As users of social media, we find the recent series of cases involving allegations of misappropriated Twitter users quite interesting.  We have worked on litigation involving an employee exiting a company, allegations of stolen customer lists, and even the customer account itself having been at issue.  And, our job as economists is to assess the “value” of that alleged theft.  In the context of social media, the legal and economic questions become more complicated as we tread uncharted waters.  So, let’s take a lesson on the intricacies of valuation.

Consider the case PhoneDog LLC v. Noah Kravitz.  PhoneDog itself is an “online community of cell phone related information.”  Kravitz is a former writer for PhoneDog, who upon leaving the company was asked to relinquish his Twitter account (“PhoneDog_Noah”) and did so by switching his Twitter handle from “noahkravitz” and keeping the 17,000 followers he amassed.  PhoneDog sued Kravitz, claiming the Twitter followers constituted a customer list Kravitz misappropriated and valuing each follower at $2.50 – therefore, seeking $340,000 in damages.  In ruling on a motion to dismiss, the District Court in the Northern District of California allowed much of the case to proceed.

We are economists, so let’s discuss the complicated valuation issues such cases present.  First, conceptually, a measure of harm to PhoneDog would be the difference between any associated benefit the company actually received from those Twitter followers and the benefit the company would have received from those Twitter followers had Kravitz not left PhoneDog and changed his Twitter handle.  (BTW, congratulations!  You have now entered what economists like to call “the but-for world,” where we construct massive databases and run sophisticated statistical analyses, examining from numerous points what the world would have looked like had the allegedly unlawful act not occurred.  We love it here!)  With that in mind, and noting that the specifics of every case are different and the methodologies used in each can be different as well, we ask:

• What do Twitter followers do for PhoneDog?  How do they (directly or indirectly) generate revenue, advertising or otherwise, for PhoneDog, if at all?
• If Twitter followers are a source of revenue, how did that change when Kravitz switched his Twitter handle?
• What costs are incurred to obtain these revenues?
• Did PhoneDog do anything to mitigate their losses?  If so, what costs did they incur?

Let’s test PhoneDog’s $2.50 Twitter follower valuation (admittedly, for reasons unknown to us it could be inappropriate to apply this figure to other “Twitter situations,” but PhoneDog did mention this value constituted an “industry standard.”).  Lady GaGa currently has the greatest number of Twitter followers – over 18 million at last count.  Applying PhoneDog’s valuation to these Twitter followers suggests Lady GaGa’s Twitter following is worth $45 million.  Interestingly, she earned $90 million as of August 2011.  PhoneDog’s methodology applied in this context could suggest that approximately half of Lady GaGa’s value lies in her Twitter account.  We’re not sure she’d agree...  but, as social media valuations continue to evolve we will likely find out the answer.

Stay tuned as we monitor future court rulings and examine the economic analysis and methodologies used in social media valuation.