Are you insane?!?! $2.3 million for a Facebook App! (or the logic behind paying $1.30 per user and why it’s not so insane)

ivebeen


Yep another Facebook post (hopefully I won’t turn into Dave McClure <jk>) but I think the reaction to Trip Advisor’s purchase of the Where I’ve Been FB app for $1.30 per user or $3 million for 2.3 million users justifies some analysis. Not only is the word insane used in the title of Pete’s blog post – the one word email I got from a friend this evening said simply “Insane” as well.

(As a former new yorker I couldn’t help but visualize Crazy Eddie)

At first blush as Pete opines at Mashable – it does seem insane especially compared to the 4 cents per user, as Inside Facebook notes, that Slide paid for the Favorite Peeps application 2 months (helping to set off the gold rush in FB app development). So how should we value Where I’ve Been?

First let’s take Craig’s point of view. It’s important to realize that the Where I’ve Been app has strong affinity to a very important and large category of e-commerce – travel. Auto, Personal Finance (at least until the mortgage market blew up this month), and Travel have dominated the e-commerce landscape for the last few years. And anyone who has auto, finance or travel related content online and has tried to monetize that content via advertising knows it’s potentially quite lucrative. That’s because the transaction and lead gen affiliate commissions paid by those categories are quite large especially for hotel bookings. Travel content has commercial value. It would have been relatively easy for Craig Ulliott, the developer behind the Where I’ve Been app, to app travel-related ads and monetize it himself. At $10 per hotel booking made from an ad in his application it would only have taken 400,000 to 500,000 bookings over the lifetime of the app (I know 300k x $10 = $3mil, but I am applying a swag for a discount rate to account for the NPV of the future cash flows). Over the next year or two that doesn’t seem out of the realm of possibility, does it? So from Craig’s perspective, his app could definitely be worth $3 million.

On the flip side, it is safe to argue the Favorite Peeps app doesn’t lend itself to a commercial category and its had to see its commercial value other then as a platform to show ads. And given the thin value prop, users won’t likely tolerate a heavy does of ads in the app. At a $.10 Run of Network CPM, even getting to $.04 (at 10 cents that’s $0.0001 per ad show or 400 ads to get to $0.04) could be a challenge for Slide.

So getting back to the Where I’ve Been app, what is it worth to Trip Advisor. First I think it’s important to try and understand what Trip Advisor’s getting – are they getting something akin to a toolbar – another application that companies pay for new users. For instance when you download Adobe Acrobat Reader, DivX, the Real Player, and many more apps you get an opt-out offer to download the Google toolbar. For every new toolbar application installed via those host applications, Google pays anywhere from $1.50 to $6 per user. Ask.com via its FunWeb division pays for distributing its toolbar upwards of supposedly $3.50 per new user. Now toolbar installs are worth quite a bit of money because as people use them to conduct searches, they are presented with paid search results which are quite lucrative. Google supposedly makes more then $12 per user per year! Now unless the Where I’ve Been application was turned into a booking engine that users regularly interacted with, i’m not sure the toolbar analogy is a good one in this case. But it does show at least how certain types of applications are currently being valued on a per user basis.

My friend and colleague, David Stern, my partner in crime when it comes to discussing any advertising or lead gen based online business, have been talking about how when it comes to acquiring consumers FB apps might be a cheaper way to acquire customers then paid search these days. With CPC’s having from my experience now squeezed every last ounce of blood out of online marketers in terms of pushing us to the breaking point, buying an app as a proxy to a click doesn’t seem so crazy. Would I rather pay $1.30 for a click on google or $1.30 for a user who’s clearly indicated a strong affinity for travel on FB? Obviously the answer is it depends on the ROI, but it’s again not so crazy to see how one can justify $1.30 per user in this case.

Another way to look at this is compared against traditional lead gen fees. Given FB apps allow you to see the contact information for a user (though currently FB imposes restrictions on your ability to use that information) the audience for an FB app is essentially a big long list of leads. In this case, a 2.3 million long list of leads. Now since its hard to say that showing an interest in signing up for a travel app in FB means you’ll buy travel from the owner of that app, those leads are not worth a great deal. Since really valuable e-commerce leads go for upwards of $100 per qualified lead, the likely thin value of these leads puts them at the other end of spectrum like say $1.30. Maybe it’s the equivalent of buying a light travel newsletter with 2.3 million readers. Paying $1.30 for per email newsletter subscriber is well within the range of my experience.

And so we see different ways to justify the acquisition of FB apps – especially in lieu of any real financial performance to base these decisions on (at least not until my friend’s Scott Rafer and Dave Cancel revolutionize the monetization of FB apps with Lookery).

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5 Responses to Are you insane?!?! $2.3 million for a Facebook App! (or the logic behind paying $1.30 per user and why it’s not so insane)

  1. Pingback: VentureBeat » Facebook application bought for $3M — land grab still in progress

  2. David says:

    It will certainly be interesting to see if people attrite from the application once changes are made to it. That is what can not be answered fully at this point and will ultimately determine whether we see more apps and transactions like this.

  3. Pingback: Think Simple. Be Decisive. » Blog Archive » $3 million facebook app acquisition

  4. Pingback: Jeff McNeill » Blog Archive » links for 2007-08-23

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