$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.

3. Well-placed skeptics. Not all the players are jumping into the social networking pool with two feet. Viacom's name hasn't been mentioned in connection with any of the large sites. And last week, once-burned-twice-shy Richard Parsons, the CEO of Time Warner, told ($ required) the Financial Times that his company wasn't particularly interested in Facebook and YouTube. "Valuations that are put on those businesses that currently make no money are astronomical and you have to have a big leap of faith."

Daniel Gross is a longtime Slate contributor. His most recent book is Better, Stronger, Faster. Follow him on Twitter.

TODAY IN SLATE

Justice Ginsburg’s Crucial Dissent in the Texas Voter ID Case

The Jarring Experience of Watching White Americans Speak Frankly About Race

How Facebook’s New Feature Could Come in Handy During a Disaster

The Most Ingenious Teaching Device Ever Invented

Sprawl, Decadence, and Environmental Ruin in Nevada

View From Chicago

You Should Be Able to Sell Your Kidney

Or at least trade it for something.

Space: The Next Generation

An All-Female Mission to Mars

As a NASA guinea pig, I verified that women would be cheaper to launch than men.

Terrorism, Immigration, and Ebola Are Combining Into a Supercluster of Anxiety

The Legal Loophole That Allows Microsoft to Seize Assets and Shut Down Companies

  News & Politics
Jurisprudence
Oct. 19 2014 1:05 PM Dawn Patrol Justice Ruth Bader Ginsburg’s critically important 5 a.m. wake-up call on voting rights.
  Business
Business Insider
Oct. 19 2014 11:40 AM Pot-Infused Halloween Candy Is a Worry in Colorado
  Life
Outward
Oct. 17 2014 5:26 PM Judge Begrudgingly Strikes Down Wyoming’s Gay Marriage Ban
  Double X
The XX Factor
Oct. 17 2014 4:23 PM A Former FBI Agent On Why It’s So Hard to Prosecute Gamergate Trolls
  Slate Plus
Tv Club
Oct. 20 2014 7:15 AM The Slate Doctor Who Podcast: Episode 9 A spoiler-filled discussion of "Flatline."
  Arts
Brow Beat
Oct. 20 2014 8:32 AM Marvel’s Civil War Is a Far-Right Paranoid Fantasy—and a Mess. Can the Movies Fix It?
  Technology
Future Tense
Oct. 17 2014 6:05 PM There Is No Better Use For Drones Than Star Wars Reenactments
  Health & Science
Bad Astronomy
Oct. 20 2014 7:00 AM Gallery: The Red Planet and the Comet
  Sports
Sports Nut
Oct. 16 2014 2:03 PM Oh What a Relief It Is How the rise of the bullpen has changed baseball.