Technology / March 2018

What is the Valuation of your Online Community?

By Gitta Amelia

In 2012, Facebook celebrated its one billion-user mark with an unusual video advertisement. It began with the banal statement – “Anyone can sit on a chair” – but quickly took a deep, profound plunge. “The universe, it is vast and dark and makes us wonder if we are alone,” said the voiceover, “so maybe the reason we make these things (such as chairs) is to remind ourselves that we are not.” Over time, Mark Zuckerberg’s ideological underpinnings became more apparent. The philosophy that the internet is more than just information but a connector of peoples is reiterated time and time again in public statements made by the Harvard-dropout millionaire.

The notion of community has been at the heart of the internet since its inception where scientists formed interactive research communities not on physical campuses but on the internet. Since then the trend of technology development over the past two decades has been to give an increasing sense of power to ‘communities’. This is reflected in the rise of cryptocurrencies (electronic currency distributed on a blockchain ledger) and popularity of initial coin offerings (ICO).

By traditional Oxford definition, communities are “people who live together and have common ownership.” However, digitization has called for the re-definition of our conventional precepts of identifying communities. The internet has allowed people to come together in meaningful ways without physically having to be there. An online community is just as material as an offline community.

It is important to establish that your online community is not your user base. Both users and communities accrue to digital platforms in the same way. However, members of an online community share ownership of the product, platform or service, and are interconnected with each other. According to IBM, a community should “let people who share a common interest interact with one another.”

Therefore, one cannot claim to own an online community if users are unable to interact with one another or if there is no user-generated content on your platform.

Online Community as an Asset

Digital business-to-consumer or consumer-to-consumer companies often boast of their community as one of their strongest assets. And certainly, the markets agree. Facebook has doubled its user-base, but more than tripled in valuation since its advertisement in 2012. This begs the question to investors and those in the financial profession – how can we price, and what metrics can we use to evaluate, this intangible asset?

Certainly, traditional startup multiples, which include putting the entire Enterprise Value over a company’s user base, is insufficient. This multiple does not take into consideration quality of users and assumes uniformity across users. Furthermore, communities are a type of user that create specific values for the company which must be accounted for.

Most visibly, online communities create barriers to entry. Stickiness is formed because interactions with other users means that the user is not only connected to the brand or the product, but to other people as well. It is more likely for a user to utilize a platform where the bulk of the communities they identify with reside. For the business, value is extracted through brokerage. Such is the case with marketplace platforms like Shopee, Tokopedia and Bukalapak which are essentially online buying-selling communities.

This is also the case with media platforms which rely on advertising revenue. Advertising business models are simply a brokerage of the brand and access to a pre-identified, target market. Naturally, online communities will also ignite a ‘network effect’, a phenomenon where increased numbers of participants improve the value of a good or service (think about how social networks generate their scale). The chief hurdle of good or services using the network effect as a barrier is to get enough users initially so that the effects take hold.

Online communities also reinforce an identity that is imprinted on users, ensuring the longevity and top-of-mind of the brand even when they sign off or are no longer users. One may come to identify oneself as a ‘foodie’ after following and interacting with a multitude of food-blogger accounts. This identity can be monetized by way of creating off-line events and partnering with brands whose target markets overlap.

The last time online communities have been seriously discussed in the academic realm was in 2000 by E.L. Lesser in his book “Knowledge and Communities.” The author identifies four ways we can extract value from electronic communities: through usage fees, content fees, transactions and advertising fees.

The higher the value of your community, the more value your business can extract. And the balance of scale is theoretically equal on both sides. The value that the consumer or community member extracts will likely be equal to the value created by the business. But these methods of value creation are no different in the online world to the offline world. Online communities enrich two other intangible assets on the balance sheet: namely content and data.

Online content can be more valuable than offline content due to its share-ability and potential for virality. In this way, online communities may add more value to certain industries and verticals such as digital media. Zetta Media is a SAAS (software-as-a-service) platform that services brands and companies looking to build online media portals. On top of the technology, Zetta allows brands to tap into their steady stream of user-generated-content (UGC) from their community of writers. From this stream, a company’s editorial board can filter and select relevant content for the community they are looking to build. This allows companies to construct media portals with content and traffic at half the speed and cost.

Correspondingly, data generated by online communities when properly tracked and collected can be very valuable. Online, you can be your true self. The choice for anonymity means that the user’s interactions with the platform and other members are based on the user’s genuine interests and desires. Data on social behavior is an increasingly important input for credit and commerce companies. It can also pose as a huge advantage to lure advertisers, offering them highly targeted marketing capabilities based on its data about users. It is this data that makes Amazon, Apple, Facebook and Microsoft seemingly unstoppable.

So the next time you think about your users, ask yourself if you have a community. If the answer is no – perhaps now is the time to invest in building one