Commentary
Social Media Biz is Rich, Rich I Say
- by Erik Sass , Staff Writer @eriksass1, January 3, 2011
Like Scrooge McDuck in his money bin, the social media business is rolling in dough following one of the most funding-est weeks in its history. Facebook just raised $500 million in a round of funding led by Goldman Sachs with help from Digital Sky Technologies -- not long after Groupon revealed it has already raised an equivalent sum as part of a planned $950 million round of funding announced just last week. These investments valued Facebook at $50 billion and Groupon at $6.4 billion. And it was just two weeks ago that Twitter raised $200 million in a funding round which valued the microblogging service at $3.7 billion.
$1.2 billion in two weeks isn't bad (and it could be $1.65 billion shortly, if Groupon finishes raising the rest of the amount specified in SEC filings). These moves would seem to confirm social media's position as the hottest spot in the online media business. Of course, nervous Nelly that I am, I still find myself wondering whether there isn't some degree of irrational exuberance at work in all this.
The strongest case for rational exuberance is Facebook, according to Wedbush social media analyst Lou Kerner, who said the $50 billion valuation is reasonable in light of revenue projections; indeed, Wedbush believes Facebook's annual revenues could reach as much as $30 billion by 2015. Twitter's valuation also makes sense, according to Kerner, in view of the fact that "Twitter is on its way to global ubiquity as well and will drive very meaningful revenue and profits."
However Groupon will face more competition in the emerging group-discount marketplace, Kerner warned -- not least from Facebook, Google, Amazon, along with Travelzoo and "literally hundreds of smaller players." Some skeptics have pointed to Groupon's onerous terms, which take a big cut of retail partners' sales (already discounted by 50%), and the difficulty of scaling its personnel-intensive local sales model. Still, Kerner was mostly sanguine, noting that "businesses will always pay for access to profitable customers" -- something which Groupon still provides.
Back to Nervous Nelly: some of the latest investments still have some bubble-like qualities, from my handwringing point of view. For example, DST Global made its latest Facebook investment -- to the tune of $125 million, through some planned horse-trading with Goldman Sachs -- a few weeks after failing to invest a similar amount in Twitter (the funding slot instead went to Kleiner Perkins Caufield & Byers, according to All Things Digital). Which to me suggests a process which might be summed up, "gotta spend this money somewhere in the social media world, but Twitter passed, so I guess Facebook will have to do" -- not exactly a scientific approach.
Erik Sass is editor of Publishers Daily. You can reach Erik at eriksass@gmail.com.
Nice summation. And excellent questions. I wrote last year that the primary winners from social media are the VC's, the site's that cash out, and the ad agencies convincing their clients to spend big bucks on social promotion.
What's not yet clear that clients/manufacturers/service providers who spend big bucks on social are getting a good return on their money. Mere ability to attract investment money and consumer accounts clearly doesn't imply "effective place to promote your product".
That requires more data than we have so far.
Lou Kerner of Wedbush presents a credible argument regarding recent social media investment and valuations for companies such as Facebook and Twitter. There is a correlation between the valuations and revenue projections as well as the enormous access and influence these social media companies provide the consumer community. As business models continue to develop in the expanding social media market the power of the community which is enabled by the likes of Facebook has the potential to translate into huge revenue opportunities. For global brands social media has rapidly moved from an emerging experiment in the sales/PR channel to an integral part of customer engagement activities. We have found that global brands are increasing their investments in social media “business” programs to leverage the power of these connected communities. Social media budgets will increase only as analytics validate the ROI of the social media spend for global brands.
As with any hot market with untapped revenue potential there is always the threat of irrational exuberance; however the trend to measure and quantify Social Intelligence hopefully suggests a more scientific approach.
Elizabeth Morgan
SVP, Client Services & Partnerships | Visible