The social networking phenomenon has been around for a few years; prominent players MySpace and Facebook only came into existence in July 2003 and February 2004 respectively. However, such sites are considered to be some of the most valuable companies in the world. A few weeks ago, RBC Capital analyst Jordan Rohan valued MySpace as being worth $15 billion - only a year after it was bought by Fox interactive for $580 million.
As for Facebook, founder Mark Zuckerberg is reported to have rejected an offer of $750 million from Viacom last January, and is said to considering another potential deal with Yahoo! for $900 million.
But, to many accountants and financiers, these valuations appear as unjustifiable. MySpace, for example, is only expected to generate about $200 million in revenue this year through its 90 million users. Massive increases in traffic, along with new and astoundingly lucrative advertising schemes and partnerships are required if the accounts are to ever match up to their 'worth'.
According to Andrew Metrick, a finance professor at Wharton University in Pennsylvania, "what makes this hard is that these companies seem to be so many years away from the kind of earnings that the valuation numbers are forecasting for them". He also feels that the $15 billion MySpace figure "would imply that a lot more people will be on MySpace than are currently on it".
Normally such assumptions would require a reflection upon the experiences of similar companies, however within such a new industry there is no directly applicable information available for comparison.
Analysts can never be certain about any company's future revenues and expenses, but this is particularly true when dealing with a young company in a fledgling industry. The assumptions used in any assessment model are ideally based on the experiences of at least six or seven competitors, Metrick claims. But there is no strong peer data in the new social networking business. During the dot-com bubble, many companies were valued at hugely inflated amounts compared to their revenues; and this is still done today with revenue figures of companies like Google whose shares sell for 55 times their annual earnings, Amazon, with share values at 45 times earnings and eBay, with shares that are nearly 40 times their annual revenues.
With social networks filtering through the online community and user figures rising at a phenomenal rate, it looks as though the concept of social networking will be around for some time.
And because these sites are ideal for advertisers who are trying to target specific markets, there appears to be a lot of room for expansion within the industry. However, the long term success of these big sites depends on an increase of members as well as advertising streams. Whether the financial figures for these companies stand up to their 'worth' will only be revealed with time, but at present the future of social networking certainly looks bright.
