interacted with regularly. Thus, the website is an important part of their marketing; a first impression. Consumers that don’t like a website – just like consumers that don’t like a salesperson – will probably not make a transaction, or if they do make a transaction, they may not come back for future business.

A website should also be a uniquely identifying feature of a firm, after all it is part of the branding process. The landing page for Half-On is a clone of another popular daily discount firm Groupon (www.groupon.com). While it could be argued that cloning the website from Groupon is a way for Half-On to reduce the learning curve for consumers using its product, the cloned website is an element of poor design. If Half-On wants to develop a niche market in Pittsburgh then every aspect of the site should reflect that desire. The cloned site displays no attempt at individual product branding. As a matter of fact, some consumers may think they are on Groupon’s website and when they find out it is a cloned site, they may feel cheated and distrustful of the site, which is opposite of the goal.

Half-On has also failed to consider its competitors. The firm is now directly competing with every online business that offers discounts for food and beverage products local to Pittsburgh. They are additionally indirectly competing with all paper coupons and paper sales local to Pittsburgh. However, because Half-On’s measure of success is based on how many transactions it can provide for a firm (a quantifiable value), not the level of advertising they can bring, (a qualitative measure) Half-On is at a disadvantage. The disadvantage is that Half-On knows exactly how many people are using its services, while its competitor can provide estimates. This disconnect represents a divorce in the choice of a firm to engage in a set sale (such as Half-On), versus engaging in an estimated sale, which has upsides such as print advertising.

Additionally, the threat of substitute products is something that appears to have not been well considered. The value of a typical deal at Half-On is around ten to fifteen dollars at around a fifty percent discount. This brings the average cost to around seven dollars. There are at least three national brands in Pittsburgh that can beat a price of seven dollars for a meal: Subway, McDonald’s, and Quiznos. Then, there are a number of Pittsburgh local eateries that can beat a value of seven dollars on their regular menu. Because these firms can beat Half-On’s deal, with no extra work required by the consumer, a price and time sensitive consumer would desire these meals all things being equal.

The lack of design by Half-On is demonstrative of a lack of knowledge about the consumers’ desires. Half-On is partially right about what its consumers want. They know that students want better food for lower prices. However, it may be that they have not considered they have two groups of consumers – the first group being students, and the second being the firms that which they offer deals – and they have not fully evaluated what both of these groups want.

Students want better food for lower prices, but they want better food and lower prices to be given to them faster. Half-On requires students to wait until after the expiration of the deal online to be able to buy their food. If it is assumed that most college students do not plan their meals, then it can also be assumed that most meals are impulse purchases. Half-On is not time sensitive, and thus they turn away students who do not want to wait.

Half-On also does not appear to consider that the firms they don’t pick to offer deals with are just as important as the firms they do pick. Every firm they pick to do a deal with has its competitors. Half-On’s choice to do a deal with a particular firm makes Half-On a competitor with that firm’s competitors. Half-On must be mindful of this because by offering a deal, competitors could offer a deal just to undercut the business of the firm and in turn prevent Half-On from doing business.

In conclusion, Half-On will fail unless they find a way to do their business better. Half-On needs its own individualized website, a way to make their measure of success something more than just how many deals they can bring to the table, a way to undercut other low price food services, and a way to get the deals to students faster while trying not to cross compete with firms they are not doing direct deals with. Half-On is not a good business model because it was underdeveloped and rushed.

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**Due to technical difficulties we recently had to switch domains and transfer all of our website content.  Please keep in mind that while we have been publishing articles for two years, the published dates shown may not reflect the initial publish date.

Hey Domino’s, get the door! It’s us!

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Written and Edited by Daniel Kilkelly
Domino’s had a campaign recently that focused around the idea of taking pictures of your pizza, and sending it in to Domino’s. If you did, you could potentially win $500. This was known as the “Show Us Your Pizza” campaign.
This campaign might well have been referred to as a success. Many people did send in pictures of their pizzas. This allowed Domino’s to effectively gauge how well (or more likely, how poorly) they were doing in certain regions in meeting customer expectations. The desire was then to take the areas that seemed to have the most customer dissatisfaction, and work to recreate the image of their product by going into the Domino’s locations and making sure that a new quality control system was in place to ensure that better quality pizzas were being made.Domino’s went so far as to show one order that was particularly poor, and show a spokesman for the company getting the pizza and bringing it to the front door of a customer who had previously sent in the picture. They then opened up the new pizza box and showed what it looked like, and asked the person to eat the pizza and tell the company what they thought about it, to which the customer said that he thought it was considerably improved. The spokesman then told the camera that they had made the customer a customer for life by fixing their order and giving them free pizza for life (if you really want to say that $500 is tantamount to enough pizza to last a lifetime), and that the whole desire behind the campaign was to make sure that everyone got better pizza.

