The Facebook Bubble

Facebook sometimes seems invincible. The company has 600 million members and raked in $4 billion in revenue last year. But the social-networking juggernaut may be more vulnerable than it appears at first glance.

Think of it this way: Facebook has two assets, data and members. Data, by itself, is worthless. Facebook is betting it can create software algorithms to extract value from that data—essentially to perform a kind of techno-alchemy and turn zillions of meaningless bits into billions of dollars. Nobody knows if the company can really pull this off, but a lot of powerful investors, including Goldman Sachs, Russian VC firm Digital Sky Technologies, and most of the big-name venture capitalists in Silicon Valley, have bid the company's private valuation up as high as $100 billion. They did this based on a belief that in a few years' time, Facebook will be generating enough profit to merit that kind of valuation.

The biggest threat Facebook faces is that Google has decided that instead of paying for the right to access Facebook's "social graph" data, Google will instead just take it. Facebook's covert smear campaign of Google, uncovered by NEWSWEEK, suggests just how worried they are. Facebook says Google is taking its data without permission. Google argues that the data is out there on the open Internet, and so Google is free to take it. Unless Facebook can protect its data, there's a real risk that a lot of very powerful and important investors are going to end up disappointed.

As for the members, history shows us that people don't stay with social networks forever. Look at AOL, MySpace, and Friendster. They get into it for a while, then they move on, and all that valuable data stops pouring in. So, for Facebook, the clock is ticking.