Social Networking: Does Anybody Know Anything?

William Goldman’s famous line about Hollywood — “Nobody knows anything” — may be true of the social media space, too. So many arguments about whether the social networking space is another dot-com bubble turn on anecdotal evidence or emotions, so we should welcome an analysis of the question that promises to include some data other than “2006 sure feels like 1996, doesn’t it?” On the [email protected] site, an unbylined author explores why it’s so hard to value social networking sites. Several Wharton professors look at the numbers, acknowledge that someone is bound to be a winner, but both the subjects and the author say — you guessed it — that it’s too early to tell. “If you have a little bit of money invested in this and you’re already invested in other things,” says Wharton adjunct finance professor John R. Percival. “Frankly the risk is not as big as you think.” In other words, the experts tell us, we don’t really know.
Should this be so difficult? We have been through this before and it wasn’t even all that difficult at the time to differentiate between the properties that has staying power (say, eBay) or those that were unlikely to differentiate themselves (think PointCast). In the early days of a new media type, there are always plenty of ventures that make noise (TheGlobe, Boo) but they’re just noise. YouTube, for example, is trying to follow the Napster model of transitioning from a copyright-infringement service to one supported by rights-holders. Academics like those at Wharton could look at Napster’s valuation as a starting point for figuring out whether YouTube is (a) worth half a billion dollars or (b) too much of a headache for any company to buy. Every new-media moment is full of players who claim that what they do is unprecedented and can’t be valued using earlier methods. But the commecial Net has been with us for more than a decade. There are plenty of examples out there worth extrapolating from to make best guesses about the future. Valuation is a moving target and it’s based on many fast-changing variables — and yet anyone who says it’s impossible to figure out isn’t thinking hard enough. Percival notes, “This is kind of like the oil and gas business … a high valuation might be justified.” OK, so what can we learn from the oil and gas business that will help us here?