For the past few days, there has been intense conversation surrounding the valuation of social networks. It began with Andrew Chen’s analysis of Facebook and MySpace which leveraged Google’s new Trends for Websites services.
Not only does Andrew suggest that, “social networks have weaker network effects than previously speculated” but he also suggests that not all social network users were created equal. His basis is that ad spending in the U.S. is quadruple the size of the next largest advertising market, the U.K. Yesterday, Mike Arrington furthered supported this argument by creating his own point based system which associates average valuation model which connects the average ad expenditure per person in each country and multiplying that into the size of each network.
I’ve done some research myself over the past 12 months and I’ve come up with my own equation:
Social Network Valuation (SNV)
(Repeat Monthly Visitors x Engagement x Virality) / Nobody Has Any Idea
As you can clearly see in my heavily researched equation, nobody has quite figured out the answer to how much a social network is worth. The biggest challenge is that nobody has yet to figure out how to effectively monetize these sites. If you’ve attended any of the industry events you’d also know that the primary reason is that advertisers have not figured out how to measure this yet.
While I believe exploring various metrics to determine more “accurate” valuations is an important exercise, I’m not sure that the models used so far are the most effective. What do you think are the most effective models for determining social network valuations?