The whole commercial and campaign showed great organization and marketing ability. It displayed open desire for the company to meet customer’s needs and also described itself as wanting to commit to a relationship with its customers. This open and “honest” advertising certainly seemed to sit well with consumers and stock purchasers, because after a several month decline in stock price from May to July (low of $10.99 on June 28, 2010)-perhaps showing that something had gone wrong with their campaign at that time and further prompting the “Show Us Your Pizza Campaign”- we note that in August, when the campaign officially came online, stock began to see an increase.

Since August, we have seen the stock enter a bull market, growing consistently quarter after quarter with its most recent close on March 10th, 2011 showing the stock price to be valued at $17.50. What’s been interesting though is seeing the amount of insider activity that’s been occurring with large amounts of insider sales occurring after the $17 price mark. Predictions are that the stock will continue to rise to $18.67 but I wonder if that’s an accurate estimation.

If we say that the average change in stock price per week is calculated as:

Change of stock price

Number of Weeks
Then => ($17.50 – $11.00) / (255/7) = $6.50 / 36.43 wks = + $0.18/weekThen in order to reach the expected $18.67 it should take:

Pfv -Ppv / ($0.18/wk) = ($18.67 – $17.50) / ($0.18/wk) = $1.17 / ($0.18/wk) = 6.5 weeks.

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**Due to technical difficulties we recently had to switch domains and transfer all of our website content.  Please keep in mind that while we have been publishing articles for two years, the published dates shown may not reflect the initial publish date.

Dearest Groupon, What are you doing?

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Written and Edited by Daniel Kilkelly
Many people, or more accurately close to 111 million, tuned in to watch this past year’s super bowl between the Green Bay Packers and the Pittsburgh Steelers. Most of these viewers had tuned in to watch two powerful teams play what was predicted to be one of the closest bowl games ever played in the history of the NFL. What they did not expect was to see a new expansive group deal internet company based in Pittsburgh, to air a commercial making a plea to the ongoing conflict and situation in Tibet and suddenly turn it into a joke as the same Tibetan people were suddenly praised for their cooking and used to promote the company.Many know this story, and probably just as many recognize the amount of backlash that the advertisement took on as a result for airing it.The first question that begs to be asked then is: why did they do it?

The intent, according to Groupon, was to garner negative publicity. In doing this effectively, one could expect to receive the same amount of attention that a well-made positive ad would bring. It was also noted on Groupon’s site, that the intent was to display the “often trivial nature of stuff on Groupon when juxtaposed against bigger world issues, making fun of Groupon.”There is an underlying understanding to this rationale; most advertisements have a very generic feeling to them. Although through repetition one could still drive higher sales, a commercial that otherwise does something out of the ordinary will receive higher attention and greater recall in memory (thus being likely to pass on almost seamlessly into long term memory). However, there is also the idea of making the correct first impression, for this is going to be the basis by which consumers will return to frequently when thinking about a product or company. Groupon realized that it was a new company and needed to garner attention, what it did wrong, was to create a first impression that negatively portrayed the company in regard to Tibet.Since the nature of people is to solve problems, it’s natural for the company to have wished to attempt to draw a connection to the problem of Tibet by bringing it into their commercial, then it chose to increase the complexity of the problem by leaving out the solution to the problem (the solution being a charity fund which Groupon sales would actually be dedicated to). Yet although people were willing to seek more information after seeing the commercial to be able to “solve” the problem they experienced in the commercial, the use of sarcasm and dark humor is seldom appropriate to the average consumer when in regard to a cause related event. In a sense, the company destroyed a level of trust with potential consumers in that consumers had been led to believe that it was a cause related commercial due to the nature of the beginning. They were soon misled when the company then mocked the people that had previously been portrayed as in need of assistance. The proximity effect of these two events through a negative correlated bridge caused viewers to believe that Groupon did not understand the gravity of the situation.

I would argue that this is especially so considering that Groupon wished to begin doing business in China. Because of the long standing negative relationship shared between Tibet and China, these negative emotions now play into the business aspect of Groupon as Chinese companies will view such a blatant statement as a sign of disrespect and overall cultural insensitivity.

