A Technology that Facebook can rake in Billions

Ladies and gentleman, we’d like you to put your hands together for….(drum roll please)….Facebook Connect.

Facebook Connect is the oft-used program that lets users sign into their favorite third-party websites with their Facebook login, and is on every domain name under the sun, from the e-analytics site Alexa, to the real estate information site Zillow Inc. (NASDAQ:Z). Released four years ago to relatively little fanfare, Facebook Connect is the bastard son of the company’s API and Platform programs, which were introduced in 2006 and 2007, respectively. On the official Facebook Inc (NASDAQ:FB) blog, the company states that Connect allows its users “to take their identity and friends with them around the Web, while being able to trust that their information is always up to date and always protected by their privacy settings.”

Besides being a convenience for web surfers, Facebook Connect is also boon to websites that integrate the platform into their login systems. Take music streaming database Spotify, which is a Napster-ish version of Pandora Media Inc. (NYSE:P), as an example of how Connect integration can be taken to the nth degree. Since making it a requirement for users to login to its system through Facebook Inc (NASDAQ:FB) last September, Spotify has added roughly 5 million users – a total representative of 25% of its user base.

Other third-party sites implement a less extensive version of Connect, though its biggest benefit is that it is free. In its first year of operation, Facebook Inc (NASDAQ:FB) reported that roughly 80,000 sites had integrated with the service; this total had grown to 2 million by the end of 2010. In the 20-plus months since, Zuckerberg and Co. have estimated that 10,000 sites a day are syncing their login systems with Connect. Doing a few back of the envelope calculations, this means that Facebook Connect must have upwards of 8 million partner sites currently, with this total expected to reach 12 million by the end of next year.

Though there are no perfect comparisons for Facebook Connect, we can make a few indirect conclusions about the potential of the service, if Facebook Inc (NASDAQ:FB) decided to start charging third-party sites. LinkedIn Premium currently charges subscribers $24.99 a month; it is notable that this premium pricing program experienced similar, but lesser growth than what is expected of Facebook Connect. As of its most recent annual report, LinkedIn reported having close to 25 million premium subscribers. LinkedIn Premium has been in existence since 2003, and it’s worth noting that in its seventh year (2010), the service garnered a little over 10 million subscribers. In Facebook Connect’s seventh year (2015), it is projected to have 15 million integrated sites.

Google’s social network, Google+, allows users to remain logged into its bevy of sites, ranging from Gmail to YouTube, though this integrated functionality only exists under the company’s banner, so to speak. Likewise,

Microsoft Company (NASDAQ:MSFT)‘s new social network “So.cl” allows its users to integrate their Bing search history into its platform, but offers little else at the moment.

Thus the question remains: is it reasonable for Facebook Inc (NASDAQ:FB) to charge third-party websites for the usage of its Connect service? When answering this question, it’s important to keep in mind that most sites are now developing their platforms to seamlessly  integrate with Connect, making login quick, smooth, and easy for users. If the social media company did choose to slap a price tag of, let’s say $24.99 a month, on the service, third-party sites would have little choice but to comply. Any site bold enough to resist this charge would risk losing the fraction of their user base that was signed up exclusively through Connect. In today’s rough-and-tumble e-marketplace, we’re willing to bet that this is a setback that no site, large or small, could afford.

If Facebook Inc (NASDAQ:FB) does choose to start charging for Connect, it would realize an additional $4.5 billion in annual revenues by the end of 2015. Considering the fact that current estimates from Wedbush Securities and eMarketer expect the company to finish 2012 with close to $5 billion in revenues, we can immediately see that any monetization of Facebook Connect would be material to the company’s bottom line.

Staying consistent with a price tag of $24.99 a month, we can then estimate that Connect monetization would add close to 50 cents to Facebook’s 2015 EPS, which current estimates place in the range of $1.50 a share. When taking this forward-looking estimate into account, Facebook’s Forward P/E drops to 26.5X, while its earnings multiple without Connect monetization rests at 35.2X. This differential is important, because if Facebook does choose to start charging third-party websites for Connect, its valuation suddenly looks more attractive in comparison to tech peers like LinkedIn (111.8X), Google (16.0X), and Microsoft (9.2X).

While it remains to be seen if Facebook Inc (NASDAQ:FB) will explore the scenario discussed in this article, it’s clear that investors might at least want to consider the possibility. Facebook Connect appears to be a perfect “secret weapon” for the company’s woes related to revenue diversification. After all, it is not unreasonable to expect the company to monetize a service that permeates the online environment in its entirety.