Around a year ago I wrote a post looking at the revenues, valuations and value per user for a number of the leading social network companies. So much has happened since then, including multiple IPO’s and acquisitions, that I thought it was worth revisiting. I’ve taken a selection of the world’s leading social networks and done my best to get accurate figures for number of users, valuation and value per user.
With the recent acquisition of Instagram, and the upcoming Facebook IPO, the value of social network companies has never been under so much scrutiny. In the absence of any developed financial performance, valuation tends to be based more on their potential, and so much of this is down to looking at the value of the millions of users that have registered for the service.
It is free to join any social network as they want to grow their user base as fast as possible – further down the line I think there are three main ways they can make money as follows:
There are a variety of advertising models for social networks but they mostly fall into two categories – display and direct response. Display advertising is more for branding purposes and charged on a CPM (cost per impression) model and direct response for demand generation based on CPC (cost per click).
2/ Premium Services
Premium services comprise of any chargeable service users can upgrade to such as additional functionality, storage or customer support.
For example, LinkedIn charge $100 per month for their full ‘Executive Package’ providing access across their whole user base, mainly used for recruitment and sales. Another example is Zynga who make most of their money from selling ‘virtual goods’ within their games that are free to play.
3/ Third Party Apps
Once a social network reaches a certain size it will usually start opening up its platform to third party developers. If these apps are generating revenues in some way then the underlying network will usually take their cut. Good examples of this are Spotify using the Facebook platform or Datasift and Gnip using the Twitter ‘firehose’ of data.
As a network becomes bigger and more widely used, the strategy will usually be to leverage the power of the platform more than the application as this expands your market and also starts to develop an eco-system that is much more defendable to competitive threats.
Apart from one outlier, Facebook is clearly in a commanding position both in terms of the sheer size of its user base and the value per user. The company will soon reach 1 billion users meaning they have more than 50% of the internet’s population and nearly 15% of the world’s population using their service. Facebook has cemented its position as ‘the social network for everyone’ propelled by strong execution and also the network effect of the bigger you get the more attractive you become thus driving further growth.
Plus, Facebook’s financial performance is well beyond the embryonic stage – the company will deliver around $7bn in revenues this year and is already turning a decent profit.
Facebook could be the advertising platform of the 21st century and has not even touched the edges of what they could do with all the user data in terms of improved and more dynamic targeting. The big question for me is whether users will stay so engaged with Facebook in the face of more advertising and a growing list of cooler, younger competitors offering more specialized services. They managed to head off a potential threat with the Instagram acquisition but can they keep doing this? It seems Facebook has become the huge, boring and paranoid goliath in the market far quicker than any other company I can remember and I worry about the implications of this.
Looking at the other social networks, they are all in the $20-80 per user range apart from Tradeshift. I’d say that the value per user is calculated from a combination of size, growth, engagement, competitive threats and evidence of monetization.
LinkedIn is rated highly because they are the unchallenged leader in providing a social network for professionals and have started to prove out a three-pronged monetization strategy that will see the company getting close to $1bn in revenues this year.
Zynga, on the other hand, has almost half the value per user. This reflects their greater competition and also a less sustainable level of engagement from its users who will just go to wherever the best games are.
The one outlier is Tradeshift (for disclosure I’m an investor in Tradeshift through Notion Capital) with a huge $1,370 per user. The big difference here is that Tradeshift is the only company in the list that is building a network for businesses as opposed to individuals. It would seem fairly certain that the opportunities to monetize businesses are greater than consumers. First, businesses have bigger budgets and are used to paying for things. Second, once you have a network of businesses at scale, the opportunities to provide services that help them to work more efficiently and bring down costs are vast. A good example of this is their ‘instant payments’ service that enables users to submit an invoice and receive an instant payment through an on the fly credit rating.
One thing’s for sure and that is none of these companies are close to justifying their valuations and value per user at this point. But I’m sure many of them will go on to realize their potential over the coming years, and to do that, they will need to extract allot more money from their users.
We’ve all had it very easy up until now but remember there’s no such thing as a free lunch!