Groupon and other Daily Deal sites will likely spend $1 billion in online ad spend this year. And most of that will be on Facebook and Google.

Given that Facebook will likely be the number one source, is it so preposterous that Groupon would buy MySpace at the right price? Now that News Corp has hung the for sale sign out and CEO Chase Carey seems particularly repulsed by the subsidiary, the timing seems right for a low price.

As well as the upfront cost, Groupon would have a large headache in getting the property to break-even but if they left 25% for current management as an incentive and kept the firm autonomous perhaps the incentives could take care of that headache for the Groupon mothership.

Also attractive about MySpace is that since it was the early leader in social network it does have a very large US userbase. Even the ghost town accounts have some value.

Given the capital markets willingness to value Groupon stock at such a high multiple, buying MySpace for $200m upfront and then perhaps another $100m a year for 2 years to get it to breakeven doesn’t seem that farfetched at all.

Eric Ries, one of the leading lights of management theory in startups, made a very good point around the wrong kind of metrics. Metrics that don’t correlate with revenue or the chief value event and says nothing about the why are vanity metrics.

I couldn’t but help think of vanity metrics when I was reading about Path’s funding by Kleiner Perkins and Index. Path is an iphone app that let’s users share private moments with friends and put a constraint on the number of friends that could happen with.

The company is founded by Dave Morin, who ran Facebook’s platform, and a series of other very talented executives. Now let’s be honest: The funding and the competitive seed round before it is entirely based upon the team and their product instincts.

But at $8.5m the company probably felt like they needed to come up with some meaningless but suitably large number and they came up with this: “The company says they have hundreds of thousands of users who’ve experienced “over 2 million moments shared.”

Now let’s unpack that 2 million into what actually could be happening. If 2,000 users with 50 friends each shared a photo 2 times each week for the 10 weeks that Path has been operational then 2 million moments would have been shared.

They should have just said nothing at all.

Craziness, it seems, is a fine line:

“[Kevin] Rose announced that he and [Tim] Ferris recently invested in Facebook “before the craziness.”

[...]

“We confirmed with Rose that he and Ferriss actually bought shares on secondary market SecondMarket at a $45 billion valuation. We’re told the deal was in the seven figures. [..] The ‘craziness’ Rose is referring to is Facebook’s recent $1.5 billion funding round from Goldman Sachs and DST at a $50 billion valuation”

Google today announced that they would no longer allow searching of real estate on Google Maps.

I’ll admit part of writing this post is to point back to my post about six months ago when I said that Google had failed in real estate to date because of their wedded view that people want to use the map interface as their preferred mechanism of searching real estate listings.

The map, in my very strong opinion, is a poor way to search for listings. If anything a search interface by images, similar to the one Like.com was pioneering for shoes and fashion, is a much more efficient way of finding real estate. The location is obviously important but the exact location is a contextual attribute not the primary one.

With that said, I think the move is a fantastic one for Google. Firstly, they’ve admitted they are wrong. This is surprisingly rare in any corporate setting, which leaves the door open to startups every single day. The willingness of startups to admit they’re wrong is a hugely under-rated competitive advantage. So bravo Google.

But that candidness does not permeate to all of Google, though. Here is Eric Chu, a group manager at Google for the Android platform on why they haven’t yet released in-app payments: “Developers were busy with their Christmas applications,” Chu said. “So we couldn’t get enough feedback,” he continued.

Are you fucking serious? Who on earth believes this was the main reason? Given that no one in their right mind would take this at face value, the cream on the cake is that they are hospital passing the blame to their development community – THEIR MOST IMPORTANT SUCCESS DRIVER.

End rant.

The real estate clean up is likely the result of Marissa Mayer and her move across to local. Although it’s the end of Google Maps and Real Estate, and Google Base in general, I find it hard to believe that Google will leave their classifieds ambitions there. It’s just too important and too close to Google’s core business to ignore for any length of time.

Finally, long time readers of this blog will know of my fascination of Eric Schmidt, essentially seeing him as the luckiest man in the history of the Internet, while after a string of failures and even a low key role in a success (Sun) was foisted upon Google by Kleiner Perkins and who never seemed to do anything let alone understand what business they were in. That was OK because Larry and Sergey agreed with him when he said something they already believed in and over-ruled him on things they didn’t. If it was a triumvirate it was an isosceles triangle and not an equilateral one.

And so it was that investors essentially didn’t care less that he stepped down from CEO as nothing much has really changed except Larry seems to be willing to take on a more public role now. But that wasn’t the last of it. Here is a line that Schmidt tweeted – after being made $6bn richer for the last decade: “Day-to-day adult supervision no longer needed”.

Really? It’s one of those passive-agressive remarks that he can chuckle with Sergey and Larry and they probably chuckle along too and in parallel think WTF? Schmidt can say it’s said in irony but I can’t help but think there is more than an ounce of truth as to what exactly beyond that he provided the company.

