Social media companies drastically overvalued?
The steady drizzle of criticism questioning the viability of Web 2.0 social networking site’s “free” business model turned into a monsoon. A flood of stories swept over blogs and news reports querying why building huge audiences with cool new entertainment experiences has not translated into profits. Some of the additional attention was no doubt related to the reportedly “somber” and “bearish” tone the journalists witnessed at the Allen & Co. hosted conference of media industry heads in Sun Valley.
New York Times M&A reporter did a retrospective on 9 July on the three year old Google - YouTube deal initially valued at $1.65 billion. The story cited a Credit Suisse estimate that YouTube will lose almost $0.5 billion this year, and Bernstein Research report which “questioned whether YouTube’s advertising revenue would ever be enough to cover Google’s costs related to bandwidth and data storage.” Google simply has not been able to convert the audience numbers into substantial revenues, and it is unclear how it will with audience allergy to more advertising.
Ryan Tate in his Valleywag story on July 9th describes Max Levchin’s Slide’s business model as a failure, and reported that opinion leaders like Barry Diller and New York Times‘ Andrew Ross Sorkin were “disparaging” Twitter’s business model at the conference.
Don Dodge’s latest blog cites his friend’s situation - the Facebook App developer with a killer app that is generating 300 million page views per month. This kind of mammoth traffic however translates into only a total of $6K to $15K of advertising revenue per month, depending on the current range of ad rates. Dodge explains that Web 2.0 sites don’t have specific search terms like Google AdWords to key off, so instead of Cost per Click (CPC) they have to charge Cost per Thousand (CPM) rates.
Assuming even a very generous $0.40 CPM rate, Dodge calculates that your Facebook/MySpace app will not earn earn $1 million from advertising, until the app gets to the outrageous number of 2.5 Billion page views per month. [for perspective - Yahoo has a total of 1.5 billion searches per month and Google has a total of 6.1 billion searches]
Social Networking’s ‘Naked’ Truth, a CNBC.com story published on 10 July by Silicon Valley Bureau Chief Jim Goldman questions whether we are “staring another dot com boom/bust right in the face.” Goldman’s post blows the whistle on social media’s inability to generate profits in the foreseeable future.
Facebook is addictive, even magical to millions. Same goes with MySpace, and Twitter, and LinkedIn, and Digg, Badoo, Classmates, Bebo, Flixster, Friendster, Orkut, and hundreds of others. They are powerful, fun, convenient. They offer value. And they build connection. Look no further than the Michael Jackson news tsunami to see how social networking affects our lives and drives information.
But with hundreds, even thousands of these sites out there already, with many attracting millions in venture capital, I simply ask, Where’s the return on the investment? What’s the business model to MAKE money and not merely to attract investment?
Partly this web 2.0 bashing is just the old media’s response to quickly losing entertainment market share to the “free” competition on the Internet, but there is something to these warnings of overvaluation. If the current advertising revenue rates remain the same, the Web 2.0 landscape will be forced to change, consolidate and find brand new new revenue models.
Looking at Zynga’s revenues and the profits of virtual gift business around the world, we can see that monetization can be done quite successfully with some formats. Warrent Buffet recently suggested that he would be willing to pay $5 per month for the pleasure of watching YouTube, and I know I was happy to pay $13,95 for HBO’s great programming in the US (although it took airing of such phenomenal content as the Soprano’s and Rome to get me to subscribe).