Social media and the price of perception

Thursday, 23 December 2010 23:03 -     - {{hitsCtrl.values.hits}}

WHILE placing values on celebrity endorsers is a risky business, the same holds true for companies whose values - like celebrities - rely heavily on perception. Take the case of Bebo, an acronym for blog early, blog often.

In 2008, when Bebo was Britain’s leading social networking website - even more popular than Facebook and MySpace - it was snatched up by AOL for a whopping $850 million. AOL was hoping to use the acquisition to gain a better foothold in the global market. But less than two years later, the market had completely changed and Bebo had fallen far behind its competitors. AOL unloaded it for reportedly less than $10 million to little-known private investment firm, Criterion Capital Partners.

It was an expensive lesson to learn in a market where, according to Annet Aris, Adjunct Professor of Strategy at INSEAD, it’s too soon to put price tags on the industry. “We all know there’s a lot of value in all the information, of all the loyalty of all these consumers on Facebook - these enormous growth rates. There is some thinking in the direction of where the revenue might come from, but it’s not very concrete yet.”

Aris worked on a case study in conjunction with Wharton Business school (the two schools’ first such alliance), analysing how companies such as Facebook are valued. “It’s not about having the best product, or the most engineered product,” Aris told INSEAD Knowledge, “it’s really about hitting the specific nerves of what consumers really value and being very, very good at that one single thing and then you can add bits and pieces.”

Like the search-engine Google, which started out fourth or fifth in its market before rising to the top, Aris said that Facebook, too, started out back in the pack. At that time, pioneers such as Six Degrees and Friendster were the industry leaders. “The amazing thing is when I taught my class two or three years ago, we didn’t even mention Facebook,” admitted Aris, adding that “everyone was already convinced that we know now who the giants in the internet industry are.” They could not have been more wrong.

By understanding and addressing the needs of its customers, says Aris, Facebook was able to far surpass the rest of the field. “Facebook, at the end of the day, just did it better than companies like Friendster which turned out to be too cumbersome (and) too over-engineered.”

Facebook, today valued at as much as $15 billion, was able to hang on long enough to become the undisputed leader in its field, but Aris says that scenario is unlikely to be repeated. “Once you get a certain critical mass, it gets really, really difficult to beat that company because the value increases exponentially,” she explains.

Aris feels that Facebook has already filled the basic needs of its customers, and so there is neither the need nor the room for new competition. “Maybe you will laugh at me in three years’ time (but) I don’t see a major need fulfillment model coming into the market at the moment. She said that even if someone managed to do better what Facebook does, the current landscape is unlikely to change. “Given all the external network effects, the advertising network from Google and the consumer network from Facebook, it’s a big barrier to entry.