Crazy valuations and acquistions – Is it for real??

This post is the outcome of the recent Instagram acquisition by Facebook for 1 billion dollars. To set some context, Instagram is a popular photo sharing application built for mobile phones. Instagram lets users take pictures with smart phones, decorate them with borders and filters, and then share the images with their friends on various social networks. Instagram was founded in 2010 and in a mere 18 months, this company with 13 employees created a photo sharing experience that is used by more than 30 million users.  Given Instagram’ s employee base of 13, Facebook is paying around $76.9 million per person for a company that has no publicly disclosed source of revenue.

But it’s not only about Instagram but other Internet companies like Facebook, Twitter, Foursquare, Youtube, Flickr, LinkedIn etc. which run in billions of dollars of valuation and they were able to reach this value within 3-4 years of their operation.

Have you ever given it a thought that why are these companies valued so high?

If asked to a financial analyst about valuation of any company, the prompt answer will be the valuation of a company depends on the assets that the company possesses and its potential future revenues. And he is right in this approach.

So what are the assets these companies have – Facebook, Twitter, YouTube, Blogger.com and how will they going to leverage those assets to make so much revenues in future?

If we look at their assets, then what is it – is it their website, the content available on them, their computer hardware, technology? And does all this be valued in billions of dollars?

If we look at their revenue streams from users then all these companies offer all their services for free to its users. Has Facebook ever charged you for creating your profile on it or uploading a photo, does YouTube charges you on viewing a video or have Twitter ever charged you for posting a tweet? Then how will they gonna make or are already making billions of dollars in revenues?

To answer the latter question – it is no hidden secret that all the above companies make their major share of revenues from Online Advertising.

But what is it that makes these companies so good at doing what they are doing i.e. advertising a product or a service online? What is it that really makes them stand apart from the league of other players in this field?

I’ll answer this in a minute.

But first let me bring to your notice that if you think that you are being served by all the above companies for free then it’s not true. You are paying them not in hard cash but in some other currency – which is valuable information about yourself.Yes, it’s the rich user data that these companies have access to, which makes them so valuable and distinct in their line of business. The more user data they have, the better they become in doing what they do – i.e. serve Ads to those users.

And this is the biggest asset they have – User data. Of course then next comes their technology and intellectual property which helps them to collect and grow this user data manifolds and create entry barriers for other players.

I know that to a layman this will sound little complicated. How do these companies have this data or information about you? You haven’t told them anything – that you live in New Delhi, you like pop music, you like buying electronic gadgets online, you went to Europe last month on vacation, you just had a baby or you are planning to do an MBA etc. etc.

Actually some of this data is shared by you yourself in an explicit manner with these portals & services. For e.g. you yourself put all your interests like pop music, watching movies etc. on your Facebook profile or join various communities like Pop Music, Bollywood Movies on Facebook. You even click ‘like’ button on posts, comments or articles on above themes everywhere and it gets recorded with Facebook. Or you provide personal details while registering in them and providing personal details.

Then also every other action you do on Internet is getting recorded – like you buying a mobile phone online on EBay, or purchasing a vacation package to Europe on MakeMyTrip, browsing diapers category P&G website, search MBA colleges on Google.com  etc. All this implicit actions are used to create an audience or behavioral profile of you on Internet and this can be used to target related advertisements to you on various websites during your visits.

Hence you can now understand that more the number of users use these free services and higher the time spent by users on them doing various activities the more user data will these services be able to collect on them and then later retarget them with advertisements. Hence this ever growing users & the user data is the real asset of all these internet companies which is so highly valued by all the investors.

What’s so cool about Online Advertising?

A lot of veteran brand managers who earlier built big brands using mediums like television, magazines, newspaper, radio, outdoor advertising etc., would have definitely asked this question to themselves that what is so cool about this Online Advertising and why there is so much buzz about it. Is it just a fad or is this new medium really going to turn things around?

The brand managers still rely on traditional marketing channels when they think about a product launch, brand awareness or getting a lot of eye balls in quick time.

Well there are few things which I want to talk about regarding the benefits of online advertising.

