Who Sells a Product--Not Just What the Product Is--Matters

Firms whose core business model relies on network effects--including all firms using a platform business model--are essentially forced to develop pro timesies for network effects that drive their success, as network effects cannot be directly measured using standard financial reporting metrics. 

Airbnb, for e timesample, might track the total number of lodging listings; the number of guest reviews; the number of booked stays; the number of site visits or completed transactions. 

Uber might track the number of drivers; the number of riders or trips. E-commerce sites such as eBay might measure the number of buyers, the number of sellers or the number of listed items for sale or the number of completed transactions. 

Social media networks such as Meta might measure the number of users; the amount of time users spend on the platform or the number of interactions between users. 

PayPal might measure the number of active registered accounts and the volume of transactions. Amazon might measure network effects for its third-party merchant services by noting the number of sellers; the number of products listed for sale; the number of reviews or the volume of product sales.

Connectivity providers using platform business models might track  the number of users; the amount of bandwidth or computing services purchased; or the number of transactions.

And though such “network effects” performance metrics are not often directly reflected in firm valuations using traditional accounting metrics, it is reasonable to assume they exist. 

For example, some might argue that Equinix's EV/EBITDA multiple was 25.7 times in 2022, while AT&T's EV/EBITDA multiple was 12.5 times. 

Equinix's price/sales multiple might have been 18.4 times in 2022, while AT&T's price/sales multiple was 5.7 times. 

Equinox’s price/earnings multiple might have reached 100.5 times in 2022, while AT&T's price/earnings multiple was 15.4 times, at least at market highs for that year. 

Equinix's multiple of annual revenue was 13.8 times in 2022, while AT&T's multiple of annual revenue was 6.4 times.

Since AT&T’s revenue was primarily driven by connectivity services, while Equinix is valued as a data center or a digital infrastructure or real estate asset, each firm’s total valuation tends to reflect the primary importance of each firm’s core business. 

But each firm sells interconnection or connectivity services that are functionally the same: dark fiber, lit fiber, Ethernet transport and optical wave services. 

The point is that the same product (interconnection) is valued differently at each firm, since each is in a different category of business. 

For executives constantly concerned about the commoditization of their connectivity services, such differences show that the value of particular interconnections can vary based on who is offering the services, or what and where the connections are made. 

Of course, larger firms often are awarded higher multiples than smaller companies. Networking specialist Megaport's EV/EBITDA multiple was 10.5 times in 2022, while AT&T's EV/EBITDA multiple was 12.5 times.

On the other hand, Megaport's price/sales multiple was 12.4 times in 2022, while AT&T's price/sales multiple was 5.7 times.

Megaport's price/earnings multiple was 24.3 times in 2022, while AT&T's price/earnings multiple was 15.4 times. 

Megaport's multiple of annual revenue was 8.1 times in 2022, while AT&T's multiple of annual revenue was 6.4 times.

So even when a smaller firm competes with a larger and more-established firm, valuation multiples for the smaller firm can be higher.