The following graphic from the WSJ (reproduced here because deep linking is discouraged) has been making the rounds, generally in support of the idea that Twitter's valuation is yet another finance mistake:
But here's the funny thing. Note how both LinkedIn and Twitter are apparently over-priced, and suddenly an alternative explanation appears: the market understands that, while right now the revenue models of these companies are not good, there is value in their networks that, either directly through advertising and other attention-monetizing strategies, or indirectly via the information value of the network, will eventually be captured. (Even if that requires a change of management, which sometimes it does.)
It's a bet on the future value of networks and their associated preference and communication data.*
As I mentioned in my post about the Skype acquisition, these companies are not just some black-box generators of revenue. In particular Twitter's resources include:
- Knowledge of the network to a level of detail that can be closed off to outsiders.
- Personnel and technology that allow for exploitation of the knowledge in the network; inasmuch as the data and technology have unique features, the personnel and the resources are partially locked into the company and are assets to be taken into account in valuation.
- An installed base that serves as a barrier to entry to competitors trying to build their network.
So, not being privy to the financial details, I cannot say whether the valuation is right or wrong, but I can certainly say that people who pass judgment on that valuation based on last year's revenue are terminally myopic. Sadly even people whom I respect seem to fall for this trap.
There's gold in those networks and the nerds who can analyze them.
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* A bet not dissimilar to that of Google trying to build their own social network with Google Plus and all the actions they take in other properties like YouTube trying to nudge people into using the social media affordances of Google Plus instead of the older comments and video responses (now discontinued, get your linkage on G+).