What drives Company valuation in Social Media?

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Google is in advanced talk to buy Yelp, leader in user-generated reviews about local businesses in the US, for more that $ 500 Million. Many people are surprised at high valuation of Yelp. In my opinion, this valuation is not high considering that Yelp can nicely compliment Google’s service known as Google Favorite Places. See the following video for a demo.

In the next 2-3 years, we are going to see many such “high valuation” deals involving companies offering Social Media services. It is important to note that valuation of such companies is derived not from revenue they generate, but from user generated content contributed by thousands of users and traffic this generates.

This explains why many Social Media sites or platforms are either free (like Twitter) or have “Freemium” pricing model. Ultimately, they will have to come up with a revenue model that can support the “free” service. And that’s why we are going to see many M&A deals involving some big names such as Google, Microsoft and the like on one hand, and Social Media platforms & services Cos. on the other. What do you think?

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