PRINT THIS PAGE Virtual communities: what’s their potential value?
14/05/2008. Source:IVCJ (Israel Venture Capital & Private Equity Journal). Udi Savithsky, Sagi Kabla, Michal Bar-Dayan, BDO Consulting Group
Virtual communities attract a focused and segmented audience with high economic potential. In this IVCJ article, BDO Consulting Group’s Udi Savithsky, CPA, MBA, senior partner and Sagi Kabla, CPA, senior manager and Michal Bar-Dayan, analyst, describe why these communities have value and how their value can be assessed. What is a virtual community?
The Internet has created virtual communities – new online virtual space for people to communicate, connect, chat and share experiences, feelings and information.
The new communities in cyberspace are, in many respects, similar to that of traditional communities. If past communities were characterized by three dimensions – social, psychological- cultural and geographic – today’s virtual communities rely mainly on the first two, while the third – geographic – does not feature prominently as in the past.
Virtual or Internet communities exist throughout the Web by means of diverse technological platforms, including forums, blogs, discussion groups, chat rooms, Internet sites, etc., with the uniqueness of each being its target audience and field of interest.
Unique features of a virtual community
The predominant feature of virtual communities is the common denominator of its members based on a specific attribute, such as new mothers, Israelis residing abroad, age or a common field of interest – e.g. sports, science fiction or an object of admiration. Virtual communities are also characterized by the nature of the dialog and the type of communication – such as support groups, discussion forums or consulting groups (usually managed by an expert professional). Examples of virtual communities are: Quit Smoking Discussion Group, Victims of Sexual Assault Forum, Movie and TV Critics Blog, Internet Law and Policy Forum and Pastry Decoration Forum.
No common geographic/physical location is required to make the virtual community accessible and open to a wide range of members. The media that serve online communities enable a type of asynchronic communication, which also eliminates the time component. Given the technological features of virtual communities, members can communicate without having to deal with the confines of accessibility stemming from distance, time and location.
Other characteristics stem from the desire to maintain the community’s stability, keep it homogeneous, and ensure it is on the real and imaginary borders that define it. Each online forum uses different mechanisms to ensure control and order, such as by applying screening and blocking software or use of data protection and self-regulating mechanisms.
Economic value of virtual communities
The high economic potential embodied in a virtual community is a result of its unique and common features, the value of which is derived from the following:
- A focused and segmented audience – As discussed, virtual communities are generally comprised of individuals with similar social standing, common fields of interest or consumer culture. In most cases, they are made up of a well-established target audience, from the middle to upper class segment of the population, with access to computer-mediated communication. The relatively homogeneous audience of each community offers advertisers the opportunity to apply proven marketing and advertising rules, namely, to become familiar with the target population and to adopt an appropriate advertising approach.
- Accessibility to a wide target audience – The unique technology underlying the virtual community enables both individuals and organizations to implement social goals that in the past had been restricted by technical, economic and other constraints. Online discussion groups and even synchronized chat rooms enable extensive Web surfer traffic and discussions on diverse topics with no time or space limits. This accessibility and convenience play a key role in creating a large number of social connections that are even stronger than those in traditional social communities. These connections are integrated into the individual’s life pattern and form part of his personal community, thereby causing Web traffic to soar in the virtual community and enabling a large number of repeat entrances for regular users.
- Desertion blockers and high loyalty rates – Members typically feel a strong connection to their community, motivating them to remain there even if the social/cultural features that led them to join in the first place are no longer present. For instance, people who browse the Web for a wedding forum to gather information and ideas for their own wedding often form strong social contacts and identify with members in a similar situation. Ultimately, most of them will remain active community members long after the wedding.
- Generating new contents – In virtual communities, there is a constant process of users generating new content, without Web site owners and operators being required to invest time or additional resources. Such content increases exposure to the site and serves as a focus of attraction for both regular and new users.
The community’s core activity in a particular domain is primarily by registered users who not only use content passively, but also contribute to activity by introducing value-added content via “postings.” If we recognize community members as the driving force of a site's activity, we could conclude that the virtual community is the main attraction contributing to high surfer traffic. When a Web site displays high traffic, it enables a business model to develop, based on focused and effective advertising targeted toward a presegmented audience. The more a topic dealt with by a community is relevant and contemporary, the more new users are attracted to it through network mechanisms such as search engines.
How is this value assessed?
In evaluating a virtual community asset, we are assisted by methods used in IP valuation. Essentially, the virtual community asset created under a platform hosting a particular virtual community is not merely the specific URL address from which other intangible assets could be identified, but a community whose activity takes place in the domain and creates the content suited to it. This asset is equivalent to other traditional IP assets – patents, trademarks, trade secrets and brands – that are valued as a whole.
There are a number of methodologies to valuate IP assets. The method chosen should be appropriate for the type of IP and the purpose for which it is being valuated. The most common methods include:
- Relief from royalty
- Excess profits or notional maximum royalty payable
- Capitalization of earnings
- Net present value of incremental cash flows
- Profit margin differential
- Premium sales price
- Comparable market transactions
- Brand strength
- Real options
The method can also use options modeling and other standard measures. However, before selecting an appropriate method, two discrete components of the community asset – the number of members and life span – should be considered. These two components are assigned their own characteristics and vary among communities. This “bottom up” approach is crucial for virtual community valuation, especially in Web sites incorporating a large number of diversified virtual communities, each with its own unique characteristics. Isolating each part makes it easier to determine which segment “is driving return.”
In summary, a better understanding of virtual communities, their unique characteristics and derived potential value will enable the valuation specialist to succeed in determining the real value behind the asset, which involves more than is derived from methodologies and approaches typically used for Web site and domain valuation.
This article first appeared in the Israel Venture Capital & Private Equity Journal (IVCJ). IVC Research Center publishes the Israel Venture Capital & Private Equity Journal, a quarterly review of trends and developments in the Israeli-related venture capital industry. IVCJ, distributed worldwide, is dedicated to provide wide-range coverage of Israel's venture capital industry. For more information please visit www.ivc-online.com
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