Pricing the Future: The siren song of Social Networks

If you had any personal experience with the terrible “dot bomb” days, chances are good the recent acquisition prices for social networking sites have you nervous. Back in the late 1990s, any number of sites were coming online, built on nothing but a dream, a domain name and several million dollars of capital investment. Sites like ValueAmerica.com, Pets.com and eToys.com dotted the landscape, hoping to repeat the positively mystical success of Amazon.com. Flash forward to now, and several social networking sites have achieved what these sites never could: Large numbers of visitors.

The difference between these sites and the aforementioned disasters, however, is that social networking sites are not online stores that need visitors to buy things in order to continue existing. Instead they offer users community. That these sites have given their visitors something for virtually nothing – save for the banner ad running along the top of the page – have made them the darlings of the new Internet. As such, companies like Google, Yahoo and NewsCorp (Fox) are willing to pay outlandish figures for them:

Last year, Fox bought Intermix Media (owners of MySpace) for $580 million.
Last month, Yahoo offered $900 million dollars for Facebook.com; Yahoo has also purchased bookmarking site del.icio.us, photo sharing site Flickr, and the event planning service Upcoming.org.
Early this month, Google was reported to have offered $1.6 billion dollars for YouTube.com.

The thinking behind such massive offers? That these social networking sites, with their dedicated communities of users, will pay for themselves with ad revenue, over the next several years. What makes this all reek of those terrible days early this decade is that the victims of the dot bomb were also predicting their success with this kind of thinking. Their value was based on everything running as smoothly as it had for the previous four years, when the internet first gained wide audience.

Today, analysts have predicted that Myspace will be worth some $15 million dollars in the next three years. However, this is based on MySpace continuing the rate of its meteoric rise... well, forever. Such optimism would require the belief that there are still several million junior high school students or second rate heavy metal bands that have still not yet heard of MySpace.

From an advertiser’s standpoint, social networks do consolidate a large number of people in one place at a time when most other media outlets are splintered. With so many users gathered in once place, it is easier to target this traffic and deliver promotional messaging to them. For the immediate future then, these sites do have great value. As for investing in a social network in the hopes that it will fetch a king’s ransom? In my opinion, you would be safer keeping your money hidden in your mattress just a little longer.

About the Author: Eric Reid

I am the Social Media Services Manager for Off Madison Ave. I've been with the company since 2006, when I was hired to do SEO, and link building in particular. When social networking sites started cropping up, at first I started using them to create backlinks - but they weren't the best for that, given all of the "nofollow" attributes. However, I did see the potential for all of the direct referral traffic they represent. Since then I've been actively pursuing both tactics for clients: Links that can help them for search, and social postings that get them involved in the conversation. It's about the coolest job you could ever get. ;)