RonAmok!

The adventures of an analog engineer and digital storyteller who studies emerging networks and their impact on the great game of business.
Nov 11, 2009

I’ve been toying with a theory for the past couple of weeks and wanted to share it with the Social Media community for comment. It involves calculating the business value of Social Media.

Typically, the Social Media/ROI debate is split into two camps:

1) those who seek to calculate the dollars directly generated from the dollars invested into Social Media activities, and

2) those who argue that Social Media activities should be considered a cost of doing business, such as management, human resources, or investor relations–departments who give up their profit and loss (P&L) lives daily for the benefit of the entire organization.

I’ve been thinking about the problem from a different perspective. What if we’ve been trying to force-fit Social Media onto the wrong financial statement? What if, instead of making it a line item on an income statement, it actually belongs on a balance sheet?

Accountants also Tally Intangible Assets

Corporate assets come in two forms: tangible (office equipment, real estate, etc…) and intangible (patents, trademarks, personnel, goodwill, etc…). Wikipedia describes intangible assets as “…nonphysical resources and rights that have a value to the firm because they give the firm some kind of advantage in the market place.” As someone who believes that Social Media activities do indeed create marketplace advantages, I decided to pursue a theory that Social Media is an intangible asset. But before I could move forward, I needed to figure out what “asset” I was measuring.

Audience as an Asset

The entire advertising industry is based on the value of an audience. Whether called “eyeballs,” “listeners,” “viewers,” or “circulation,” publishers and broadcasters are happy to rent access to their audiences through the use of column inches or thirty-second spots. Both describe access to their audiences as “inventory,” a common term that shows up on non-publishing balance sheets all around the world. So, what if we considered the audiences that corporations build through their Social Media activities as an asset to track?

I dug through some financial statements to see if publishers assign some sort of asset value to their circulations and found that the New York Times’ balance sheet carries a $661 million intangible asset called “goodwill.”

Just for kicks, I decided to compare its goodwill numbers from FY2007 and FY2008.

2007 2008
$683.440M $661.201M


Between fiscal years 2007 and 2008, the New York Times reports a $22.239 million loss in goodwill–a 3.25% year-over-year reduction. Interestingly enough, the paper also lost 3.6% of its weekday circulation over the same period of time. Could the circulation of the New York Times consist of 90% of its goodwill?

Although one data point doesn’t determine a trend, the result was enough for me to continue exploring the concept of audience as an asset. If audiences are assets to publishers, can the audiences that companies earn through their Social Media efforts (communities, RSS subscribers, website visitors, etc…)  be considered a corporate asset, like that of a patent, or any other intellectual property?

Investors Assign Value to Audiences

In May 2006, Google paid $1.65 billion for an 18 month old video sharing site called Youtube. Although the website had no revenue stream, it routinely logged 12 million monthly unique visitors, thus translating into Google paying $137.50 per unique monthly visitor.  And according to statements made last month, Google gave us another hint as to how they valuated this audience. In a recent interview, Google commented that it knowingly overpaid for YouTube by $1 billion, after considering the steep growth rate of those monthly uniques. Taking this new information into account, Google’s own bean counters valuated the 2006 YouTube audience at $54.17 per unique monthly visitor with a premium of $83.33 per unique as upside!

Analysts Assign Value to Audiences

For the past two years, Techcrunch has been trying to calculate the value of social networks. The common denominator in its financial model? Audience. In its 2009 calculations, Techcrunch values a unique user for the United States, UK, Australia, and Denmark at $132, $213, $148, and $144 respectively, based on each country’s advertising expenditures.

Businesses Value Other People’s Audiences

There’s a term in financial circles called OPM, meaning “other people’s money.” Well, businesses have been paying for access to other people’s audiences (OPA) for a very long time. The advertising industry is built on the fact that businesses value access to OPAs so much that they are willing to rent them…even if it’s for only a day.

Sprinkles Cupcakes is a five-year old Beverly Hills-based bakery that produces cupcakes that its loyal customers describe in terms usually reserved for religious experiences. Along with its website, the company also maintains a Facebook fan page, complete with 77,600 fans.

