• CNN Money, Thursday, August 17, 2006 11:15 AM

CNN's Paul R. La Monica worries that big media companies like CNN parent Time Warner will repeat the mistakes made at the beginning of the new century in the latest new-media land grab. Following News Corp.'s successful purchase of Intermix Media, owner of MySpace, everyone seems to want a social network. The problem, however, is that the price of social networks has skyrocketed after that acquisition. Plus, the others don't have anything approaching the usage or member-base of MySpace. Facebook, for example, recently turned down a $750 million buyout offer after management requested $2 billion; British social network Bebo.com recently asked for $1 billion. "If a big media company is willing to buy Facebook, which doesn't have the traffic of MySpace, for more than three times the price of Intermix, that would be the surest sign yet that media companies are hopeless suckers," writes La Monica. He adds that $750 million may have been too much. Then there's the controversial Digg.com article that appeared in BusinessWeek. It said the tech news and gossip site could easily be worth $200 million, even though the site barely breaks even on sales of $3 million. If Digg were public, that would value the company at 67 times sales. Yahoo trades at about seven times last year's sales. News Corp.'s purchase of Intermix valued the company at about seven times its 2005 sales. Even Google's high valuation trades at 19 times last year's revenue. YouTube, another red-hot site, is said to be worth somewhere between $500 million and $1 billion. Never mind that it has yet to break even. All this points to Web Bubble 2.0. "The online advertising market may be sizzling now but it is still advertising. And advertising is a business that does not hold up well when the economy cools," La Monica writes. The difference between today and five years ago is that companies are being valued in terms of acquisition costs--rather than the potential that could be raised by going public. Their valuations are outrageous because they're popular. By now, we should all know that popularity can be short-lived on the Web. (Anybody talking about Friendster these days?)

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