$1 Billion for Facebook.com? LOL!

Commentary about business and finance.
Sept. 28 2006 11:24 AM

$1 Billion for Facebook? LOL!

Is the social-networking boom a replay of the '90s dotcom bubble?

The "social-networking" gold rush continues. Last year, MySpace was acquired by News Corp. for $580 million in cash. Now the other big social-networking sites are the subject of rumors, deals, and transactions. Yahoo! was interested in acquiring Facebook for $1 billion, but the company's youthful founders are holding out for more. Warner Music earlier this month cut a revenue-sharing deal with YouTube. In August, Google and MySpace struck a $900-million agreement for Google to sell ads on MySpace.

The Dow's at a record high, youthful entrepreneurs are minting dotcom fortunes, and big media types are talking about "monetizing eyeballs"—close those eyeballs for a moment, and it almost seems like 1999. Back then, big media companies threw huge amounts of cash at the hot new things on the Internet: portals and online news sites that had impressive traffic figures but not-so-impressive profit-and-loss statements. Disney spun off Go.com; NBC created NBC Interactive; CBS helped form CBS Marketwatch.com. The trend peaked when Time Warner accepted the inflated currency of the ultimate eyeball business—AOL—and entered into its disastrous 2000 merger.

Advertisement

So, is the mania for Facebook and MySpace different than the lust for portals and online news sites seven years ago? No, and yes.

What's the same?

1. Lots of traffic, little profits. These of-the-moment social networking businesses are hot because of their impressive traffic figures. As Bambi Francisco of Marketwatch notes, in July, 37.4 million people downloaded 1.46 billion videos on MySpace, and 30.5 million people downloaded 649 million videos on YouTube. But the profit picture is substantially less clear. In its most recent earnings announcement, News Corp. doesn't mention anything about MySpace's financial performance. Writing in Fortune in August, Patricia Seller said that MySpace lost money this year on revenues of $200 million. Last month, Fortune reported that YouTube's founders were coy about their profits. And in August, Business Week noted that Digg.com (potential value: $200 million) "is breaking even on an estimated $3 million in revenues."

2. Eyeballs, baby.As a result, just as in the 1990s, analysts have to devise new metrics to justify values placed on the companies. Forget about cash flow or operating income. Companies are being valued based on how many registered users they have, just as they were during the bubble. Forbes recently cited Tim Boyd, an analyst at Caris & Company, whose "back of the envelope math estimates that Facebook's 9.5 million users may be worth six to eight times what News Corp. paid for MySpace's 30 million users last summer." (News Corp. paid about $19.33 per user.)CNN blogger Dierdre Terry calculated that Sony had purchased video-sharing site Grouper for $65 million, or $70 per user.

3. Me too, Rupert. In the 1990s, big media companies rushed into the net en masse, like a herd of wildebeest. They looked with envy at media sectors where audiences were growing exponentially while their core audiences were stagnant or shrinking. News Corp.'s acquisition of MySpace, which wasn't particularly hailed as a stroke of genius at the time, is now seen in megamedia circles as a masterstroke. One of the reasons Tom Freston got fired from Viacom was because he had failed to bid aggressively on MySpace.

What's different?

1. Deeper streams. Many of the 1990s-vintage portal and content efforts failed because there simply wasn't enough online advertising to go around. But the online advertising market has matured. This year, marketers are expected to spend $16 billion on Internet advertising in the United States, up 28 percent from 2005, according to eMarketer. And real advertisers are paying real money to advertise on social networking sites. An analyst cited in this Forbes article said that online video ads command per-viewer charges that are comparable to those paid for prime-time broadcast television.

2. Better business models. The social-networking companies may lose money, but they don't lose it on the scale that portals and start-up content firms did in the 1990s. These Web 2.0 companies are built on the wreckage of the dotcom/fiber-optic boom and bust of the 1990s. Last decade's over-investment in wires, Web sites, and hype helped spread broadband to homes, created a large community of users, and left behind cheap infrastructure. Web 2.0 companies like YouTube and Facebook have thus been able to gain scale and operate relatively cheaply. Their main costs are hosting services and overhead. Another crucial difference: The 1990s portal businesses devoured cash because they had huge budgets for marketing and advertising and for creating proprietary content. The social networking sites, by contrast, spend virtually nothing on advertising and get virtually all of their content for free courtesy of the users.

TODAY IN SLATE

Politics

Meet the New Bosses

How the Republicans would run the Senate.

The Government Is Giving Millions of Dollars in Electric-Car Subsidies to the Wrong Drivers

Scotland Is Just the Beginning. Expect More Political Earthquakes in Europe.

Cheez-Its. Ritz. Triscuits.

Why all cracker names sound alike.

Friends Was the Last Purely Pleasurable Sitcom

The Eye

This Whimsical Driverless Car Imagines Transportation in 2059

Medical Examiner

Did America Get Fat by Drinking Diet Soda?  

A high-profile study points the finger at artificial sweeteners.

The Afghan Town With a Legitimately Good Tourism Pitch

A Futurama Writer on How the Vietnam War Shaped the Series

  News & Politics
Photography
Sept. 21 2014 11:34 PM People’s Climate March in Photos Hundreds of thousands of marchers took to the streets of NYC in the largest climate rally in history.
  Business
Business Insider
Sept. 20 2014 6:30 AM The Man Making Bill Gates Richer
  Life
Quora
Sept. 20 2014 7:27 AM How Do Plants Grow Aboard the International Space Station?
  Double X
The XX Factor
Sept. 19 2014 4:58 PM Steubenville Gets the Lifetime Treatment (And a Cheerleader Erupts Into Flames)
  Slate Plus
Tv Club
Sept. 21 2014 1:15 PM The Slate Doctor Who Podcast: Episode 5  A spoiler-filled discussion of "Time Heist."
  Arts
Television
Sept. 21 2014 9:00 PM Attractive People Being Funny While Doing Amusing and Sometimes Romantic Things Don’t dismiss it. Friends was a truly great show.
  Technology
Future Tense
Sept. 21 2014 11:38 PM “Welcome to the War of Tomorrow” How Futurama’s writers depicted asymmetrical warfare.
  Health & Science
The Good Word
Sept. 21 2014 11:44 PM Does This Name Make Me Sound High-Fat? Why it just seems so right to call a cracker “Cheez-It.”
  Sports
Sports Nut
Sept. 18 2014 11:42 AM Grandmaster Clash One of the most amazing feats in chess history just happened, and no one noticed.