The value of social networks

If you missed Michael Arrington's blog post on the value of social networks, you missed one of the few attempts to try to quantify the value of all the different social networks. It's a good read for those of us trying to understand how to justify expenditure on these sites. According to the article, the value of a social network is based upon two criteria:

1. The amount of traffic to the social network based on ComScore's data. Of course this brings up another thread of discussion about the validity of poll data versus actual traffic but that's another post.

2. The average advertising spend (estimated by PriceWaterhouseCoopers in a recent report) for each person online in a country, or as he calls it, market.

3. Finally they multiplied the average Internet spend per user in each market with the number of unique users each social network has in that market, essentially creating a “weighted average” based on the advertising dollars chasing users.

Here's the result:

The article goes on to provide justification of this model based on some recent financial transactions involving these social networks. Frankly, based on those transactions, this type of valuation makes sense, especially considering there are few people or organizations that have tried to really quantitatively measure what these social networks are worth.

However, it suffers from the same problem that most online advertising evaluation suffers from. Too much of the valuation is based upon direct online purchases that most of the users of these networks would make. It does not account for the influence in perception or even offline purchase that these types of activities would have, let alone the value of interacting directly with customers instead of "advertising" to them.

As Internet and traditional media continue to merge and more dollars are placed in online advertising, those of us responsible for being "experts" need to understand the impact of advertising dollars beyond the direct impact. If we don't, consumers and our clients alike will put us into the realm of telemarketers and junk mail senders. - Paul Herring

Comments

[Jon Burg]

One of the key pieces missing here are the "un-advertiser friendly" social networks.

Gaia Online's numbers are HUGE, yet they don't even rank under this methodology!