azeem.azhar

The folk a Techcrunch, a blog, have done some nice digging to build a first draft model for valuing social networks based on user-numbers and advertising yields in different markets.

It is a clever model which attempts:

to rank various competing social networks. It bumps down networks like Orkut and Friendster who have tens of millions of users in markets with very little advertising spend, and bumps up networks with lots of users in higher value markets.

Now corporate valuations are notoriously tricky. The big bibles reinforce just how many caveats there are. And the art of getting a good price is what makes for a succesful investment banker

I like the effort to bring some clarity to the question, now I’d like to see the next version of the model to take into account several other factors.

1. The market dynamics: Techcrunch recognised that some markets are worth more than others, by purely looking at advertising yield. But one also needs to weigh in market maturity both in terms of the users penetration within that market, the internet penetration within that market and the advertising potential within the market. It is one reason why P/Es of Chinese  internet firms run higher than those of US firms. GOOG: 32.20; BIDU 64.35 Tencent: 44.82.
2. Reach premium: There is still a reach premium associated with social networks (and indeed businesses as a whole). This reach premium may reflect in better economics (a larger user base across which to amortise fixed costs), a more attractive advertising platform or just the minimum scale for a social network to work. So a relatively larger social network should command a higher price per user than a smaller one, all other things being equal.
3. The other side of the reach premium is whether a business is subscale. And a subscale business might just not be worth very much at all.
4. Nature of the user base and the nature of their use: One might argue that Bebo’s users are worth less than a LinkedIn user not simply because LinkedIn is a business tool but also because Bebo targets users going through radical personal, psychological and preference changes: the teenage years. So how far is this cohort going to stay on Bebo–hard to see them there in their 20s.
5. Concentration within a particular geographic, demographic or psychographic market: A soc net with 5m users but 90% penetration in a small emerging market with an immature advertising base might be worth more than a fourth tier soc net with 5m users spread like a feeble patina across several developed markets.
6. The direction of travel: A socnet which is losing users or stagnating or having to pay heavily for customer acquisition clearly needs a discount to one that is booming.

Each of these really needs to be taken into account to add some nuance to Techcrunch’s very good first draft. Perhaps the second draft can take a crack at them?

Are there any other considerations that are missing or things we need to take into account?

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