Abstract
Wall Street and Silicon Valley debate the valuation of newly listed platforms. Wall Street emphasizes profit, while Silicon Valley emphasizes the user base because they believe that strong network effects will lead to accelerating the growth of a platform’s profits. With the support of Silicon Valley, platforms keep losing money and claim that it is due to the investment on the intangible asset “user base.” We use a data set from Groupon to analyze whether it is reasonable to sacrifice the current profit to promote the growth of the user base. We show that indirect network effects are not sufficient for a platform’s success and the cross-period impacts of the user base is more important. Conditional on the cross-period impacts of the user base, indirect network effects are amplifiers of the impacts of users on a platform’s value. Furthermore, our simulation-based analysis shows that it is not worth sacrificing current profit to promote the growth of Groupon’s user base.Â
Speaker bio
Zhou Zhou is a doctoral candidate at the Questrom School of Business, Boston University. His research field is platform valuation. Zhou studies economic moats of platforms, including how platforms build their economic moats and how the economic moats impact their valuations.