Is Bandwidth a Metric for Value?

A recent article published on Quartz brought up an interesting angle in determining digital media value.  With a number of social media and digital media firms going public in recent years, many are caught up in the discussion of what drives the true value of these firms.  Is it the number of users?  Is it the level of engagement of those users?  Is it the time spent on the site? 

The Quartz article pointed to the idea that bandwidth can be used as a proxy for determining value.  It provides the example of Facebook and Netflix.  Facebook currently carries a valuation of $115 billion and over a billion users.  This dwarfs Netflix’s $19.8 billion valuation and 45 million subscribers.  However, on a per person basis, Netflix’s valuation actually surpasses that of Facebook.  Netflix commands $445 per person, while Facebook fails to break $100 with $96 per user.

The article published by Quartz points to the fact Netflix’s bandwidth usage is considerably larger than that of Facebook, and it suggests that this relationship underlines a larger theme for valuing digital or social media companies.  In short, firms which require greater bandwidth deserve a larger valuation since the content they are providing is more engaging.

It’s clear we are still trying to make sense of digital media and with that, its true value.  However, this should not lead us to make spurious connections between characteristics such as bandwidth and value.  Netflix’s bandwidth usage is 24x Facebook’s, while it’s valuation per subscriber is only 4.6x.  Clearly, this proposed relationship is not scalable and really lacks applicability.  Additionally, this method of approaching valuation is still victim to the obstacles present in other methods.  Simply because Netflix is using more bandwidth doesn’t necessarily mean its users are more engaged, underlining the problem with determining engagement.  Also, both the valuations of Facebook and Netflix are subject to debate in a larger context.  With valuations so heavily based on the prospect of much larger future earnings, one has to view them conservatively.