Interesting piece here on totaltele.com reviewing recent valuations of social media firms.
My interest was immediately piqued by the introduction to the article : ‘Traditional metrics are no longer valid when it comes to measuring the value of the new breed of social media companies’, which then goes on to review the valuations placed on four social media firms – with more to come – as a result of stock market flotations. The key quotes come via a ‘technology valuation expert’ at a major firm of accountants troubled by an overlong name and a 90s-oriented obsession with marketing, with the article highlighting that:
…traditional metrics like price-to-earnings ratios do not apply when it comes to social media companies, which tend to prioritise growth over earnings. PwC suggests that a ‘value per user’ metric is more appropriate for these companies, “on the presumption that subscriber bases can eventually be monetised”.
At that point, I had a severe touch of déjà vu, since this is more or less precisely the (ir)rationale which led to the over-inflated values of internet firms being a contributory factor in crashes in stock markets at the turn of the last decade. In short: we’ll throw out tried and trusted means of valuing firms because we fancy gambling your money, pensions, etc. on something new and sexy which we don’t quite understand but which we hope will come good. Markets evidently don’t function in cases of imperfect information – but let’s at least hold this sort of rubbish up to the ill-informed gamble that it is.
Add in the prospect of rising interest rates and a stagnant FTSE100 over the last six months (and a Nasdaq that seems to be in a similar place) and we have at least some of the conditions of 2000’s implosion in place all over again. Oil prices which seem to be rising again following the correction of early May, stubbornly high inflation, a weak economy heading for another ‘soft patch’ and a government whose economic ‘education’ is firmly in the traditions of Alfred Roberts’s Grantham corner shop all add to the pressures.
An unreformed, business as usual capitalism is not only free, but destined, to repeat the same mistakes over and over again. That it seems to be doing so with such a velocity is something of a surprise, but this is perhaps a corollary of governments’ apparent collective refusal to contemplate systemic change, as well as our dependency on financial services and the associated structural problems of the UK economy (on which Larry Elliott had some interesting things to say in yesterday’s The Guardian). An economy so dependent on financial services seems to me to be not only in thrall to the City but also thereby blinded to the problems which imperfect information causes to market-based systems. Until we grapple with that, the economy isn’t going to get better.