1. User Behavioral Pattern is changing - There has been a big change in the behavioral & consumption pattern of people over the last few years when we talk about information, entertainment, news, communication and socializing. Today people are spending a lot more time on Internet in doing things which earlier they use to do on television, print media or outside their homes. Like lot of people now stream videos, watch TV series and movies online, read online newspaper, communicate more via emails and online messenger, spent lot of time on social networking websites, play online games, manage all their finances and do banking online, shop online, search online to locate any person, product, place, hotel etc. and so on. In a nutshell, people are using Internet for almost all their needs and other activities. Hence Internet has become a great place to catch hold of users and market any product or service.
2. Targeted Advertising - Internet is a more powerful channel than any of the traditional marketing channels like Television, radio, newspaper, magazines, outdoor billboards etc. in the sense that it gives marketer control on choosing its targeting audience. Other marketing channels like television, radio, print media etc. work like a broadcast channel where everyone accessing those channels is exposed to a brand campaign even if they are not the right target audience for that particular brand. In traditional marketing channel, a marketer cannot choose his audience at a user level and so end up spending his marketing dollars on users who are not even his target audience, in an attempt to reach out to the real customers. But this is not the case in online advertising which allows a marketer to choose his target audience based on various factors like demographics, age, income, geography, interests etc. 
3.  Costs are lower and controllable – For a marketer to advertise his product or service on traditional medium has to shell out lot more money than in case of online advertising. In traditional marketing channels, marketer ends up paying for eyeballs which are not his real target audience and which are not gonna give him any real business. Whereas in case of online marketing a marketer pays only for those users that are his target audience and who have really shown any interest in his product by viewing the Ad or clicking on the Ad or finally getting converted.
4. Better tracking and measurable results - Traditional marketing channels comes with a big loop-hole that it lacks reliable, accurate and measurable success metrics. So it’s really difficult to measure the effectiveness of traditional channels. Whereas in online advertising a marketer can successfully track the success of the campaign in a very objective manner through metrics like impressions viewed, click through rates, conversion rates, ROI etc.
5. Speed of execution – Speed of execution is much more in online advertising than traditional advertising and marketer can start online advertising to a wide audience the moment the marketer makes his/her campaign available to the online ad network.hereas in traditional medium a marketer has to go through the lengthy process of signing a contract each time, pre-booking a slot on the channel, giving detailed specifics and then wait till the time the campaign actually gets served.
6. More adaptable and customizable solution – Online advertising is more adaptable and customizable. A marketer can create multiple creatives for the same brand and can rotate the campaigns shown so that user gets to see a new campaign each time. Also the marketer can take quick actions on the results like the creative which gets better response is shown more while poor performing creative is discarded. Also at any time the marketer can change his budget, target audiences and many other variables like frequency, day part timings etc.
7. More Informative medium and actionable – Online advertising is much more informative than any traditional marketing. In online advertising, the advertiser is able to convey far more details about the advertisement to the audience and that too at relatively low cost. Most of the online advertising campaigns are composed of a clickable link to a specific landing page, where users get more information about the product mentioned in the ad. Whereas in traditional marketing channel marketer has to condense all information in the available space or time slot.
8. Variety of formats – Another benefit of online advertising is the variety of formats supported there like image banners, video ads, flash ads, rich media formats etc. 

Internomics!! I thought Internet was free! Isn’t it so?

What do you mean by economics of Internet? Internet is free!! Isn’t it? Economics can only be applied to scenarios or events where for some benefit an individual need to pay something in return. If you are getting something for free there is no economics involved. And on Internet most of the services we use are for free – Gmail, Facebook, YouTube, News, Music, Games, Twitter, Maps, Spreadsheets, Blogs etc. Has Gmail ever charged a fee for delivering mails in your mailbox, or does Facebook charges you for creating your profile on it or uploading a photo, does YouTube ask for a fee on viewing a video or have Twitter ever charged you for posting a tweet? So since one is not paying any money in return for these services, people tend to think that there is no economics involved. But it’s not correct.

Have you ever thought that why are these organizations or individuals running these services if there is no revenue model involved. I know today most of you will be able to answer about their business model which is that all these companies make their big buck through Online Advertising.

But this still doesn’t answer the question that as a user what are we paying to these companies for using their services?

Let me clarify it here that there are no free lunches in this world. So if you think that you are being served by all the above companies for free then it’s not true. You are paying them not in hard cash but in some other currency – which is valuable information about yourself.

Yes, it’s the rich user data that these companies have access to when users enjoy their services. So whenever a user uses these services, they end up paying them with data about themselves. And this data is provided either explicitly by the user through filling registration details on these websites or implicitly by viewing content, clicks or interacting with these internet applications.

This data is very valuable as it tells all these applications about you and then they can better target advertisements to you. So next time when you use any of these internet services rest assured that you are paying a price for it – it’s not real dollars but rich information about yourself.