Value Creation in Online Social Networks The Importance of Looking Beyond Financial Information

Abstract: This thesis emphasizes value drivers that are characteristic for online social networks in order to discuss whether or not market values of such companies are realistic. The motive behind this is the current discussion of overvalued social networks such as Facebook and Twitter. The thesis begins with a definition of online social networks and continues with a brief review of the current situation on the market. Further, existing valuation methods for online social networking companies are introduced. This discussion evolves into defining the aim of the thesis. The next part of the study helps to understand the issue through a theory chapter which also contains two working hypothesis that supports the analysis. The empirical chapter consists of two different approaches. Firstly, interviews with analysts that work with the valuation of these kinds of companies on a daily basis and an interview with the founder of one of the first social networks ever – Lunarstorm – have been conducted. Secondly, a case study has been conducted, examining acquisitions of the two Swedish online social networks Lunarstorm and Playahead. The results from the empirics along with the theory end up in an analysis where the importance of value drivers not taken into consideration in traditional valuations is discussed. The main benefit from this study is its contribution to a greater understanding for what drives the expected values of online social networks to its height. Throughout the interviews, the respondents have indicated that there are additional value drivers beyond financial information, such as platform theory and network externalities, that affect the firm value in these companies. The conducted case study of Lunarstorm and Playahead, where the valuations based on solely financial statements were below their true market values, supports this argument. However, due to that the results rely on only two companies included in the case study, no general conclusions throughout the industry of online social networks can be drawn.