My bet is that Schmidt will become the next Jim Barksdale, who after Netscape ramped up a venture fund that made a string of average and poor investments and has drifted off into the ether.

My first reaction to Facebook raising $500m from Goldman Sachs and ‘a Russian investor’ at a $50bn valuation and perhaps up to $1.5bn more from private clients of Goldman Sachs was twofold: Bravo Facebook management for locking in such a rich valuation and secondly, if I thought the investors were so stupid as to pay such a price, what price would I pay for the company?

Facebook at present is the investment-equivalent of an alluring velvet rope leading to a private room at a nightclub: Nobody knows for sure what’s back there but they want to be there nonetheless.

Saying $50bn is too rich a valuation might seem just as idiotic as investing at that price because no one, except for Facebook insiders, knows for sure what the financial inner workings of the company are. But there are enough external references to the markets that Facebook operates in that can give some decent clues.

There are three parts to Facebook that have value at present. They are, roughly in order of importance: Facebook Credits, the self-service display ad business used by direct response marketers and brand-directed advertising.

Facebook credits is most analogous to Apple’s app store, where both process huge volumes of casual gaming transactions. Through June of 2010, Apple said the app store had 5 billion downloads and that it had paid out over $1 billion to developers, implying that more than $1.4 billion (Apple pays out 70% and keeps 30%) of transaction volume has passed through the app store.

Now, in terms of getting a time period estimate, last year roughly 4 billion apps were downloaded from the app store. Using the same monetization metrics and taking Apple’s cut, in 2010 we get to a figure of $288 million.

Facebook is likely on the same trajectory (say $300m for 2010 and $600m for 2011).

Facebook credits is a wonderful business and in itself is worth billions of dollars (but not tens of billions of dollars). For one, micro-payments have bad economics because credit card fees on small amounts take a large percentage of the revenue. There are moves afoot to reduce these fees by government but at present they are bad.

Let’s ascribe a $8 billion valuation to the Facebook credits business (probably about half of what Paypal is being valued at).

The direct-response, self-service display ad business has huge scale: Roughly one in four page views on the Internet in the United States are served by Facebook (and more in international markets) and the targeting mechanisms made available are rich and full-featured. There is one small problem though: Users are there to share information and photos with each other and not to make purchase decisions. Geocities had huge page views, Yahoo Mail has huge page views and folks like Meebo have huge page views but they don’t have huge revenue because of the context of the inventory: communications is a fundamentally bad environment for advertising.

The fact that Facebook has real information about users and has opened that up to targeting however, means that there still is an interesting business.

Also, because the advertising is self-service and Facebook have made available rich apis to manipulate the advertising, technology vendors that help companies manage their spending on search are now rushing to help advertisers manage their spending on Facebook too.

This development is no small thing because it means that Facebook doesn’t have to employ steak-dinner eating, fairway-walking to the 18th hole sales people for this part of its business and the profit margins can be attractive. In the years since the wonder that is Google Adwords, an ad platform has not come close until Facebook’s self-service business (and to be clear, Facebook is still not in the same ballpark but at least they’re playing the same sport).

The Facebook direct response business likely did $400m in 2010 and let’s say it will do $600m in 2011. But because this business has been riding the gravity-defying rise of Facebook users and there simply aren’t that many more people to join Facebook in the world the business has a lower ceiling than Facebook credits which will benefit from all sorts of things being sold within Facebook beyond games. Let’s give the direct response, self-service display ad business a valuation of $5 billion.

The brand-directed division will likely get the most attention but in my opinion is worth the least (and is lucky to be worth anything). Yahoo’s brand-directed display business is currently the largest in the world and investors effectively value it at zero since the Chinese and Japanese assets of YHOO account for the whole (or even >100%) of the stock price at present. AOL is valued at $2.5bn and it has a dying dial-up business that still accounts for the majority of cash flow.

Quite simply, the steak dinner sales people are expensive, the CPMs are forever falling because of competition amongst impressions and despite the ability to ‘measure everything’ the actual stuff a marketer wants to know is very hard to get at since they are impacting human psychology and people buy stuff in the real world as well.

Even with growing revenue in the hundreds of millions of dollars I still would only place a value of $1 billion for the brand-directed unit of Facebook.

That leaves a valuation of Facebook, in my humble opinion, of $14 billion.

In judging the likelihood of the year ahead it’s always important to see how the last year set it up. And there is no better group of people to follow than private equity firms. I’m not referring to what they have said but rather what they have done.

This year the dividend recap returned in style. Private equity firms borrowed money to pay out dividends to themselves at the highest ever level after the market was essentially shut down in the last two years.

A dividend recap in itself is not inherently bad like debt into itself is not inherently bad. However, what they unmistakably do is reduce the margin of error for the business. It also reveals several nuances about the thought process of private equity firms.

