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Valuing social media companies and Facebook apps October 9, 2007

Posted by jeremyliew in advertising, facebook, media, myspace, social media, social networks, start-up, startups, VC, Venture Capital.

People are asking what a widget is worth, and in particular what a Facebook app is worth. Lance Tokuda, CEO of Rockyou (a Lightspeed company), received a lot of coverage when he told the NY Times that the Superwall app was worth more than $10m.

Despite my previous attempts at building a framework to value a facebook app, I now think it makes little sense to talk in the abstract about what “an app” is worth. It’s better to apply the same principles to think about what a company is worth. A company will have various distribution channels through which it reaches its users; this can include its own website, a Facebook App, a Myspace widget, a distribution deal with AOL, SEM on Google, email virality, and others. Viewed this way, open platforms, and distribution, are opposite sides of the same coin.

In the late 90s, some companies pinned their futures to a single distribution deal with a single portal, and paid up for the privilege. Others, wisely, diversified their dependency on any single channel. A company that defines itself solely as a Facebook app runs the risk of relying on a single distribution channel.

Companies like iLike and Flixster (a Lightspeed company) have built their systems as a single database; their users can access the same data regardless of if they come in from their Facebook app or from their website. As the other social networks open up their platforms, these too will become alternative channels to reach users with the same system. It’s like one kitchen serving multiple restaurants.

On this basis then, we can apply standard mechanisms for valuing a media company, but adding the virality factor that is peculiar to social media:

    Value of a social media company
    = # of users x value of a user

    = # of users x RPM x lifetime “pageviews” generated by user and subsequent invitees

    = # of users x RPM x lifetime “pageviews” generated by user x virality factor

    = # of users x RPM x “pageviews” per user per month / monthly churn rate x virality factor

(Note that I use the term pageviews loosely – these can include canvas views or any area that the company can put an ad.)

So value goes up as RPM goes up. RPM goes up depending on how targeted your traffic is; whether you’ve got endemic advertisers, demographically targeted users or just broad reach.

Similarly, value goes up as PV/user/month goes up. This argues that companies with high ongoing engagement (ie some aspect of ongoing utility) will be more valuable. Higher engagement often comes with access to the social graph through an API.

Value goes down as monthly churn goes up
. One of the factors that reduces churn and increases “stickiness” of a social media site is how much “archive” value is built on top of the site. The more you commit to adding information to an site, the stickier that site will become.

Finally, value goes up as virality goes up. Virality will be different in each distribution channel, so this will need to be evaluated separately, depending on what viral growth modes are open in each social network.

As Myspace, iGoogle/Orkut, Hi5, LinkedIn, Bebo, Tagged and others open up APIs to their platforms, I think the companies that treat each social network as a distribution channel, rather than defining themselves as an application on a single platform, will create the most value.


1. lawrence - October 10, 2007

Well said Jeremy. Your point is especially relevant to folks whose widgets / apps / apis / toolbars gather user data.

One of my overwhelming takaways from the Community Next and Graphing Social conferences was how few companies are heeding your advice. In the mad land grab that was the early days of the Facebook platform, most folks chose to slap something up on Facebook on a standalone basis rather than sync it with their home bases – and many don’t even have home bases. I expect this to change.

2. Jim Elliott - October 10, 2007

Spot on with your point of these social spaces as distribution channels.

3. Jordan Mitchell - October 10, 2007

Is it really accurate to view Facebook as a *distribution* channel when every user you gain is not really your user at all, nor do you have any rights to the value of the network (social graph)?

Doesn’t matter whether you get 10 users or 10M, Facebook can terminate your agreement and you’re done — you have 24 hours to delete all user and social graph data.

For that reason, I view the value as more of promotion not distribution. Maybe splitting hairs …

4. ettsproject - October 10, 2007

I agree with the whole promotion over ditribution. Just think about the sheer ridiculousness of someone relying on a face book app as their only distrubution channel…. I dont know… I just wouldnt do it

5. Tag Team Interactive - October 11, 2007

[…] Liew posted a very insightful piece about valuing widgets (er, “social media companies”) from the pe…. He writes in his post that: …I now think it makes little sense to talk in the abstract about […]

6. Jonathan Cottrell - October 11, 2007

Great points, Jeremy! While I believe there will be a general shift in entrepreneurs’ thinking to understand this very concept over the coming months, I would say that the majority of these “social media companies” are purely jumping on the social platform bandwagon because they’re in it for the fast buck. They don’t want to become “companies,” they’re purely app developers who want to strike it rich as fast as they can. The people who truly succeed will be those who are smart about their long-term plans and understand that the social web is exactly what you say – another distribution channel which must be leveraged, but not relied upon, for success. It’ll be interesting to watch over the coming months who rises and, of course, who falls.

7. Tag Team Interactive - October 15, 2007

[…] to no effect upon the networks that are building solid “Social Media Businesses” (as Jeremy Liew refers to them) atop the social networks following Facebook’s opening lead. There are two major reasons […]

8. Bluewall Media - Software, Web, Media Content Design and Development - February 12, 2008

[…] People are asking what a widget is worth, and in particular what a Facebook app is worth. Lance Tokuda, CEO of Rockyou (a Lightspeed company), received a lot of coverage when he told the NY Times that the Superwall app was worth more than $10m. […]

9. The Value of a Facebook App | The NWEN Blog - July 27, 2008

[…] your company centers around your distribution — your users. Jeremy Liew wrote a good post on how to value a social media company, and # of users is his first variable for good reason — assuming they’re YOUR users. I […]

10. Oliver Feakins - April 2, 2009

Very good post. People dont often take into effect the viral benifit to an app. That viral buzz has a value as well and needs to be determined prior to valuation.

11. Searching for social media experts « Direct Marketing Observations - May 18, 2009

[…] A blog post titled, Valuing social media companies and Facebook apps […]

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