How do you value a social network?
I just completed final exams, finishing a nice 2 hour exam on corporate finance. When I got home, I glance at Techcrunch and saw Michael Arrington writing that Facebook is quoted as stating it’s an $8 billion dollar company. To be fair, Arrington has no link to that statement, so I am not sure if it’s a misprint or otherwise.
However, a link to Bloomberg does quote Facebook executives mentioning a possible future IPO.
All this talk got me thinking. The tradition method for valuing a company based on free cash flows obviously does not work for current-day social networks. This is because social networks are ’supposedly’ still in the infancy stages of monetization. Thus, in an acquisition of a social networking site, what the acquirer is really buying is a nice mix of potential, hype, brand and partnership.
Potential: I am in total agreement that social networks may be substantially monetized in the future. However, I doubt these sums will be anywhere near what some people envision. Why? I believe that the most profitable social networks will be niche networks where the user is compelled to buy products and click on ads within that network. Here is the problem: a niche social network inherently has a limited number of users, so while the margins may be good, the aggregate result will not be enormous. I think we have seen the last of the uber-big networks.
Hype: Social networks are HOT right now. Hence, I wonder how much of the Yahoo valuation is truly Facebook.com being worth $1- $2billion and how much is really Yahoo in total disarray and not wanting to get left further behind? I also understand from Mashable! that social networks have topped the charts for Google search terms in ’06 – but are people really looking for Matcafe, or the content on Metacafe, which in theory they could get from any similar network?
Brand: Social networks do have brand value. In class we refer to this as goodwill, or the excess an acquirer is willing to pay above the actual present value of the future cash streams. While I am sure that Coke will still be impacting millions of people each year in 2015“ I definitely have my doubts about Facebook.com.
My issue with social networks as brands is that there are very few technology brands that have survived and thrived. Especially websites/technology popular among my core group of college friends in 2002. Also, it seems that most web-related name brands experience a down period at some point (AOL, Oracle, Amazon, Netscape). Some recover, some don’t. Those that recover seem to do so by reinventing themselves and to do this takes diversity in resources (see next paragraph). I am not convinced that a solo Facebook.com could weather such a storm.
Partnership: As I stated, it’s my belief that the future of social networks lies in niche networks and PARTNERSHIPS. Myspace is kicking ass in large part because of its ties to NewsCorp. Last week I watched the last episodes of Prison Break and Vanished on Myspace for free. It was awesome! However, you can’t do that on Facebook.
Social Networks, in my opinion, are best served as complementary applications rather than as stand-alone companies. Especially now that Facebook has removed its exclusivity, it needs to scale quickly. People will pay premiums for exclusiveness“ but when you go big, you need to play and spend big. It’s a numbers game. Myspace is the clear winner here.
If I were at Facebook, I would be seriously considering my business model. After watching Behind the Glory, Kevin Garnett on ESPN tonight, I see some parallels. If a great high school basketball prospect is definitely going to get drafted (acquired), why take the risk of staying in college when a fluke, or unanticipated accident could be all that stands between minimum wage and one heck of a payday?
Carpe Diem Facebook!