Social networking: the new dotcom bubble?

Source: Exec Digital USA

Date :12/14/2007 11:33:00 AM

With advertisers still working the exact value of social networks is, ExecUS asks if the $15 billion valuation of Facebook is justified - could it be a major staging post in the next dotcom crash?

By James Hurley

When Rupert Murdoch sealed a milestone $580 million deal for MySpace back in 2005, few could have imagined how dramatically the social networking landscape would shift in little over two years. At the time, observers questioned the wisdom of the transaction, wondering if the price tag could be justified even when the undoubted value of the site’s advertising ‘inventory’ was taken into consideration.

After all, MySpace was the fifth most-viewed internet domain in the US at the time, and its young demographic - who use the site to meet friends, share interests and create gaudy ‘profile pages’ reminiscent of teenagers’ bedrooms – is an advertisers’ wet dream, at least in terms of the huge and exhaustive database it represents. But how were advertisers going to actually reach this audience?

At the time of the purchase, MySpace actually rated higher than Google in terms of page views, but tellingly, the search engine’s advertising revenues of $6 billion dwarfed MySpace’s $30 million.

User generated content

One of the biggest stumbling blocks for advertisers is the very thing that has driven the Web 2.0 explosion; user generated content. Relinquishing control over a brand in a truly open marketplace of ideas is a frightening prospect, and one with potentially damaging consequences – social networks have as much power to break a brand as they have to make it.

Advertisers want to engage Web 2.0 audiences, but they’re frightened of engaging these audiences in a Web 2.0 way, and it was Murdoch’s intention to tackle this issue head on. While MySpace is still by far the largest network in the world, with some 68 million unique users in the US alone, it’s increasingly feeling the squeeze from a gaggle of young(er) pretenders, most notably Facebook.

At the end of October, Microsoft paid $240 million for a 1.6 percent stake in the site, implying an eye watering $15 billion valuation. Much has been made of the price-to-earnings multiple that this equates to – some 500 times its projected $30 million earnings for 2007. While many are simply impressed that the company is profitable (unlike most of the great white hopes of the 90s dotcom bubble), it’s a valuation that has drawn much scrutiny to the business models of all of the major social networks.

Reid Hoffman, angel investor and founder and CEO of LinkedIn, a social network used primarily for business connections and job searching, says that to compare an online revenue model with that of a traditional company is to miss the point. “When people come to me looking for funding, they have a business plan. I don’t want to see a business plan – I just want to know how they’re going to capture their first 10,000 users.

Once you’ve got the traction, you can then figure out how to monetize it.” Hoffman has stakes in Facebook, image sharing site FlickR and content portal Digg, amongst others. LinkedIn became profitable last year, three years after it was founded. And advertising spending on the web is growing at a rapid pace...

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