March 17, 2008

Social networking value capture

There has been a discussion, in Sweden at least, about the long-term popularity and commercial viability of community/social networking sites. How wise have the acquisitions of Apberget, LunarStorm and Playahead really been? And what about AOL's $850 million acquisition of Bebo?

Generally I'm not too concerned about the lifespan of popular community sites (i.e. are they fads?). They will not live forever, but compared with other media the popular communities seem to have very decent lifespans. The issue is with the sites that never become popular, on the other hand those site are rarely bought and thus not an issue for the traditional media companies.

I think the buyers of social networking sites are facing two basic challenges; 1) how to continue to create value (i.e. create and operate a very good community even if the founders leave) while 2) capturing value in a way that doesn't make the community significantly worse (i.e. plastering big ads on a site doesn't really make it better).

From a short-term point-of-view there are a lot of things even a semi-skilled buyer can do to increase the financial results of a popular social networking site (basically having more advertising on the site and selling it at a higher price). The issue is that such behavior usually fights rather than solves the two basic challenges.

A skilled buyer thinks really hard about how to introduce a revenue model that makes the acquired site better, instead of putting up more traditional banner advertising on the site. Google, Craigslist, Blocket and are four examples of sites that are great businesses because they found revenue models that make their sites better, instead of mindlessly putting up banner advertisements.

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