Jul 16, 2009

Fad element of social networking has a negative effect on the valuation of facebook

I was recently conducting a training session on "social media". Normally , In a session like this I talk about how facebook is gaining traction. So I spoke of the 200 Million people on facebook at the moment. with how it almost the size of 5 time a country of Malaysian population etc.
So a question popped up on how is facebook ranked among the top brands according to interbrand ?
Well the explanation lies in the fact that that a key factor in valuating brands is the discounted future earning value. And its easy to notice that a large chunk of Facebooks demographic is the fickle college going and 35+ newbies which are a dangerous duo when it comes to churn for a social networking site.

So its difficult to imagine what will happen to facebook say 5 years from now.
But the good part of not being a last mover is that brands can learn from the hiccups and disasters that the first movers suffered.

According to Mark Zukerberg the chief executive officer for facebook, he has 500 million in revenues last year without pushing the throttle too much. Now that's what i call being wise . The Myspace debacle of pushing for too much advertising and loosing the traffic in exchange is not the best method to follow. So Mark seems to be compromising on the $$ as of now.

Outlinining Interbrands brand equity method:
Interbrand's methodology because it evaluates brands much the way analysts value other assets: on the basis of how much they're likely to earn in the future. The projected profits are then discounted to a present value, taking into account the likelihood that those earnings will actually materialize.

THE FIRST STEP IS figuring out what percentage of a company's revenues can be credited to a brand. (The brand may be almost the entire company, as with McDonald's Corp., or just a portion, as it is for Marlboro.) Based on reports from analysts at J.P. Morgan Chase, Citigroup, and Morgan Stanley, Interbrand projects five years of earnings and sales for the brand. It then deducts operating costs, taxes, and a charge for the capital employed to arrive at the intangible earnings. The company strips out intangibles such as patents and management strength to assess what portion of those earnings can be attributed to the brand.

FINALLY, THE BRAND'S strength is assessed to determine the risk profile of those earnings forecasts. Considerations include market leadership, stability, and global reach—or the ability to cross both geographic and cultural borders. That generates a discount rate, which is applied to brand earnings to get a net present value. BusinessWeek and Interbrand believe this figure comes closest to representing a brand's true economic worth.

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