I’m by no means alone in my perception that Facebook’s mission is to become the Internet. I’m a proponent of open standards, open software, open platforms and an open internet, the past several months have made me feel that the online world is coalescing around two internets – Facebook’s version of the internet and THE internet. Like us, most companies have had to replicate their online presence on Facebook, as an acknowledgement of the traffic, audience and opportunity. And this replication process has become a business for us, as it has for other firms in the digital strategy sphere. Further, last month – for the first time – more referrals landed on our site from Facebook than Google. So why am I bothered by this?

Frankly, it feels regressive, rather than progressive. Facebook’s walled garden approach immediately recalls AOL’s halcyon days of 1995 – 2003, back when AOL was the internet for over 22 million dial up subscribers. And those 22+ million had not yet discovered that there was also an ACTUAL internet outside the walled garden. Eventually technology caught up with AOL, as those dial up subs migrated to faster connections, bringing down the walls on their AOL world and opening them up to the internet beyond the walled garden. So here we are at the end of 2010. A lifetime later in digital years. And Facebook has obliterated the objectives and promise that AOL once saw as their domain and re-imagined the internet as a 2.0 version of the portal – of AOL.

But hang on… because we’re at the very early days of the social web, a 1.0 period if you will. The social experience is now mature, and 25% of internet users are on Facebook. And yet, it’s only beginning. Which means Facebook’s easy growth is behind it, as AOL’s easy growth was between 1994 and 2001. The social web has already claimed one high profile victim – MySpace. And LinkedIn is clearly emerging as the victor over Plaxo in the corporate social network race. As the herd moves (and moves quickly) more fragmentation is on the horizon and new entities will emerge as both the social graph and social connectivity expand.

If you’re intrigued by the notion of this current status of Social Networking, where it came from, and where it could be going, TechCrunch (owned by AOL) has run a 3-part series on Social Networking – Past, Present and Future by Mark Suster of GRP Partners. In the series, Mark has effectively framed the growth of the social web as we now know it. I’ve embedded his entire presentation below, and it’s a worth a review. As is his narrative on TechCrunch – and if you want, you can read it on Facebook!

Social Networks: Past, Present & Future –

Aol. starts life as a new public company this Wednesday. Not as the once all conquering AOL, but as the newly re-branded, seemingly apologetic Aol. As it departs from the Time Warner stable, I can imagine the TW sentiment is somewhere on the harsh side of “good riddance to bad rubbish”. It would be impossible to calculate the opportunity cost at TW over the past decade by the countless failed attempts at integrations, acquisitions, management shuffles and divisional reorganizations. Even as Aol. stumbles toward its reimagined future, it remains burdened by its legacy, and looks to jettison a third of its workforce – 2500 employees – in the countdown to its IPO.

Back in the post-merger honeymoon period, and just before the crash in March 2000, AOL commanded a market cap of $176 billion US. In 2005, Google acquired a 5% stake for $1 billion, slashing AOL’s valuation to $20 billion – effectively dropping more than $31 billion per year over that 5 year period. In July 2009, AOL bought back Google’s 5% stake for $283 million, taking a further downgrade to peg its valuation at $5.66 billion. In recent weeks, with revelations  about the degradation of their Access business (despite accounting for 60% of their EBITDA) and their weak ad revenues, the new Aol. has lowered the IPO mark to a mere $3.2 billion.  In 2000, AOL was yes, wildly overvalued and ranked as the number 9 company in the US by market cap in the table below. If it enters the market at $3.2 billion, it will land around number 428 – down over $17 billion per year in that period… a decline that makes GM’s fall look like a slight stumble in comparison.

(Market Cap in $mm US)

As the new Aol. launches this week, the continued deterioration of its access business as consumers migrate away from dial up is inevitable. AOL has only managed to make money from Access, and has only maintained users through Access, the stickiness and switching challenges of an AOL e-mail address and AIM. Content as a standalone is not a driver for their customers, only on the back of Access. Lose the Access customers, lose the eyeballs for content and the corresponding ad revenue. I’d like to see if, and how Aol. could turn it around at this point, but lacking positive momentum, unique and proprietary IP, the allure of some mystical reality distortion field or viral expansion loop, I suspect Aol. will continue to see a decline in their valuation beyond their December 9th IPO.

iLike’s sale to MySpace, announced earlier this week merits comments on a couple of points.

First, it’s fire sale time. At roughly $20 million, this represents a new low for music-based valuations. In halcyon days, we had seen the prices climb. From Real’s $36 million acquisition of Listen.com in 2003, to Yahoo’s 2004 $160 million acquisition of MusicMatch, followed by the 2007 CBS purchase of Last.FM for $280 million. These last two deals were likely at inflated valuations due to competition for the properties (Viacom for MusicMatch) or desperation, as in the case of CBS. In January 2007, Napster purchased 300,000 subscribers from AOL for $15 million. Also in 2007, the Rhapsody America JV between Rhapsody and MTV roundtripped $230 million through a 5 year note in that amount (from MTV to Real) and a guaranteed ad spend in the same amount (by Real/Rhapsody). And it killed the Urge brand (and service) MTV had invested several million dollars and a couple of years in developing. In late 2007, Microsoft snapped up  Musiwave, in an acquisition that has yet to bear fruit, for a rumored $40 million. And last year’s acquisition of Napster (and its 700,0000 subscribers) for $121 million, included $67 million in cash, which really set the value at $54 million.

Next, the Napster transactions give us a per subscriber valuation – the AOL sub purchase (300k subs for $15 million) equates to $50/subscriber. The Napster sale (700k subs for $54 million) equates to $77/subscriber, but Best Buy was buying the whole company including customers who purchased downloads, not just a block of subs, so the attributable premium makes sense. In iLike’s case, while users do not equal subscribers, an audience of some 55 million was just sold for $0.36/user. This price is a steal for MySpace!

Lastly, of the acquisitions cited above, I would believe that only MusicMatch (due to their much loved downloadable player) was approaching profitability at the time of the purchase. Therefore the valuations were based on either 1) the desire to take a product out of the market so as not to advantage a competitor, 2) add the potential value of a new audience and business to an existing audience and business, 3) technological advantages or 4) a new JV. In iLike’s case, I would surmise that reasons 1 and 3 are applicable – as the MySpace and iLike audiences are highly duplicative. iLike is deeply woven into Facebook, which represents an opportunity for MySpace to disrupt Facebook, and the iLike platform is content-type agnostic.

Given today’s market, iLike should be pleased that they were able to close out a deal. It’s probably not at the valuation anticipated by the shareholders. Spiral Frog wasn’t able to find a buyer, Qtrax is on the skids. imeem’s investors will look at this with concern, as will Project Playlist’s and even Pandora’s and those backing the much-hyped Spotify. Audience is not enough – iLike claimed 55 million users – profitability, despite challenging content terms is key to seeing these valuations reverse their downward spiral.