Umair Haque / Bubblegeneration
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Design principles for 21st century companies, markets, and economies. Foreword by Gary Hamel. Coming January 4th. Pre-order at Amazon.

Thursday, May 25, 2006

Market Update - Valuations and Churn

Mark recently commented about 2.0 valuations and churn. Which are two great topics for a quick update.

A general note - we can take a broad spectrum of recent transaction comps, as well as market comps of public net/media players, as a pretty good universe on which to begin 2.0 and new media valuations.

From there, we can fine tune along many dimensions, given the specifics of economics and potential business models for a set of plays - coming up with, in the end, a value of attention; or a rough average value of cashflows the market thinks will accrue to the attention economies generated by a given play.

When we do this, many interesting patterns emerge, which are beyond our scope here. In general, 2.0 and new media valuations have been inflating significantly; different markets track differently, but on average, the value of attention has risen by between 50-100%. The important point to note here is that traditional media valuations are, of course, mostly collapsing.

Interestingly, Bebo's recent funding points to a bit of 2.0 deflation - if Rafat's info about a mid double digit millions number is right, Bebo is undervalued relative to recent transactions quite significantly.

Is this due to higher risk in Europe for 2.0? Probably - but it's also a simple matter of supply and demand; there is much less capital chasing 2.0 in Europe than there is in the States, so valuations should be relatively deflated.

Now to churn. Recently, more and more analysts and observers have been talking about churn.

The problem, of course, is that few really understand the attention economies that lie at the heart of connected consumption. In fact, the deep economics of markets, networks, and communities tell us that they will be winner-take-all markets, which will see very little churn, and huge stickiness.

Unless, of course, you get the social value proposition wrong - in which case you end up with maximal churn (ie, burnout and defection). So what people are really calling churn is the market sorting itself out into extremes - winners like MySpace, and losers like Friendster.

As always, if you wanna chat more, drop me a line.

-- umair // 4:12 PM // 12 comments


Actually Umair - my thoughts were around how the shift to the edge challenges our very thinking of what churn is - and most importantly the methods used in traditional economies to combat churn.

If i truly control my content, my consumption, and my attention - then those barriers no longer apply.

My thinking is therefore that the likes of Myspace can lose users far quicker than, say a traditional 1.0 business that centralized that content and functionality.
// Blogger marks ramblings // 5:49 PM

Great post.

On churn though, I think that you're making a mistake in disregarding the effect of change with time. Remember, that in life (& society in general), change is the only constant. The concepts of "fashion" and "seasonality" don't suddenly disapear because we're socializing online - popularity is as fickle and transient an asset as it has always been. It's foolish to believe that users wouldn't switch from myspace if something "better" came along.

Agreed that myspace is winner-take-all .... in 2006 .... but in 2008, it could be some-one else - by 2010 it most certainly will be. Not necessarily because the place becomes uncool but because the people there do - it's a fact of life, we all grow up (unfortunately).

This will continue to be the curse of *purely*social*social*networks* - because the past is not as cool as the future - the past is actually irrelevant in a social setting, it has little bearing on where you party next - all that matters in the social context is where the beautiful people are now and where they will be tomorrow.

A nightclub is still the best analog we have for the forces at play in myspace and other purely social spaces. Even studio 54 came to an end. Anyone in that industry will tell you that nothing (socially) great ever lasts for ever. Because WE change.

Interestingly, networks that exist for non-social purposes can actually exploit their history and use that change to improve their stickiness, increasing switching costs. eBay is the master of this; a well-populated sales history is so compelling to buyers that sellers would feel the pain if they had to start over again - no wonder eBay just rolled out the marketplace research tool - each product they build using their historical trading data increases the chasm a competitor would have to cross.

I'm convinced that a line should be drawn between communities that are primarily socially productive & those primarily economically productive (from the participants' perspective) - especially on this issue of churn.
// Anonymous David G // 5:53 PM

i used to be in the nightclub business! i grew up!

Your point on Ebay is exactly what i am concerned about. Ebay owns your history - this is the 1.0 deadly weapon combatting churn - for me to switch would wipe away my reputation etc etc.

But with power going to the edge, i will feasably be able to take my digital persona in all its manefestations (buying history, product reccomendations, music tastes, and so on) with me where ever i go right? then my switching decisions are entirely driven by my 'wired vs tired' view of the online environment i am currently present in - i dont have to consider leaving my digital detritus behind when i break camp for the next location -

2.0 removes 1.0's barrier to switching - thus my contention that valuations of these communities must have higher discounts applied (or risk elements) as the volatility of users could theoretically be higher by removing traditional barriers to switching.
// Blogger marks ramblings // 6:22 PM

Hi David and Mark,

Very interesting points.

