Social-Networks' Valuations: Irrational Exuberance 2.0?

Media Moguls Risk Overpaying for Fickle Fans of Facebook, MySpace

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NEW YORK ( -- Several million fickle teens + dozens of curious advertisers x reams of breathless press - some perverts = $2 billion, please.
Facebook and MySpace are just two of the hot new social networking properties that are attracting a frenzy of VC funds.
Facebook and MySpace are just two of the hot new social networking properties that are attracting a frenzy of VC funds.

$25 million VC funding
Before it locked down $25 million in venture capital a couple of weeks ago, that was the sort of the calculus Facebook was apparently working under. The ever heady combination of ballooning price tags, youth appeal and gauzy PR signaled to some a second-coming of the late-1990s Internet bubble forming in the fast-growing social-networking and media realm, where tens of millions of young consumers congregate -- and have turned sites like YouTube, MySpace and Xanga into hot new properties for VC firms and titans of old media. Just last week Viacom announced it has dropped $102 million in cash for Xfire, an online gaming community that will be part of MTV Networks.

While neither the power of consumer-generated content nor the marketing cachet of digital communities united around similar tastes is being questioned, there's a feeling that the exorbitant figures being tossed about for Facebook signal some fin-de-siecle exuberance about properties that, though successful at reaching large numbers of an elusive demographic, are untried over the long haul.

Turned down $750 million
Facebook, launched just over two years ago by a Harvard University sophomore, reportedly turned down a $750 million offer in the hopes of fetching about $2 billion from rumored suitors ranging from Viacom to Google. That was way up from the $580 million commanded last year by the much larger MySpace, which went to News Corp. (In March, Facebook had 12.9 million unique visitors compared to MySpace's 41.9 million, according to ComScore Media Metrix.)

"It seems like a lot," said Debra Aho Williamson, senior analyst at eMarketer. "Facebook is much smaller and it doesn't make much sense that it would go for that much more. But then again, everyone's laser-focused on networks. Maybe in the long run it will just look like News Corp. got a great deal."

"The jury is still out on whether these are sustainable businesses," said David Cohen, U.S. director-digital communications, Universal McCann. "The audience is fickle."

A Facebook spokeswoman declined to comment.

Stiff challenges
There are stiff challenges facing these sites, largely brought on by their own popularity and success in luring the attention of marketers. First off, they have to deal with the already well-publicized reality that the plethora of photos and reams of personal information about teen users, including likes, dislikes and very intimate fare, is just so much chum in the water for sexual predators.

Second, they have to combat the negative effects of increased commercialization. "They're still trying to get how to remain cool while offering an appealing option to advertisers," said Mr. Cohen.

"The key issue for MySpace is figuring out more and more ways to offer easier functionality and more features to drive advertising revenue," said Richard Greenfield, media and entertainment analyst at Pali Research. "The critical aspect will be working with advertisers to explain how to use this creatively and also creating safer MySpace-programmed areas."

The future of Facebook and MySpace -- as well as any number of challengers -- rests on the continued enthusiasm of kids like Nikki Rennalls. To say she has a social-networking addiction would be an understatement. Rather than give up the usual college-girl fare for Lent -- chocolate, cigarettes, beer -- the 19-year-old Georgia Tech freshman stopped using Facebook. That meant she had to (gasp!) e-mail or (yikes!)pick up the phone and call her friends.

Widening Facebook's audience
She's obviously a fanatic and loves improvements like the site's capacity to allow uploads of short music clips. But Facebook's attempt to widen its audience has already irked her: "My little brother can now check up on my schedule and my pictures whenever he wants. In addition, all of his little friends, who want as many college friends as possible, can friend me. ... It's like spam for Facebook."

And to her, a lot of the attraction is in the lack of commercial interference. "There isn't some corporate guy at Apple who started the 'I Can't Live Without My iPod' Facebook group," she wrote. "It is led by a group of kids who really cannot live without their iPod."

Um, yeah -- except for the fact that marketers are dying to find of ways of harnessing both the reach and targeted features of these sites through paid advertising and through more organic word-of-mouth appeal. Whether they can negotiate between the often brand-friendly but advertising-hostile nature of American youth and the needs of advertisers that provide their revenue is a big issue.

"We're all looking for the next big thing, and there's a lot of hype and sensationalism," said Mr. Cohen. "But this is a front-and-center issue for a lot of marketers. [Teens and young adults] are a tough audience to reach and both MySpace and Facebook do a great job of it."
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