With damage done in markets both at home and potential ones abroad, Groupon needs to begin a very strong counter campaign and begin PR reparations. Although the company wishes to stand by its decision to create the commercial and educate consumers about its intent, this is yet another incorrect response by a company that seemingly does not care nor include consumers in its competitive strategy. The company should seek to apologize to its consumers and to China. Although the cause they wished to benefit would have been an admirable socially oriented event, this still would not have been the way to enter negotiations with the Chinese. Unfortunately, the company cannot do anything further than issue apologies without incurring further penalties. If it wishes to ardently pursue China, it may have to remove its ties with the Tibetan fund. Conversely, if it were to do this, then many more consumers at the home base would cry foul. Even worse, it would go against the principles whereupon the company was built, that being to have a socially concerned company trying to support people in need.

At this point in time, they must adhere to holding onto the Tibetan fund. This will at least help to lock-in customers in their home market, and although in the short run it may completely eradicate chances to successful business with China, in time they may be able to build better a better relationship with the company. Important as well, is the potential consumer in China. They may notice the oppression and recognize more readily the similarities between their own situation and that formerly faced by the Tibetan people. Should Groupon finally enter China, this will be recognized and rewarded. Similar venues may be available to the company if they go into other countries. Such importance will be placed on holding to their ethical roots, that if they should forego them now, the result would be devastating. By garnering more widespread approval the company may then issue a challenge to China to review its actions and thereby inspire a shift of thought.

In addition to the apologies required, further commercials and ads must more firmly establish a positive message between the company and it’s standing on social issues. In this way they can begin to rebuild trust with its consumer base. This could quite easily be done by including the names of whatever charities, groups, or funds that the company wishes to be associated with, which can be tailored to fit individual advertisements in different media to better align with market segment tastes.

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**Due to technical difficulties we recently had to switch domains and transfer all of our website content.  Please keep in mind that while we have been publishing articles for two years, the published dates shown may not reflect the initial publish date.

SmartPhones Will Be Better Then PCs

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Written and Edited by Gregory Bartolomei

According to a news article published by the Associated Press and republished by IBN Live today (February 9th, 2011) [smartphones-outsell-pcs] smart-phones have officially outsold personal computers with 100.9 million phones shipped verses 92.1 million personal computers sold at the end of 2010.

The news article suggests that the rate of sales for smart-phones and PCs are not related and thus not suggesting a trend in the consumer electronics market.

The arguments for this line of reasoning are twofold: one, smart-phones and PCs serve different functions and two, the price difference between the products should be considered in the rate of sales.
To the first argument, that smart-phones and PCs serve different functions, let us define these different functions. All things being equal, a smart-phone is a tool for one to one communication via phone calls or SMS. All things being equal. a computer is a tool for data processing (text, numerical, multimedia, ect…). However, where is the line drawn between these two technologies? For example, all smart-phones can store and process multimedia data while a few models (bordering on many models) offer limited word and numerical processing capacity. Also, with programs like Skype (and other related voice over internet protocols) consumers can use PC’s to communicate via phone calls or SMS. It seems the difference between smart-phones and PCs has become blurred.

To the second argument, that the price difference between the products should be considered in the rate of sales, an analysis of the prices of the products both initial and future are worth due consideration. Let us assume that the average cost of a smart-phone is $100 (the price given in the article) and that the average price of a PC’s is $800 (average price of thirty computers listed on Walmart.com, Tigerdirect.com, and Target.com rounded for simplicity) all things being equal. The cost attached to a smart phone include a two year contract for service, a data plan, and a minutes/SMS plan. The cost attached to a PC’s are a service plan for internet in a home or via one of the numerous hotspot wireless provider. However, it should be noted that more and more business such as Panera bread, Starbuck, and Barnes & Noble are providing free internet. Let us assume however, that a PC purchase requires the additional purchase of internet tied to a one year contract.

Analysis of Cost

SmartPhone: Initial $100 plus two year contract charged monthly (24 months) of data plan average cost $90 a month (this number was assumed from the average midrange charges on a number of smartphone websites)

Thus $100+NPV of $90 for 24 periods at 1.6% inflation = $1881.97

PC: Initial $800 plus one year contact charged monthly (12 months) of internet service at an average cost of $50 a month (this number was assumed from an average of  midrange charges on a number of internet provider websites.)

Thus $800 +NPV of $50 for 12 periods at 1.6% inflation = $1341.99

This analysis shows the NPV of a smartphone purchase to be $539.97 more than the cost of a PC purchase. This suggest that a price sensitive consumer would be willing to purchase a PC over a smartphone due to the cost savings.

