Let's say you're Sumner Redstone. Your top people at Viacom (VIA) let that other billionaire media mogul, Rupert Murdoch at News Corp. (NWS), scoop up the social networking upstart MySpace last year for $580 million. What would your next move be?
Well, you might spend a year or so on the sidelines, watching how the MySpace deal shapes up and taking some comfort in all the chatter about the risk involved in that transaction. But after a year, MySpace is still growing strong. And then it signs a landmark $900 million deal with Google (GOOG) (see BusinessWeek.com, 8/8/06, "Google Gets Back into MySpace"), boosting its credibility and nearly doubling its money on the acquisition. What now?
Well, you'd probably think about acquiring one of the social networking sites that compete with MySpace. There has been speculation in recent days that Viacom has been in talks with social-networking site Bebo, which is based in San Francisco but has the bulk of its audience in Britain and Ireland (see BusinessWeek.com, 7/11/06, "A Billion for Bebo? Bubble, Bubble, Double Trouble").
TOUGH SPOT. The problem is that such sites are expensive. Bebo is looking for something in the range of $1 billion, according to one industry executive. And several executives say that FaceBook, another hot social networking site, wants $2 billion to sell, at least earlier this year (see BusinessWeek.com, 3/28/06, "Facebook's on the Block").
Such aspirations put potential buyers such as Viacom in a tough spot. It refused to match the $580 million News Corp. paid last year for MySpace. Does it really want to pay several times that amount for Facebook or Bebo, which are smaller? MySpace had 54.5 million unique monthly visitors in July, while FaceBook had 14.3 million and Bebo had 2 million, according to market researcher comScore Media Metrix.
And despite its size, MySpace is expanding its community at a rate of 157% on a year-over-year basis. Facebook is growing at a rate of 117% and Bebo at 85%, suggesting that neither site is on track to overtake MySpace when it comes to scale.
The market may soon find out whether up-and-coming sites such as Bebo and Facebook will command a price in the billion-dollar range. Some analysts think it's possible. "I wouldn't be surprised if they got something in that range. Part of it is hype, and part of it is what appears to be the power of social networking on the Internet," says Internet analyst Greg Sterling of Sterling Market Intelligence in Oakland, Calif. He thinks there's a good chance Bebo or Facebook or both will sell over the next few quarters.
HIGH RISK. Still, there are skeptics. "I don't think any buyer is willing to pay [the $580 million MySpace got]," according to investment banker Ken Marlin of Marlin & Associates, a media- and tech-focused investment bank. "But either company could command hundreds of millions of dollars." He thinks both are likely to sell during the next year or two.
How does one go about valuing a young company with little in the way or profits or revenues? Marlin, who isn't working for a company on either side of a potential transaction, says the answer is part art and part science. It's a matter of figuring out how many ads can realistically be sold now and over the next few years, and using the best available metrics to figure out how much money those ads can command.
He believes that both Facebook and Bebo have the potential to generate millions of dollars in profit over the next few years, and that they might one day deserve a valuation in the billion-dollar range. "But they won't get that much now because the risk that they won't grow into those valuations is too high," Marlin says.
Facebook's growth has leveled off during the past few months, which will make it more difficult for the company to command a massive premium. It had 14 million unique visitors in May, according to comScore. That number dropped to 13.7 million in June before moving up to 14.3 million in July. That's hardly a catastrophe, but it doesn't strengthen the case for a billion-dollar deal.
VALUING THE CUSTOMER. Bebo has shown steady growth in number of users over the last few months. And its page views doubled to 2 billion in July from 1 billion in June. But measured in terms of unique monthly visitors, it's still small.
Marlin says that News Corp.'s deal with Google notwithstanding, the potential transaction value of social networking sites has not increased much since last year. But the notion of social networking on the Web as a legitimate channel for marketing and advertising has gained traction.
"Let's say you are a dealer of antique cars. If you can identify potential customers as part of a community on the Web, and get those people to interact deeply with your brand, why wouldn't you find that valuable?" says Mark Kingdon, chief executive of interactive advertising and consulting group Organic. "Valuing these companies is really about figuring out what the value of a customer is," he says.
If social networking sites can continue to develop their ability to analyze their community, and come up with new kinds of targeted ads and marketing campaigns, their hopes for billion-dollar valuations could be fulfilled. The issue is whether potential buyers such as Viacom and potential sellers such as Bebo and Facebook can agree on what those properties are worth today.
Rosenbush is a senior writer for BusinessWeek.com in New York, and Scott is an intern in BusinessWeek's London bureau
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