Kevin Rose questions the propriety of Jason Calacanis putting a price tag on the active contributors at Web 2.0 Social Web properties such as Digg and Netscape (See "Digg vs. Netscape, Kevin vs. Jason, Web 2.0 vs. commercial Internet”)
The bigger question is: How much are the Web 2.0 Social Web legions of non-contributing, and non-paying, users worth?
I put forth the notion of Web 2.0 "Social Freeloaders” last month in “Social freeloaders: Is there a collective wisdom and can the Web obtain it?”:
Wikipedia’s 'small core community' that does the vast majority of the work reflects the extremely low ratio of contributing users to non-contributing users throughout the new social Web that relies on user contributions for its content.
From Wikipedia to de.licio.us, and from YouTube to Riya, both not-for-profit endeavors and purely commercial enterprises are staking their entire existence on user-generated content that is unreliable, inconsistent and difficult to come by.
The average YouTube user is watching the content, not generating it, 'while more than 35 million videos are viewed daily, only 35,000 are uploaded' and at Riya photo search, 'searchers outnumber the uploaders…20 to 1.'
Perhaps the social Web will come to be known for its freeloaders, rather than its uploaders.
While traffic and usage numbers have grown at Web 2.0 properties, the very low ratio of contributing users to non-contributing users has not evolved.
From YouTube, to Digg, to MySpace, Social Web stars are touting enormous traffic and usage metrics.
The traffic overwhelmingly involves non-contributing, and non-paying, users, however, and the usage is not well monetized.
Additionally, the Web 2.0 leaders in traffic and usage are incurring greater infrastructure costs to support the growing non-paying users, and under-monetized usage.
In “Social Web or Business Web: where is the money?” I cite The New York Times piece last April, “For MySpace, Making Friends Was Easy. Big Profit Is Tougher”:
MySpace now displays more pages each month than any other Web site except Yahoo. More pages, of course, means more room for ads. And, in theory, those ads can be narrowly focused on each member's personal passions, which they conveniently display on their profiles. As an added bonus for advertisers, the music, photos and video clips that members place on their profiles constitutes a real-time barometer of what is hot.
For now, MySpace is charging bargain-basement rates to attract enough advertisers for the nearly one billion pages it displays each day. The company will have revenue of about $200 million this year, estimated Richard Greenfield of Pali Capital, a brokerage firm in New York. That is less than one-twentieth of Yahoo's revenue.
A “The Hollywood Reporter” story on MySpace this week, with a Fox Interactive Media president Ross Levinsohn interview, puts forth vastly different projections than the analyst estimate, as reported by “The New York Times” in April.
As indicated by “The Hollywood Reporter”:
The prospects for generating revenue and profits are just as limitless. Murdoch said FIM will post at least $350 million in revenue this year, up from $47 million last year, and at least $500 million in 2007…
Since acquiring MySpace nine months ago, its user base and revenue have more than tripled, and News Corp. makes a profit on every registered friend.
After putting forth the MySpace positive scenario, “The Hollywood Reporter” story indicates:
News Corp. executives decline to discuss most FIM or MySpace financial particulars, which are still lumped into the "other" line on the company ledger.
The story also indicates News Corp. is providing financial assistance to MySpace:
It received a $20 million infusion from News Corp. to beef up infrastructure and servers and has doubled its annual operating budget to about $40 million, sources said.
A recent eMarketer study gauges MySpace ad revenues at $180 million for this year, as reported by AdAge. MySpace’s estimated ad take would represent about 2/3 of total ad spend projected for the year in the Social Web space. AdAge reports:
the entire area will attract some $280 million during the same period. That means ad spending on social-networking sites will account for just 1.7% of the $16.7 billion spent on U.S. online advertising in 2006…
In 2006, eMarketer expects general social networks excluding MySpace (such as Friendster, Facebook) to earn $35 million in ad revenue, and vertical networks (such as LinkedIn, which targets business types) to draw $20 million.
Networks presently being offered by leading portals such as Yahoo 360 and MSN Spaces will only bring in $45 million in ad revenue this year, eMarketer predicts. Notably, YouTube is lumped into this group, indicating that the most popular video-sharing service online today is not expected to generate much ad revenue in 2006.
So, how much is a non-paying MySpace user worth?
Using very rounded numbers, here is a “quick and dirty” analysis:
- MySpace 2005 acquisition price: $580 million
- MySpace 2006 “friends” user base: 100 million
- MySpace 2006 ad revenues: $200 million
MySpace acquisition price reflects an approximate multiple of $5-$6 per “friend.”
MySpace is currently generating approximately $2 in revenue per “friend.”
The MySpace effort to grow ad revenues since its acquisition by News Corp. last year provides would be bidders for Digg, YouTube…a valuable reference for measuring the financial potential of a large, non-paying base of young Internet users.