The new wave of dot.com riches
Why the price tags of online properties like YouTube and Facebook may keep heading higher.
NEW YORK (CNNMoney.com) -- The next generation of Web start-ups are coming into their own, with talk of some of these online properties ready to join the billion dollar club.
Earlier this week, blogs were buzzing with the possibility of online video Web site YouTube possibly fetching $1 billion. Facebook, a social networking site aimed at college students, is also said to be asking for a cool $2 billion.
The value of these companies revolving around user-generated content is rapidly escalating -- just last year, Rupert Murdoch's News Corp. bought teen hangout site MySpace for $580 million.
That's raised some concern that some of these social media firms are being too richly valued.
"With this area getting so much attention, almost by definition there's going to be some hype," said Tolman Geffs, a managing director with The Jordan Edmiston Group (JEGI), an investment bank focused on the media and information industries.
Nonetheless, price tags in general aren't really that out of line and may even head higher, industry experts said.
Here's a look at some of the reasons why:
It's a sellers market. Corporate acquirers are keen on finding ways to offer more sophisticated content and services, according to Brian Farrar, managing director at investment banking firm Innovation Advisors.
Several traditional media firms aiming to tap the new Net boom are hungry for these firms, while tech firms have an eye on some of the underlying technology developed by these next-generation upstarts.
Earlier this month, Conde Nast bought the Wired News Web site for $25 million. The purchase of the online site, which features blogs and breaking news, is seen as a part of a broader move into new media for the publishing house, which already owns Wired Magazine.
There appears to be no shortage of buyers. "We aren't seeing any reduction in appetite. Companies are very focused on using acquired growth judiciously to expand their businesses," Farrar said.
Not all deals are huge. While there's been a surge in the number of acquisitions, there haven't been that many blockbuster deals, said Richard McManus, co-founder of the Web 2.0 Workgroup and author of technology blog Read/WriteWeb.
There's a broad dollar size range for these deals, as valuations are dependent on who's doing the acquiring and the motivation behind the purchase, experts said.
A purchase made for a site's underlying technology platform might fall on the lower end of the price spectrum, while those being bought for their massive audience reach might fall on the higher end.
"The big deals are generating a lot of attention, but you also tend to see acquisitions in the $10 to $30 million range for much smaller companies where the Yahoos and Googles see a product or technology they want to incorporate," said Jeff Crowe, general partner at venture capital firm Norwest Venture Partners.
Yahoo owns online photo sharing site Flickr and del.icio.us, which lets people share their bookmarks, while the Blogger Web service is part of Google's portfolio.
Untapped potential. Like any acquisition, buyers of user-oriented sites have future revenue potential on their mind when they go shopping.
The long-term advertising potential for social networking sites is outstanding, according to Geffs from JEGI. "Companies are looking to buy a sticky, loyal audience and higher-impact ad revenue."
MySpace, for instance, attracted 17 percent of non-sponsored link advertising in June, up from 8 percent in the same period last year, according to Web traffic tracker Nielsen//NetRatings AdRelevance.
Once ads can be better linked to user behavior -- matched to a user's search history between sites, for instance -- there will be even more opportunity to tap, Geffs added.
"We've barely tapped the ad potential for social networking," he said.