Sunday, 27 September 2009

Twitter worth $1b? Or has the world gone mad again?

(By Richard Holway 6.00pm Sunday 27th Sept 09) Several readers sent me the 37Signals Valuation tops $100b after bold VC investment spoof. It’s all about how a minute $1 investment theoretically implies huge valuations. It has a lovely paragraph –

In order to increase the value of the company, 37signals has decided to stop generating revenues. “When it comes to valuation, making money is a real obstacle. Our profitability has been a real drag on our valuation,” said Mr. Fried. “Once you have profits, it’s impossible to just make stuff up. That’s why we’re switching to a ‘freeconomics’ model. We’ll give away everything for free and let the market speculate about how much money we could make if we wanted to make money. That way, the sky’s the limit!”

Of course, all this is not so far-fetched. Last week Twitter raised $100m (from Insight Venture Partners, T. Rowe Price, Institutional Venture Partners, Spark Capital, Benchmark Capital, and Morgan Stanley) which implies a valuation of $1b. Twitter doesn’t sell ads. Indeed, as far as I know it doesn’t have any monetization business model. Maybe they will use the funding to work out how it might make some money at some point before the $155m they have raised so far runs out? All this is a bit like the $15b valuation which Microsoft’s 1.6% $240m stake in Facebook in Oct 07 implied. See my post 24th Oct 07 post – Microsoft stake values Facebook at irrelevant $15b. It’s now pretty much common knowledge that Facebook tried to buy Twitter last year. Now Facebook is developing its own competing micro blogging features. Leading me to wonder if Twitter’s popularity has peaked?

It’s all so reminiscent of the crazy days of 1999 when eyeballs were the currency and revenues and profits just got in the way. The current boom is already littered with huge writedowns – like ITV and Friends Reunited, eBay and Skype, YouTube and Google and News Corp and Myspace.

Nobody has so far come up with a viable monetization model. Ads on their own won’t be enough. Subscriptions will probably fail in the 'World of the Free'. Can a backend sales model be built? Well, no one has even tried that yet for social networking sites.

Which leads me on to my long held view that these sites are really only of value as a marketing come on; attracting visitors to something else from which you can make money. (That’s the only justification for the YouTube/Google coupling). But, what I am certain about is that, longer term, none are worth these kind of crazy valuations.

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