An article over at The Guardian has me seriously considering something I’ve always wondered about today’s swath of web 2.0 businesses – why are they valued so much and where are the profits coming from to justify these values?
The Guardian article puts forth that Anthropologist Sekai Farai was given a grant from Columbia University to study the effects of the burgening web 2.0 markets. The more he studied the changing valuations, the more he saw the emerging bubble forming.
In the article, Alan Patrick, co-founder of technology consultancy Broadsight, makes it pretty clear that the bubble has already begun:
“A bubble is defined by too much money chasing assets, greater production of those assets, then the need to find a greater fool to buy them.”
With Facebook now valued at somewhere between $US50 and 60 billion dollars, and Group buying discount site Groupon offered $6 billion for the site by Google – it’s not hard to get caught up in the hype and the astronomical figures being thrown around.
Just as absurd is that Twitter is now worth $US10 billion – a pretty figure, until you consider that Twitter has no revenue streams to speak of. Even Farmville, the running joke among some Facebook users – is now valued at more than US$9 billion: big dollars for a social media game.
Farai says we should ultimately follow where the money is coming from:
“There’s a sense that this isn’t real money. In the long run, that can’t be good.”
Are these valuations out of control? Let us know below. [The Guardian]
matt
Tuesday, February 22, 2011 at 1:13 PMI thought farmville made money through ‘in app purchases’?
doubleDizz
Tuesday, February 22, 2011 at 2:47 PMI assumed they calculated the worth by the amount of personal information the business has access to….?
Daniel Long
Tuesday, February 22, 2011 at 4:11 PMYes, you’re correct. Every piece of data a company has on our web surfing habits is marketable in some way, although valuations in the many billions do make you wonder how big the global advertising business is and how much revenue it can spend to keep these sites and their mammoth valuations alive.
Bruce
Tuesday, February 22, 2011 at 3:07 PMyou got me at explosion,
but seriously, didn’t people learn after bubble V1? isn’t Google, Amazon, Facebook’s valuation based on their revenues (often a lot from advertising) as well as the number of eyeballs they have command over, and future plans that those eyeballs make possible?
When Google and FB started they had difficulty raising venture capital precisely because they had no income streams, but people saw the potential. after the GFC, a lot of investors had to reign in their easy money spending. I notice that many exclusively online companies are going belly up all the time, so isn’t the market sort of regulating itself?
In my case I made a website http://www.dogwalkersmelbourne.com.au that exists to showcase my service, I only make money from performing a dog walking service, locally. Many website of the business kind are also only in existence to back up bricks and mortar. So not all business websites are likely to be bubble affected. On the other hand there are the web 2.0 varieties that USUALLY only grow if they have a real plan to be able to compete.
So yes, I think the bubble is very over rated.
I have read several Google expose books and some of the speculation to take over advertising steams from other industries, new ways of embedding their application, ways of taking over other industries and collating individuals search and spending potential makes them many more times valuable than just their current revenue streams. Sure this is just potential, but they have done alright already in following plans – so many bricks and mortar competitors would say.
No body can predict a bubble burst, but in many of the web 2.0 giant cases, they are so embedded and don’t rely only on disposable income, that they have some form of stability beyond what predecessors had.
B
Steve
Tuesday, February 22, 2011 at 5:52 PMBut Google has always been honest about being an advertising company and the fact they have many great products like Gmail, maps, Android, Chrome OS/Browser etc means that should they choose, they can always start charging in some way (if not outright purchase, than definitely through others or ads)
Facebook on the other hand, yeah it’s popular but it doesn’t exactly sell anything either. It’s not worth the ludicrous amounts of money that’s throwing around.
Farmville is the biggest joke of all. Zynga is a business empire built on smoke and mirrors. Once its audiences simply grow bored with their product, their revenue from micro-transactions will dry up and we’ll see just how much a small team of devs is somehow worht $9 billion.
Michael
Tuesday, February 22, 2011 at 7:00 PMWe run a few websites, http://www.handband.com.au, http://www.mediband.com, http://www.medibandplus.com. We also spend money on Facebook ads for these sites. Surely Facebook is making a significant amount of revenue from their ads. A an aside, we have all but stopped advertising with Google, as the return just is not there. Social advertising is far more effective and worthwhile.
Muhammad Noman
Tuesday, February 22, 2011 at 9:10 PMPeople say that groupon is losing its value but i think goup on is flying high! http://grouponbot.com site is getting increasing greater no. of visitors day by day only because of their user friendly deals of all kinds especially for the discount hunters…and you can see people are cloning groupon type of sites …thats a fact but they can never provide services as good as groupon i bet on that!
Mark Kernke
Tuesday, February 22, 2011 at 9:58 PMThese sites are valued like any other business, through their ability to make money. Not all of that is being monetised at the moment due to building a stronger user base and gaining brand awareness and customer loyalty (which translated to good will in accounting terms).
Facebook has some very good information for targeted ad serving (many people really ‘like’ a lot of things or talk about a lot of topics they are interested in) which it is starting to put to some good use and has seen profit margins increase to very high levels this past year, with even more crazy growth expected this year. Twitter does have a revenue stream through promoting your twitter account or particular tweets (http://business.twitter.com/advertise/start) and also has a lot of very useful infrastructure and data that is valuable to the likes of google or facebook or other ad serving or data-mining companies.
The place for these web2.0 sites to fail is with the revenue stream becoming smaller from adserving, however with current understanding in the advertising industry we don’t even see huge cuts to advertising budgets in recessions any more because we understand the importance of continual advertising to market brands.
As today’s adsevers are becoming faster, more targeted at the users and cheaper for the hardware back-end (which is all natural progression of any industry) then it means these sites should only solidify in the future and have higher values and not bust.
(Aside: Although I will not say these valuations are accurate, they at least give a good indication. You don’t know the real value of anything until a buyer comes along and the purchase is made.)
John
Friday, March 18, 2011 at 7:13 AM“The Guardian article puts forth that Anthropologist Sekai Farai was given a grant from Columbia University to study the effects of the burgening web 2.0 markets. The more he studied the changing valuations, the more he saw the emerging bubble forming.”
Sekai Farai is a “she” not a “he.” Please correct this typo.
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