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Social networking fuels new Web boom

By Ravi Agrawal for CNN
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(CNN) -- If you haven't already created a cyber profile on a social networking Web site like MySpace.com or Facebook.com, you're part of a rapidly shrinking minority.

With growth rates unheard of since the online boom of the late 90s, the question every investor worth his bandwidth secretly wants to know the answer to is whether the gold rush is going to last.

After NewsCorp. acquired MySpace last year for $580 million, and with news last month of Yahoo bidding $1billion for Facebook, new social networking sites are mushrooming every week.

According to the latest figures released by comScore World Metrix, Web 2.0 -- a vague moniker for newer internet companies started with less capital and focusing on open business models and the customers -- companies are growing at an unprecedented rate.

While older sites run by Yahoo!, eBay, and Amazon continue to be among the top 10 sites with the most unique visitors, they have grown in single digit figures in the last year.

Meanwhile MySpace (243% annual growth in unique visitors to 79.6m) and Facebook (86% growth to 15.5m) are fast pushing to become the most trafficked Internet destinations.

But when Facebook has approximately a fifth of the users MySpace can boast of, how can Yahoo! justify paying almost double the price NewsCorp paid out?

According to Caris and Company's analyst Tim Boyd, $1bn is a "reasonable price" for Facebook. In a research note, Boyd suggests that the perceived value of social networking sites has increased by six to eight times in the last year.

Due to Facebook's "lack of public company expenses" and its' "far-more-targeted user demographic" the deal could well be a sound one for Yahoo!, says Boyd.

Many analysts are confident that the new boom won't explode like the 90s bubble burst.

"The 90s bubble was fueled by investors' money being pumped into the economy and forcing it to rise without any real justification," said Bob Ivins, the managing director of comScore Europe.

"Now investors have rigorous financial models and a vision of how to monetize Web traffic and engagement statistics. They're conducting the due diligence to make sure the mathematics makes sense."

For some founders of social networking sites, the end goal isn't necessarily to start a bidding war and cash out fast. The bigger bucks may just lie in advertizing in the long term.

Facebook signed an online advertizing deal last month with Microsoft Corp., guaranteeing the software giant at least $200m over the next three years. MySpace too signed a $900m three-year deal with Google, almost double what NewsCorp. paid out to buy the social networking site.

"The Google-MySpace deal shows that the mathematics [behind potential bids] makes sense if investors can monetize user traffic," added Ivins.

Michael Birch, the co-founder of Bebo -- a social networking site with 27m users which claims to have overtaking MySpace in the UK -- is just one of many start-up gurus who might not sell anytime soon.

"We're not looking to sell. I've spent all these years trying to get to this point. To sell out as soon as I get to it just seems a little bit silly," he told The Times in an interview last week.

And if the competition to survive wasn't intense enough already, a Microsoft spin-off called Wallop announced last week it expects to take on MySpace and Facebook by touting tools users can buy to craft better-looking web pages.

According to its Web site, Wallop started as a research project at Microsoft four years ago, and will allow users to share "photos, music, and other media allowing natural conversations."


story.myspace.gi.jpg

Newscorp. paid $580 million for the social networking site MySpace last year.

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