However, perhaps the most important issue of the differences between a smartphone and PC has yet to be addressed; their mobility. All things being equal, smart-phones are more model then PCs at the cost of their capacity to data process and preform the higher functions of PCs. However, with the expected introduction of technologies like virtual keyboards and projection imagining devices – the size of a smart-phone will soon not be a limit to the functionality it can provide.

So, if the differences between PCs and smart-phones are blurred, the cost of a smart phone is greater then PCs, and the question of the differences in mobility and therefore capacity to data process will soon not be a question what then does this imply to the consumer electronics market?

It suggest that smart-phones and PCs are related and that as soon as smart phones can data process the products will become substitutes. In conclusion, a change is coming and this change will be as radical and significant to consumer electronics as how the P2P software program Napster fundamentally changed the music industry.

This should be something that is a serious consideration to PC manufacturers and if they do not adapt to this upcoming change; there will be a shift in the consumers electronics market.

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**Due to technical difficulties we recently had to switch domains and transfer all of our website content.  Please keep in mind that while we have been publishing articles for two years, the published dates shown may not reflect the initial publish date.

Night of the Living Casino

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Screen Shot 2013-10-21 at 4.22.31 PM“Everything dies, that’s a fact. But maybe everything that dies someday comes back.”
Bruce Springsteen’s 1982 song “Atlantic City” echoed up and down the New Jersey shoreline over 20 years ago. The boss sang about the once iconic town and how desperate people used it as an “all or nothing” shot to get out of a financial rut. However, with a deal nearly reached on the new Revel Casino development in Atlantic City, Springsteen’s song may have a new meaning.
Recently, J.P. Morgan has received commitments for $850 Million for the $1.5 Billion capital structuring. This, along with help from the New Jersey State government, could be the “all or nothing” shot to get Atlantic City, and perhaps even the state, out of the financial rut. With tax rebates of $261Million, over a 20 year period, pledged by Gov. Christie, the eleven – hundred room resort may be able to attract the crowd necessary to revive AC back to its “glory days” level.[1]According to a recent Washington Post[2] article, Atlantic City goers are spending 30% less at the casinos, the gambling market in general is down around 22%, and gross operating profit per hour is down 61%. As the nation’s second largest gambling market, AC followed industry leader Las Vegas by $1.61 Billion in 2009[3]. What is one of the main differences between Vegas and AC? The Branding.

That is the source of the risk, according to some analysts. The new Revel Casino will attempt to rebrand Atlantic City into a place for business meetings and vacations – not just gambling.
Looking at this from a five forces model, could this work? New entrants into Atlantic City have been successful, including the Borgata which is currently the most successful and the newest AC Casino. Substitutes such as online gambling have becoming increasingly popular; thus, taking profits away from casinos. Suppliers are not very relevant or powerful in this industry. However, existing competitors are a threat. With new casinos spouting up in Pennsylvania, existing casinos in New York, and the national focus on Las Vegas as the gambling capital, Atlantic City seems nothing more than a fun weekend. This is especially true to people who can go to local casinos on weekdays or to people who save up for yearly vacations in Las Vegas. However, if its marketing campaign can accurately depict their new unique product, Revel’s competitors are nearly none existent, east of the Mississippi.
The overwhelming question is within the fifth force: buyers. In other words, will people buy in to this new branding? The economy seems to be improving and discretionary spending will soon grow with it. If the economy continues to grow, then Revel can create a new business and vacation destination and Atlantic City, as a whole, can possibly come back to life.
This industry is relatively attractive for Revel. With two forces, threats of entry and suppliers, in their favor as well as the conquerable forces of substitutes and competitors, Revel has a fighting chance to win buyers. I believe that it can become the East Coast Business and Vacation destination as well as a place for gamblers.
Everything dies, that’s a fact. But with new spending and branding, AC can come back.
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**Due to technical difficulties we recently had to switch domains and transfer all of our website content.  Please keep in mind that while we have been publishing articles for two years, the published dates shown may not reflect the initial publish date.
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Berzon, Alexandra. “Big Casino Project Back From Dead.” Wall Street Journal. 9 February, 2011.http://www.washingtontimes.com/news/2010/dec/7/atlantic-city-casino-profits-plummet/

http://www.americangaming.org/Industry/factsheets/statistics_detail.cfv?id=4

Is Facebook Really Worth Fifty Billion Dollars?

