Media: All about ... Social media valuations

Are we witnessing the start of another dotcom bubble, Alasdair Reid asks.

Well, here we go again. So soon, we hear you ask. Perhaps, as our goldfish bowl shrinks, so our attention span becomes ever shorter. History, you might begin to suspect, now aspires to a revolving door or a Magic Roundabout.

Because, a mere 11 years (almost to the hour: 10 March 2000 was the fateful day) after the first dotcom bubble popped, we are, according to many analysts, about to embark upon the whole dizzying, hyperventilating exercise again. And, yes, as you might expect, Twitter is right at the centre of it all.

A number of informal conversations involving Twitter and two possible corporate suitors, Facebook and Google, have apparently led to an understanding that the company's current valuation is likely to be somewhere around $10 billion - even though it made a loss in 2010 on revenues of $45 million.

Yet the Twitter valuation is nothing short of feeble when set alongside Facebook's. When Facebook shares change hands in private transactions (it's not yet a listed company), they're currently priced at a level that would value the whole company at around $60 billion.

But at least Facebook can point to impressive revenue growth in recent years. Other companies caught up in recent valuation hype can hardly say the same. Take, for instance, Spotify, the loss-making online jukebox that hasn't yet been able to launch in the US because major music companies such as Sony are deeply sceptical about whether its business model makes sense. Fear not, though. Its new valuation is (drum-roll optional here) ... $1 billion.

Market bubbles generally arise out of a cocktail of greed, stupidity, fraudulent misrepresentation, graft and chronic over-optimism. And clearly, where Twitter's concerned, we're interested largely in the last in this list of factors. There's a staggering amount of wishful thinking behind this particular brand.

The feeling that social media has transmuted reality (including former fundamentals such as human nature and the rules of arithmetic) in a rather beautiful way is a notion that has taken a powerful hold on the imaginations of a whole generation.

Twitter, in particular, is now imbued with a power and a glory that passeth all understanding.

On a broadly anthropological level, in recent weeks this has been underlined no more clearly than in some of the coverage of political upheavals in foreign lands - and the underlying assumption, evident in dispatches across a wide spectrum of sources, that Twitter will somehow waft gilded democracy upon a magic carpet to the Arab world.

And, of course, it's possible. All things are possible. It is, for instance, just as possible that a loss-making company with no real business model can be worth $10 billion of your (and, as ever, it really will turn out to be yours) hard-earned cash.

All of which only really goes to prove, perhaps, the notion that history repeats itself, first as tragedy, then as ... as ... what was the question again?

1. Reckoning of a new Twitter valuation began to emerge last month following reports in the business press that both Facebook and Google had conducted exploratory talks. JP Morgan is also reported to be in discussions to buy a 10 per cent stake, valuing it at $4.5 billion. Twitter's previous valuation (itself rather remarkable) was $3.7 billion.

It has been selling advertising (in the US only) since March 2010 - and took $45 million in revenues last year.

2. Facebook, which now has more than 500 million users, has a rapidly growing share of the display advertising market. Its revenues were $740 million in 2009; $1.86 billion in 2010; and it is expected to take upwards of $4 billion this year.

3. Last week, it was reported that the investment company Kleiner Perkins Caufield Byers, which claims expertise in backing hi-tech companies, is to pay $50 million to acquire just under 5 per cent of the loss-making Swedish online music provider Spotify.

4. The social gaming company Zynga, the owner of FarmVille (the most popular game on Facebook, with 62 million users), is also trying to raise $250 million on terms that would value it at more than $7 billion. Zynga turned in revenues of $850 million last year. JP Morgan is reported to be interested in a stake too.

WHAT IT MEANS FOR ...

THE ADVERTISING ECONOMY

- Market bubbles (over the short term, at least) are rather good for ad agencies and media owners. The first dotcom bubble was certainly a case in point.

- In fact, in the media world, the only people who lost out were those who accepted payment in the form of dotcom stocks and shares - which turned out to be worth less than the paper they were printed on.

THE REAL ECONOMY

- There are those who argue that hi-tech bubbles are dangerous and nasty - because they tend to be followed by downturns that damage otherwise healthy parts of the economy. Others believe they're a price worth paying for economic progress.

- There are also those who believe that any damage can be localised - the analogy here being Google, which has proved it can absorb the huge losses incurred in investments such as YouTube, acquired for $1.65 billion in 2006. YouTube continues to lose money - for instance, an estimated $500 million in 2009.

SOCIAL MEDIA

- Some analysts argue that Twitter and Facebook are the keystones of a new social architecture - and, as such, they are almost priceless. After all, a significant chunk of the world's educated and affluent population now spends a large amount of time in this space.

- And yet, while Facebook's future as a business seems assured, Twitter's very definitely is not. The pressure will now build on the likes of Twitter (and there are a whole host of other social media operations about which this could also be said) to start generating significant revenues.