Valuation of social networks

Published on: 29 Mar 2008 by Anders Conbere

We are beyond the point where social networks should be valued on the number of locked in customers they posses. This was the wrong way to place value on social networks to begin with, but it's almost silly now. When looking at social network valuation we need to know a couple of things

1. what are the quality of the users who are participating?

how much money do they spend on the products being sold (ads or otherwise)

A social network that engages people with high disposable incomes, and are likely to purchase products online is much more likely to sell products on that network via advertising. If your network is a particular niche, the strength of that relationship might also come into play, as the quality of the products being sold (advertising) might as a result also increase.

2. how active are those users on the network?

that is, how much time are they spending engaging with the network, and how is that resulting in higher sales.

A social network that engages people to spend more time engaging with people, the product and advertising is worth more than a social networks that fails to do those things. Further the correlation between that activity and sales of products or ads interacted with are extremely important metrics when attempting to understand how valuable the time spent there is.

3. What is the quality of the service your application is providing?

How likely is it that your service will continue to engage users in participation.

If you have a crappy photo editing social network, it's less likely to continue to draw engagement from your users over time than a high quality product in the same niche.

So what does this do to the way we perceive the value of social networks today? If you don't care where your users come from, only that they are active on your site and engaged, what benefits do you have to lockin? I would argue none! I think this idea is terrifying to the folks at Myspace and Facebook, but this kind of valuation has huge ramifications to little sites like dopplr or tripit. These sites have no perceived value in building a social network. They are selling a service, and if they could build their product off of a pre-existing network that was large enough to continue to flow traffic through them at an acceptable rate, I would argue that economically that makes way more sense than attempting to entice people into creating new networks there.

This is what Facebook is selling with their app platform, what google wants to see happen with open social, and where a lot of the conversation about Social Network Portability should be happening. This is a fundamental change in the way that the majority of people view the valuation of social applications, and a difficult one to describe. But this is the power of tools like XMPP, FOAF and XFN. They begin to bring about a decentralized social network that the creators of social networks can use to dramatically increase the valuation of their application (by bringing more people through their app, and allowing them to focus on the quality of the services they provide), which for most social network creators, is how they make their money.

Facebook and MySpace might not be rushing out to join this game, but all the small services should be looking around and saying. "Why are we busy building social networks when we could be using a network that already exists to drive more traffic through our site and thus generate more revenue?" And that's the question really, "how do we generate more revenue?"