Bebo Sale: Who pays the piper?

Writing in the New York Times, songwriter Billy Bragg raises several important questions about money and music in the context of the sale of music-focused social networking site Bebo, which was recently purchased by Time Warner for $850 million.

As we noted yesterday discussing how dividing Facebook revenues amongst all the participants in that social network would yield very little to each person, it is important to put some of these big money deals in context.

I am totally in agreement with those that suggest the "right answer" is to find ways to bring the content producers into the equation by giving them equity stakes in the projects they help to build. However it is also important to understand the needs of investors who have little incentive to pump cash into projects unless their equity stake is reasonably in line with the investment.

Rightly or wrongly, music is cheap and money is expensive, so it is not reasonable to expect venture capital to flow unless equity is delivered. Of course in the case of Bebo the founders reaped the giant money and their main contribution was the *idea and excellent implementation" of a musical social community. How do you value that idea compared to the value of the musical contributions?

Bragg writes:

The musicians who posted their work on Bebo.com are no different from investors in a start-up enterprise. Their investment is the content provided for free while the site has no liquid assets. Now that the business has reaped huge benefits, surely they deserve a dividend.

Yes, a dividend but no, this is not like investment of capital. Even if the online company fails (and most do fail), the musicians get something of value which is distribution and promotion of their work. Since they don't give up their rights to pull the work and move on to greener pastures (or more importantly promote themselves at all networks all the time), their is effectively zero risk to the musicians in these equations. Risk lies at the heart of what makes investment equations difficult, so generally as you eliminate the risk you must reduce the rewards if you want to maintain a successful business ecosystem.

The claim that sites such as MySpace and Bebo are doing us a favor by promoting our work is disingenuous. Radio stations also promote our work, but they pay us a royalty that recognizes our contribution to their business. Why should that not apply to the Internet, too?

Not disingenuous, but probably incomplete to suggest that exposure is all the artist should get. Royalties should be integrated into the risk and reward equation we are talking about above. This isn't about fairness as much as it is about creating systems that can work to deliver the goods to people. Without that, nobody will make any money.

I think Bragg's point here about compensation is basically valid. The best models will find a way to get money flowing to artists in proportion to their contribution to the social network. Given that music consumers are the big winners in the current system through free downloads both legal and illegal, I think it would be optimal to find better ways for musical consumers to pitch more cash into the social networking equation, perhaps in exchange for greater social networking privileges such as insider interactions with the artists, pre-release music, and more.

What social networking features would get you to happily pay more for your music?

Who owns all that content at the Information Plantatations?

In Meanwhile, Back at the Plantation Nick Carr raises questions about the importance of who owns what in a social network. He looks at the recent sale of Bebo - the world's third largest social network after Facebook and Myspace - to Time Warner. Carr notes that the founders in that case did not claim ownership of their participants content:

Birch, to his credit, did not claim ownership rights to the music and other creative work uploaded to his site. But neither did he offer any royalties or other financial benefits to the musicians whose work, as Bragg writes, played such an important role in "draw[ing] members and advertising — to his business."

Although it is easy to react to these big social media sales as an act of digital exploitation, where a handful of key players reap the rewards of millions of individual contributors, it is also important to note the many nuanced aspects of these deals. The big players have created for many a sort of "digital playground" and that has a value both for the content producers and the content consumers. Many businesses reap advantages as well, as when a band uses social media rather than advertising to spread the word. No network would dare to claim any ownership from song royalties even if it was that network that launched the career.

Perhaps most important, however, is the fact that even if you could find a formula for distributing network advertising proceeds according to content production the checks to the content folks would be in most cases so tiny as to be almost insignificant.

For example in 2007 Facebook's revenues were about $150 million. Thus Facebook's 100 million participants generate, on average, less than $1.50 in revenue *per year*.

Facebook CEO Zuckerberg says he expects to double that to 300 million in 2008, but most think that estimate is unrealistic and even if true the average per user would be well under $3 per year given the increase in subscribers we can expect over that time.

So, as one of the information slaves at Facebook I am contributing to the site in a way that allows them to make $1.50 per year monetizing my participation, and maybe just under a penny per day next year if all goes very well for them.

I certainly get more value than that from Facebook, and thus it appears I have only a weak claim to ask for them to cut me a monthly check for the $0.12 in advertising revenues I helped to generate. Mark Z - I guess it will be OK if you send me that ... quarterly.

Bebo Financials

Today's big news is AOL's acquisition of Social Network Bebo for a cool $850 million. Kara Swisher has an excellent piece detailing some of the financial aspects of this mega-deal. She also notes that despite some significant success in the space, Bebo is very much in the shadow of Myspace and Facebook as a social network.

With only $5 million in EBITA for 2007, Bebo is selling at a whopping 160+ times earnings. Big companies tend to do be viewed more favorably than small ones by this EBITA multiple metric, but it is notable that with small and moderate sized website dealings one would expect to pay only about one or two times annual earnings rather than paying in the tens or in this case over one hundred times annual earnings.

This discrepancy is in part due to the fact that large sites are arguably more stable than small ones, but in my opinion this is still a very conspicuous aspect of wheeling and dealing with online companies, and arguably yet another indication that internet bubble two may be ... growing ever larger.

One has to be middle aged to remember when AOL was pretty much the *only* big game in town in terms of online socializing, and I'm sure AOL execs are wishing they had managed to turn more of that early chat room activity and idle banter into a thriving social network like Myspace or Facebook or Bebo.

Can Bebo help AOL regain the former glory it enjoyed in the early days of online activity?

AOL Buys Bebo For $850 Million

AOL is about to acquire Bebo for $850 million. AOL announces the Bebo acquisition. Bebo is the the third place Social Network in the US and far behind both Myspace and Facebook, but it is the first place social network in the British Isles and Second in New Zealand.

Based in London and begun in 2005, Bebo lists these features as major aspects of the Bebo philosophy of social networking:

Open Media: Open Media gives media companies free and open access to Bebo's users worldwide and the Bebo community free and open access to thousands of hours of premium entertainment content from some of the world's best known media brands.

Open Social: In November 2007, Bebo announced that it is joining OpenSocial, a set of common APIs for building social applications across the web. In addition to this Bebo announced plans for a Developers Platform.

Most analysts argue that AOL's internet prospects have been declining for some time, and this move is likely to breath some life into the sagging AOL empire. This also may suggest that AOL and Yahoo are now extremely unlikely to merge given the size of this deal. CNBC has more about this deal and how it might affect the proposed Microsoft takeover of Yahoo.