Valuation of online social networks taking into account users’ interconnectedness

Abstract

Online social networks have been gaining increasing economic importance in light of the rising number of their users. Numerous recent acquisitions priced at enormous amounts have illustrated this development and revealed the need for adequate business valuation models. The value of an online social network is largely determined by the value of its users, the relationships between these users, and the resulting network effects. Therefore, the interconnectedness of a user within the network has to be considered explicitly to get a reasonable estimate for its economic value. Established standard business valuation models, however, do not account for these aspects sufficiently. Thus, we propose an economic model for the valuation of online social networks, which takes into account the users' interconnectedness within the network. Furthermore, we analyze different centrality measures, which can be used to quantify users' interconnectedness in online social networks and propose a measure which is based on the PageRank-algorithm. Finally, the practical application of the model is illustrated by an example of the European online social network XING.com.