Assessing the long term survival of social networking sites

Are we looking at another bubble or is this what sites are really now worth?

Recent reporting on funding received by business social networking site LinkedIn has speculated that the site is worth just over US$1 billion, based on a 5% stake that several equity firms recently took for US$53 million. The equity firms would be looking to recoup significant returns on their investments, so their internal valuation of the site would be much higher than the current billion dollar valuation.

With the Internet forming more of our daily lives, is the market valuation for sites like these too high? Over the last twelve months there have been a number of very significant sales of Internet companies, including Google's US$3 billion purchase of DoubleClick, Microsoft's US$6 billion purchase of aQuantive, Yahoo's US$680 million purchase of their outstanding Right Media stake, and Real Media being purchased for US$649 million. Facebook received a market valuation of around US$15 billion after Microsoft bought 1.6% of the site for US$240 million last year, and other networking sites have had valuations between US$200 million and US$560 million, based on transactions from this year. Microsoft's blocked purchase attempt for Yahoo! also falls into this category, with the online portal and services company knocking back a valuation of more than US$50 billion to remain an independent company.

Where is the value in these sites? Is it in the traffic that uses them daily, or is it in the potential advertising revenue -- revenue which might have already peaked for many sites. Perhaps the future for many of these sites is being played out at the moment by News Corporation's MySpace, which is currently undergoing a significant overhaul and despite the figures being quoted by News Corp of 110 million worldwide users and 300,000 new users daily, there are whispers that MySpace is losing its relevance and will one day join the ranks of the sites that it displaced on its way to market dominance. How soon that day is, and whether any of these new billion-dollar market babies will head there first is yet to be seen. Online communities are notoriously fickle and it isn't going to take much to lose a lot of that perceived value. By comparison, it is reported that LinkedIn has 23 million users, with 1.2 million new users per month.

A more desirable outcome for both the investors and users is if the many different sites can come to a working equilibrium, much as Slashdot, Digg, and Kuro5hin have done with certain niches of technical users (though it can be argued that Digg has lost a lot of its original tech-heavy lean as it became more wide market). If the current size of their userbases is accurate, it would seem that many of these social and business networking sites have sufficient numbers to ensure long term survival. As there is little cost to doing so, most users will just open up new accounts on the new services as they appear and maintain several active and not so active accounts with the different services popular at the time.

If the companies make too much of a push to deliver returns through advertising it will drive their users away in revolt, something Facebook had to face when it tried to implement new advertising and user tracking 'features' but was forced to back down after vocal complaints.

Online companies and services are not immune to wider market forces, including increased market volatility and current influx of funds to private capital. Are these valuations and transactions signs of what Internet presence is really worth, or are we witnessing another bubble? We're all going to have to sit back and watch what happens.

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