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Screen Shot 2013-10-21 at 4.16.30 PM

Written and Edited by Gregory Bartolomei

The most recent valuation of Facebook says that the private firm is worth fifty billion dollars after a five hundred million dollar investment by Goldman Sacks Inc. This valuation seems to be more like a speculation. The value of Facebook is accounting terms is that it booked a reported two billion dollars in sales at the close of the fiscal year 2010 which makes Facebook the largest and fastest growing internet firm in the history of internet firms.

Is Facebook really worth fifty billion dollars?

An application of a basic model for valuing a firm (a firm’s value is the present value of all its future cash flows) or [Cash Flow of a Firm + (1+growth rate)]/ Discount Rate seems justified to ball park the value of Facebook.

Let Cash Flow= 2 Billion – last years cash flow.

Let Growth Rate = 5% – as a lack of data will not allow for a calculation of a sustainable growth rate.
Let the Discount Rate= 4% – the prime rate for 2010.[$2,000,000,000+(1.05)]/.04= $52,500,000,000This basic valuation puts the current valuation two and half billion dollars short. However, this valuation does not account for risk systematic or unsystematic, increases or decreases in the growth/discount rate, and other variables that could have an adverse effect on Facebook’s value.For example, what would happen if Facebook’s servers were hacked? This not an unfounded question. Already users are seeing applications inside of Facebook that are designed to hack personal information. What would happen if a user decided to take down the network? That would be a catastrophic system failure.

Another potential issue is the current lawsuit that Verizon is filing over the Net Neutrally Laws. Since an increasing number of Facebook users are going mobile (using the mobile application for Facebook) there is a threat that a change to the current laws could adversely effect a mobile users access to Facebook. While not as catastrophic as a hack, loosing or diminishing the mobile interface would reduce the value of Facebook to its users and in turn advertising firms that buy information from Facebook.

Additionally, internet privacy laws could be rewritten. Currently, sites like www.thepiratebay.orgwww.bittorrent.com, and www.facebook.com enjoy not dealing with privacy laws. While The Pirate Bay and Bit Torrent enjoy facilitating p2p of music, video, books, programs, operating systems, and anything else that can be uploaded to the internet they are in violation of copyright laws (as defined in the USA.) While they are in a sense untouchable, many companies (namely internet providers) are being pressured into preventing their customers from accessing such site and committing copyright violations. This situation faced by The Pirate Bay and Bit Torrent is very similar to the situation faced by Facebook.

Because of the wealth of personal information loaded onto Facebook, there is a concern that Facebook is selling that information to marketeers. Another concern is that users whom are seeking jobs are being scoped out on Facebook by recruiters. Facebook is supposed to be the social experience and both of these factors represent a dilemma for its users. However, these issues also represent dilemmas for lawmakers. Facebook represents uncharted waters; should marketeers not have access to publicly stated information? Should firms not have the right to view a Facebook profile to evaluate the mettle of a potential employee? If the law rules that Facebook can not provide users information then that adversely effects Facebook’s fiscal purpose. If the law rules that firms can review profiles, will there be a decline in overall usage thus effecting the amount of information Facebook can provided; effecting its total sales?

If it is assumed that these three issues have a 5% chance of happening (all things being equal) than adding an addition 15% to the discount rate in the basic valuation expression previously used should give an adjusted valuation.

Let Cash Flow= 2 Billion – last years cash flow.

Let Growth Rate = 5% – as a lack of data will not allow for a calculation of a sustainable growth rate.
Let the Discount Rate= 4% – the prime rate for 2010 plus 15% for risk.[$2,000,000,000+(1.05)]/.19= $11,052,631,578.This valuation shows almost an 80% reduction in the value of the firm.While these valuations are crude (there is a real lack of data because Facebook is not reporting its finances) they are not dismissible.

I would argue that the valuation of Facebook has not successfully accounted for many of the risks that it faces going into its future operations. While the firm represents great potential for making money, people should not be so eager to throw their money at Facebook. In an objective sense Facebook is a young unproven technology that carries an equal amount of risk for the rewards that it is offer.

Facebook is too good of an investment to be true – thus it is not worth fifty billion dollars.

It should be noted that the three risks discussed do not considered all of the factors that could effect Facebook. A thought out Porter analysis or a SWOT would yield many other risks or perhaps growth opportunities.

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**Due to technical difficulties we recently had to switch domains and transfer all of our website content.  Please keep in mind that while we have been publishing articles for two years, the published dates shown may not reflect the initial publish date.