I agree that there is more risk than 1.0 definitely. I wouldn't necessarily apply that in a discount rate, though; I would haircut the comps or choose those that reflect this risk most accurately.

Also note that eBay is getting killed exactly *because* the rep mechanism doesn't scale, and so power sellers are defecting (check my edge comps presentation for the analysis).

Finally, I can't give the game away here - but there are very real switching costs in 2.0, because we are talking about multisided, multilevel network FX.

The nightclub analogy is actually a good one: the really iconic nightclubs of the world - tresor, the liquid room, cbgb, etc - have been around for a looong time and aren't going anywhere soon.

These, I think are more like MySpace - built on true multilevel network FX.

OTOH, clubs like 54 were/are basically the equivalent of a social net built around a celeb endorsememnts; obviously, this is not sustainable in the long run, unless you pull a Nike, and go sweatshop style to reap scale/scope economies.

Thx for the comments guys.
// Blogger umair // 11:47 PM

Great discussion. We should put up some tradesports contracts on the future active membership at myspace.

On the portability of reputation, I'm in the cynical camp; unless you can take ALL of the context with you, reputation isn't (fully) portable - if only it were, & we could escape linked-in, that's a socio-economic network with undeniable stickiness. Your social myspace reputation on the other hand is no longer valuable once the cool crowd is elsewhere (I'll only quit linked-in the day I retire).

Sellers & manufacturers going direct is a real issue for all e-tailers. Don't count eBay out - their model's built on the tail so resilient to defection by even powersellers & they have plenty of room to grow - that's a bet I think I'm gonna take on the stock exchange.

Umair; I'm dying to hear your thoughts on eBay + Yahoo; is this 1+1>2 ;-) Interesting that the JV's are "search and graphical advertising, online payments, a co-branded toolbar, and the "click-to-call" functionality."
// Anonymous David G // 3:36 AM

"coming up with, in the end, a value of attention; or a rough average value of cashflows the market thinks will accrue to the attention economies generated by a given play"

I'd be interested in seeing the calculations and final numbers re: this.

I'd do it myself, but it seems like you've already done it - no point in re-inventing the wheel :)


// Blogger K // 5:05 AM

More nonsense from Umair:-

"eBay is getting killed exactly *because* the rep mechanism doesn't scale".

Huh? What eBay does Umair mean? Surely not this eBay:-

San Jose, CA, April 19, 2006 -
For its first quarter ended March 31, 2006 eBay reported record consolidated Q1-06 net revenues of $1.390 billion, representing a growth rate of 35% year
over year and GAAP operating income of $322.6 million representing a 23% operating margin."

This is "getting killed"?

If you truly analyze the value chain and dominant strategies, you come to one conclusion on content and audience. I will give you a little clue what it is: a magic number close to 40,000,000.
// Anonymous web2.0sceptic // 1:44 PM


That's for clients :)


Surely you don't think that citing a profitable quarter has anything to do with thinking strategically about eBay - one could just as easily do the same for, say, newspapers.

Magic numbers indeed...

Thx for the comments guys.
// Blogger umair // 1:59 PM

Oh yeah - David, I will talk about Yahoo + eBay and rep portability as time permits - both are v interesting topics.
// Blogger umair // 2:00 PM

Dear Umair,

the cold, hard cash generated in that "one quarter" could mop up (i.e. acquire) the entire Web 2.0 bubble*.

I'd rather have that kind of CIMITYM quarter than this WEB2.0 one:-

How does this kind of chart chime with your hyperbolic predictions** for growth i.e.,


* Not that that would make any more sense than buying Skype.

** Warren Buffet once said that those who cannot understand why he cannot continue to generate the same level of retuns in the future don't understand simple math.
// Anonymous Web2.0Sceptic // 2:54 PM


I should note that you're confused about (unaware of?) the differences between returns, user growth, cashflow, revenues, margins, etc; and try and explain them to you. But somehow, I doubt you'd listen.

FYI, MySpace is still very much growing...

Anyways, look - I don't wanna waste more time on an anon commenter.

If you really wanna discuss (vs troll), let us know who you are.

Thx for the comment.
// Blogger umair // 3:09 PM

Dear Umair,

"I should note that you're confused about (unaware of?) the differences between returns, user growth, cashflow, revenues, margins, etc"

Tell me - to avoid any confusion - how many of those does MySpace currently have?

My name is Promod.
// Anonymous Web2.0Sceptic // 4:00 PM

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