$$$ (Original #2)

Social media is used for more than the furtherance of brands. Social media websites are brands unto themselves and owners of these sites are beginning to sell them to make money. They use themselves to create value.

The Huffington Post is selling for $315m. Twitter is valued at $3.7b, may have been offered $500m by Facebook in a sale proposal, and  is seeing JP Morgan look to use some of its growth fund to acquire a 10 percent minority stake in the company. Facebook has been valued at $50b and Goldman Sachs has invested $450m while trying to attract another $1.5b from investors.

Where does this money come from? How are these sites able to make enough money to justify the billions in value and millions in investment? Twitter is expected to post $50m and Facebook $2b in revenue for the 2010 financial year, while the Huffington Post earned $30m, presumably from selling ad space. Twitter has an uncertain revenue model but has a rough plan to make money off "Promoted Tweets," or tweets that will be more prominent under certain search terms (it reminds me of Google adwords). Facebook's revenue model is a multi-faceted one based on ads, applications and credits. An attractive graphical explanation of Facebook's model can be found here. Given that these sites are expected to grow, it seems reasonable to assume that large investments can be recouped and profits made after a couple of years.

However, these profits haven't yet been justified. As the companies are private, there is no public and definite proof of revenue. More important though, even if the figures above are correct, these companies may be overvalued. Facebook for instance, is trading shares without being a public company but those shares are trading at 25-30 times its annual revenue, so that the writer of the former link declares it the most overvalued company and calls for us to remember the tech bubble and Amazon's steep devaluation. As the writer of the latter article says, the secondary markets on which these values are being determined are mercurial and prone to trendy exaggeration. Oh, and that writer also says that Twitter may soon be traded at 45 times its annual revenue.

So where will this go? Personally, I don't see how Twitter could be worth billions off an adwords-like option alone. Facebook is certainly innovative but what it offers seems to me to be so disposable that its pay-for-service features will always be on the precipice of relevance. As for the Huffington Post, read my post on it to see why I think readership (and therefore ad revenue) will fall. But none of this is to say I don't think these companies are worthless. I just think they are benefiting from the financial world being taken with the latest fad.

Do you think these companies are - or could be - worth as much as they are believed to be worth?