Tags: jacob | wolinsky | social | network | value | facebook | hype

Taking Social Networks at Face Value

By Jacob Wolinsky   |   Thursday, 05 May 2011 08:01 AM

The hype surrounding the social-networking sites today is almost identical to that of the Internet bubble of 1999.

Facebook, the most popular social-networking site today, was recently valued at more than $100 billion, according to The Wall Street Journal.

It is believed that Yahoo, during the initial years, offered Facebook $1.62 billion with the projection of revenues of Facebook going up to $949 million in 2010 and generating up to $1 billion by 2015.

Comparing Yahoo’s estimate with the current value of Facebook, one wonders about the basis of the valuation which lead to the figure of $100 billion.

If we observe the age group of investors in big businesses like Google and Yahoo, it is evident that they are 35 and older. To them, the real reason behind the current trend of social networking isn’t clear. Their valuation is based on the fact that 10 percent of the total U.S. web-traffic goes to social networking and the belief that Facebook has a consistently growing number of active users going beyond 600 million.

Also, the fact that Facebook has the highest number of page views in a single day attracts big investors as they feel these social-networking sites are an excellent platform for advertising.

What they aren’t aware of is the reality that these social-networking sites aren’t viewed by users as a source of promotional messages but mostly for social interaction.

Thus, Facebook as a medium of advertising might be effective for small to midsize enterprises but not for big companies.

Moreover, there is no concept of brand-loyalty when it comes to websites, which means there is lack of stability in that industry. With more interesting, innovative and superior social-networking websites, users enthusiastically switch their preferred medium of interaction in a very short span of time. For example, Hi5 and Geocities were once among the dominating networking websites but with the introduction of more-innovative websites, the hype surrounding these websites vanished.

Irrefutably, the valuation of social-networking sites can be deemed as being absurd as these values aren’t based on the monetized web-traffic figures or on the balance-sheet figures of these websites.

To get a reality check regarding websites such as Facebook, one should realize that if advertising through such medium was effective and profitable for all the companies investing through them, the total economy of our country would be much higher than it is now.

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