By Pace Lattin (This article has been derived from an external source)
I’ve questioned the sanity behind some of the media valuations in my blogs lately, from Twitter’s $1 billion-plus valuation to Groupon’s claims of being worth $15 billion. To many people, including my humble self, these valuations seem downright crazy, especially when faced with the realization that more than a few of these companies haven’t made a single dollar in revenue and have no real plan on how to make money. Still, there are pros and cons when it comes to interactive advertising and how this could affect the industry, and I’d like to quickly examine them and hopefully get some feedback from you guys and gals. (Note: feedback doesn’t mean “I tweeted it…ain’t this interesting?”)
First, I’d like to look at the pros of these valuations:
- The value per user is often ridiculous, pushing more and more companies with cash to try acquiring new users. I figured, based on the $1 billion valuation of Twitter, each user was worth about $38 to the company right now, and the acquisition cost per user (minus turnover) is around $4 to $10 per user. In the case of Groupon, for example, it has spent tens of millions of dollars per quarter to acquire users via performance-based marketing, especially when it wanted to be sold, raise money, or go public.
- It brings more money into the virtual economy. That’s always good when investments are made online, as there is more money to be used in advertising.
- Huge valuations raise advertiser interest. Nothing interests an agency more than articles touting the value of specific media properties. Whenever someone talks about a specific property in the media, especially mainstream media, advertisers flock to try new things. Facebook has become a dream for the advertising community, partially because of the enormous press given to it.
Now, the three big cons of the valuations:
- It dilutes the value of advertising. When media properties with millions of visitors have huge valuations but the advertising is selling at sub $1.00 CPMs, it often dilutes the value of advertising completely. While we’d like to think that media buyers are smart, we all know that they often just want the lowest price and don’t really think beyond the box. Anyone remember when MySpace was selling inventory at 10 cents CPM right after it was sold?
- It ignores interactive advertising companies as investments. For some reason, interactive advertising companies are being ignored value-wise in comparison to other “hot topic”-based websites.
- It ignores revenue as a metric for value. Which is mainly based on advertising. Unless you are selling a product or subscription, the main way media properties have made money traditionally is by interactive advertising. Frankly, the valuations of properties on the Internet should be made by the revenue they are bringing in, not how many visitors they have, or how many times Michael Arrington says their name.
My last point is the most important. Despite all the hoopla about various products, services, and technologies online, interactive advertising is what makes everything go ’round. Whatever term you want to call it to get attention (e.g., social media), it’s all the same: interactive advertising. As an industry, we are the water that keeps the ecosystem of the Internet going, and our expertise is the only reason these sites succeed. When Facebook wanted to learn how to develop revenue, it didn’t hire a “social media” expert, but instead interactive advertising veterans who developed a system that made the company money. We need to remember that and hopefully remind the media and the investment community of this fact.