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Jun 23, 2008

NEWS: Modeling The Real Market Value Of Social Networks

The growth of social networks, high valuations without supporting revenues, and the race among Facebook and Myspace has been a subject of conversation. Mr. Chen did a market analysis by country. Mr. Arrington extended the analysis to place better valuation on the social network companies. DCF analysts claim that without cashflows, social networking is just the web 2.0 bubble.

A few observations:
  • Data gathering is a problem. Are the UU counts accurate? Is there overlap among networks? Which network truly owns the mindshare of the user? We don't know.
  • The asset-pricing model addresses both high growth and mature businesses. Earnings multiples is the inverse of the differential between expected growth and risk. (i.e. 1/g-r) 
  • Mature companies like Microsoft have track records and low risk; however expected growth is also low. 
  • A social network company has little revenue history, high user growth, and high risk. Is the growth/risk differential sufficient to offset low historic revenues? For leaders like Myspace and Facebook, their dominance of markets by country improves the multiple. Even Yahoo and Google cannot invade the social network space.
  • Country dominance matters. Emerging countries have higher Internet growth. Revenue risk is also higher - it may take a long time to realize revenues. Ironically, Wall Street cares about long term sustainability of revenues, but don't value long term sustainability of user members.
  • The best valuation is high growth and low risk, like Apple and Google.
Also, missing from the discussion is the implicit statement that advertising has become a global business - not a segmented business like newspapers and magazines. Monetizing a global business traditionally requires a global salesforce, which is expensive to build.

Modeling The Real Market Value Of Social Networks

Michael Arrington


Is MySpace worth $3 billion, or $20 billion? It depends on how you value a user.

It’s time to start comparing the big global social networks on something other than unique visitors and page views. I believe an effective way to value a particular user is based on the average Internet advertising spend per person in the country they live in. The higher the spend, the more value the social network can get out of the user by serving them advertising and other products. That means that, for now, users in a handful of key countries are worth far more in terms of revenue potential than those in the rest of the world.

We’ve begun to build out a model that looks at social network usage by country/region and compares that to available data on total Internet advertising spend in each of those countries. The model is then able to turn an apples-to-oranges comparison into an apples-to-apples comparison. The early results are surprising.

The ultimate financial value of any asset is, ultimately, what the market will pay for it. We have only a few data points to help us: FacebookBebo and LinkedInare worth $15 billion$850 million and $1 billion, respectively, based on relatively recent valuations (although only Bebo was actually sold completely; Facebook and LinkedIn raised investments at those valuations). The last valuation of MySpace was just $580 million, back in 2005 when it was acquired by News Corp...

MySpace versus Facebook: Analysis of both traffic and ad revenue, using Google Trends

(above, Facebook beating MySpace in Australia with the crossover at Oct 07)

MySpace versus Facebook
As some of you know, I've previously written about the MySpace versus Facebook topic, both a year ago in the post Wanna bet? In 1 year, will Facebook be bigger? Or will MySpace? and MySpace versus Facebook: Winning in the US, Losing internationally. In general, I've taken a fairly pro-MySpace stance, since I think there's a lot of qualities of the sitewhich are lost on the typical technogeek here in San Francisco...

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