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Saul Klein, a partner at Index Ventures, one of Europe's largest venture capital firms, has some shocking advice for European media companies.

They need to buy more of the startups that VC firms like his have backed.

In particular, European media companies should focus on social networks because, according to Klein:

"New audiences are not in newspapers or on TV or radio. They're online and on mobile and in social media companies."

Index Ventures currently counts social media startups such as Netlog, Stardoll, Frengo and Netvibes as portfolio companies.

And I'm sure that Klein would be open to discussing acquisitions similar in nature to those realized by some of the firm's previous investments, such as Skype (purchased by eBay for $2.6bn) and Last.fm (purchased by CBS for $280m).

Klein cites AOL's insane purchase of Bebo for $850m as the model that European media companies should be following:

"The point when Bebo got acquired was just when they were starting to show monetization and AOL has a salesforce that has been selling online ads for 15 years. What they were missing was the audience."

Putting hype aside, there's little justification for paying 160 times EBITDA for a startup, which is exactly what an increasingly troubled AOL did.

Most importantly, there's little evidence that, despite their massive audiences, popular social networks can be monetized at the level hoped for.

Google hasn't been able to solve the monetization riddle. Rumors are that News Corp.'s MySpace is having difficulty too with its in-house advertising sales efforts.

While that's not to say that there's no value in social networks for big media companies, overpaying for "growth" - no matter what kind - is rarely advisable.

News Corp. scored a coup d’état when it snatched up MySpace for $580m in 2005. According to eMarketer's crystal ball, MySpace will pull in more than $800m in revenue this year, accounting for more than half of all advertising spend on social networks in the United States.

As such, even if MySpace declines, Rupert Murdoch has turned a profit on the deal, in large part thanks to the generosity of Google.

But in two years, will AOL be able to say the same when reevaluating its Bebo acquisition? And if Microsoft purchases Facebook for billions, as some speculate is possible, will it ever look back and be able to say that it got a good deal?

Anything is possible, but the realistic answer to both is "probably not."

The truth is that not all advertising inventory is created equal and despite their impressive audiences and usage metrics, popular social networks are still on the bottom of the totem pole - for good reason. For many, they haven't delivered ROI and for logical reasons, they may never be able to do so.

Of course, VCs like Saul Klein can ignore the facts when advising media companies to spend big money buying social networks because they're in the business of making fools out of such companies.

It's easy to tell media executives that they have the expertise to sell advertising but just need more inventory while pitching them on the idea that buying less-than-saleable inventory is a good business move - even when it isn't.

Perhaps more amusing than the fact that someone would listen to a VC advising deep-pocketed corporations to buy overvalued, profitless startups is the fact that Reuters would actually publish a story about it.

I've been harsh on bloggers but in this case, Reuters should be criticized for publishing such a pointless "story" (or more accurately - "non-story").

Hopefully, executives at European media companies will continue to demonstrate a little bit more discipline than some of their American counterparts when it comes to speculative acquisitions - because while following Klein's advice may benefit his bank account, it probably isn't going to benefit theirs.

Drama 2.0

Published 28 May, 2008 by Drama 2.0

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