One is that simply debt is free and easy once more. When interest rates are low, investors ‘reach for yield’ and the further away they stray from treasuries, the greater the likelihood of a misjudgment of risk. The second is that IPOs (another way they are able to return cash to their own limited partners) are still essentially a tough proposition. Even if a portfolio was able to IPO then the public still frowns upon the private equity firm taking much cash off the table straight away.

Investors in debt markets remain some of the most puzzling to me: Seemingly they have the most money and the least idea. One is that debt is an inherently safer investment instrument than equity and so you can be dumber because there are less variables and less uncertainty. Default rates are low but precisely because refinancing debt is so easy.

Another looming cloud on the horizon is all of the friendly debt that was used to fuel the large buyout boom in 2007/2008. Friendly terms, like Payment-in-Kind toggles and long dated maturities, meant that it’s simply very hard to actually default on the debt. But that’s only until 2012/2013 when a lot of the excess will run its course.

So in summary, we have the newly issued debt that was used to fund dividends for equity owners in 2010, compounded with the friendly debt that fuelled the buyout boom and that’s all coming soon (companies try to restructure the debt ahead of the logjam). To say that 2011 could be a better year than 2010 in terms of the economy doesn’t seem possible to me.

Over the past few years I have become a complete student of value investing and have been quite successful. So naturally when some dumb schmuck gets lucky, the desire to impart the ‘fool proof’ system rises.

But seriously, there are two huge principles of finance that they teach you at University that I think are completely wrong.

When buying, the price of a share does not matter (or the efficient market hypothesis). Academic study says that the market is efficient and therefore the price of a security fully captures all of the possible information. But there are obvious situations where this is completely wrong. When a stock is included in an index, funds that mimic the index then have to buy the stock. This has nothing to do with the underlying value of the stock.

Conversely, some institutional investors have preset limits on the size of companies they can invest in. If a stock falls below that threshold, they have to sell no matter what the future prospects of that company. And that’s just capturing the obvious situations: There are countless more that revolve around the themes of emotion, complexity of the security and the rules of market participants mean that the theory is completely full of shit. At least over shorter time periods. Benjamin Graham said it best: “Markets in the short term are voting machines but in the long term weighing machines”.

Risk is best measured by volatility. This one is completely baffling to me. Here the theory has it that the risk of a security should be measured by how volatile it is. If the shares of IBM go up by $50, the stock is just as risky as if the shares of IBM went down by $50. IBM at $100 is a lot less riskier than IBM at $200 but the concept of risk = volatility says that the risk is exactly the same in both situations.

This concept led to the creation of mortgage securities that were ‘safe’ because they didn’t move much in price. But still waters run deep and years of steady and safe-seeming trading blew up like a bomb upon the realization that everything was fundamentally flawed.

You can see the same trends appearing in the Government bonds of countries like Greece and Ireland a few years ago (everything is OK until it isn’t) and probably the very same thing happening with US treasuries at the present time. Still waters run deep.

For years, I used to retort Apple fanboys with the measly market share numbers the firm held in desktops and laptops. But businesses are about profits and not units shipped or even revenue earned and Apple’s strategy is designed to maximize profit.

In recent times Android has ‘raced’ past iPhone shipments but Google has to funge a meaningless number about its ‘mobile division’ being a billion dollar business ‘on an annualized basis’. That means they earned $83 million in a month. And that’s after they bought a low-margin mobile ad network for $750m, have the ‘leading’ mobile OS and a monopoly position in mobile search. Apple sold 14 million iphones just in the last quarter and have the powerful apps economy that powers it.

By some estimates Apple accounts for 40% of the total mobile handset industry profits with just 3% market share.

A similar meaningless conversation will ensue soon when Android tablets and other competitors enter. The iPad’s market share will likely decrease into the teens or some small percentage but that won’t matter one bit for Apple’s march towards the world’s most valuable company.

A quick shout out to Sandy Kory who recently founded Horizon Partners, a boutique investment banking firm that helps small Internet companies raise money or execute an M&A process. Somewhat uniquely, they are also beginning to blog with the aim to bring more transparency to the M&A process for entrepreneurs.

Also, Sandy was on Mixergy recently where he runs through in detail some transactions he was involved with in the lead generation industry and Investopedia, which was sold to Forbes.

Go read, follow, subscribe!

From Whitney Tilson of T2 Partners, a value investment hedge fund:

“We choose to share some of our ideas and analyses publicly not for marketing or ego reasons, but because it helps us make money for our investors, in three primary ways: a) when it is widely known that we have a position in a particular stock, we often hear from other investors who share valuable information or analyses; b) invariably, some people have the polar opposite view of a particular stock and, in sharing it with us, they can help us identify things we might have missed in our analysis; and c) when we share our ideas, it creates reciprocity and others share their best ideas with us.”

Love this. Secrecy usually is correlated to how fragile and the perishable ideas are.