Question: What is the value of this audience to the company?

One way to calculate the value is to compare it with the value of OPAs. For example, The Los Angeles Times would charge Sprinkles $972 per column inch for a one-time access to its print audience. If Sprinkles wanted to purchase a non-discounted full page ad, it would cost them $125,388 (at 129 inches per page) to deliver its delicious message to the paper’s 657,000 daily readers.

In this example, Sprinkles is paying $0.19085 per LA Times reader for a single day. But with its own audience on Facebook, Sprinkles doesn’t need to rent OPAs. Assuming conservatively that a Sprinkles Facebook fan equals an average LA Times reader (a FB fan should be worth much more!), then the Sprinkles’ Facebook audience might be valued at $14,809 (77,600*0.19085)

But that’s still not the full story. Sprinkles has access to its Facebook audience 365 days per year–at no incremental cost per new message delivered. Today, Sprinkles is taking advantage of this economics of influence by using the channel to deliver daily challenges such as:

Sprinkles uses vanilla from Madagascar! The first 50 people to whisper “Bourbon Islands” at each Sprinkles receive a free vanilla cupcake!

Is it possible that the value of the Sprinkles Facebook audience could be calculated through saved advertising costs? Might it be considered a corporate asset of $5.4 million ($14,809 * 365)?

Seem a bit too high? Let’s use another yardstick. Online banner ads can be purchased around the net for between $20 and $100 per thousand (CPM) impressions. Using these numbers, conservatively, every Sprinkles message sent to its Facebook audience might be the equivalent of renting OPAs to the tune of between $1,552 and $7,760 per day. Over the course of 365 days, such an asset could be worth between $566,000 and $2.83 million.

Wrapping it up

Social Media is about creating content so compelling that your customers will not only return to consume it, but that they’ll forward it to their friends. These returning visitors can be considered an audience.

Businesses have always understood the value of audiences, having budgeted for access to other people’s audiences through advertising. But now, with access to New Media platforms such as blogs, podcasts, online video, or Social networks such as Facebook, businesses now have the opportunity to develop their own audiences.

Perhaps the value of corporate audiences should be calculated as investors do: at $54.17 per present monthly visitor with an upside of $83.33. Maybe they should be calculated through an algorithm based on advertising spends, falling somewhere between $132 and $213 per unique visitor. Or perhaps your accountant is more comfortable with considering what your company could sell its audience to itself for, giving the audience a value of 19 cents per reader per day, or somewhere between 2  and 10 cents per impression/fan per day.

Whatever the method of calculation, can we come to some sort of agreement that the audience your company has built through its Social Media efforts is a cherished corporate resource that gives your company competitive advantage?

Filed under: Audience is an Asset

Comments

Ron I think you are onto something here. Another thought, would you see an incremental increase in value over time for a particular 'fan'? i.e. loyalty increases the asset value. You could probably argue that an engaged audience that hangs around is worth more than a casual fan especially of you could then factor in account (commenting, wall messages, link passing) Of course measuring this gets tricky – but you've done a good job so far so why not have a crack? he he

Paul Baiguerra
November 11, 2009

it's mean to say 'if you could factor in action' – doh

Paul Baiguerra
November 11, 2009

Absolutely, Paul! Not all audiences are created equal. Some will indeed be more valuable than others.

ronploof
November 11, 2009

Hi Ron, you should trust your intuition because I am also on the same page when it comes to social media ROI. As we know, social media has a cumulative value effect and therefore any investment is best tracked on a balance sheet. Like you said, social media also improves other online and offline channels such as advertising, SEO and web traffic, it often can lead to a transaction. When value and action are combined into a ROI calculation, you can get the true measure of your competitive differentiation.

Wendy Troupe
November 12, 2009

Ron – I really liked this article. I'd never thought of the “business” of a brand or audience like this. You opened my eyes! Thanks.

Tom J
November 14, 2009

Ron – I really liked this article. I'd never thought of the “business” of a brand or audience like this. You opened my eyes! Thanks.

Tom J
November 14, 2009

Ron – this is definitely an interesting concept and certainly worth digging into. Lot's of work, but worth it I would say.

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