The ROIGuy has been absent for a couple of weeks while recovering from Oral Surgery. Having the nerves of my teeth exposed to the continual irritation of every breath and every bite has resulted in a dental dam of the creative process.

Buying YouTube for $1.65 Billion is a brilliant move to block out Yahoo, NewsCorp, Ask and MSN. Google may have overpaid or they may not have, but they now own the traffic that could have gone to a competitor.

The $900 million MySpace–Google search deal announced in May established the valuation and made acquisition of YouTube inevitable. The MySpace deal was a huge win for NewsCorp and set a very high price tag for acquiring Social Media sites that are leading their segment. Rumors about Yahoo talking to FaceBook about a $1 billion sales have been floating for months; the rumors suddenly include Google and prices as high as 2.3 billion.

While the headlines invoke demons of 1999, the real danger here is not the potentially inflated values of a few sites that lead their space; the real issue is the terrible consequences for other social media sites. The search advertising revenue model and skyrocketing valuations distort the focus of Social Media sites and turns them into giant affiliate sites for search advertising.

For competing sites with shallower pockets and smaller market share, the need to generate revenue will inevitably compromise the user experience. CPC advertising revenue is a great model—for a search engine. When a community site depends on driving search queries for revenue, it takes the emphasis away from the user’s reason for coming to the site. The site sacrifices whatever makes it unique in favor of a generic user experience.

Social Networking and User Generated Content sites need to develop their own revenue streams based on the characteristics that synthesize their communities. They need to identify specific markets for which they understand user affinity and then figure out how to monetize delivery of relevant content that enhances the user experience. For example, if a site encourages users to list their favorite type of music or musical artists, they could partner with labels, artists or music promoters in each city to sell tickets to the show. Even better, they could negotiate for access to presale tickets and/or a special section in the arena for their members and let users create a buzz around the event.

The inflated valuations caused by this deal may be even more devastating in the long run. Slapping a $1 billion price tag on an immature site with a tons of users puts a lot of pressure on management to cash in. A site that was organically evolving through the interaction with users and slowly approaching profitability is suddenly an entity on the auction block. If the site is sold, it creates an all consuming demand to generate revenue. In the end, these objectives are accomplished (or not) to the detriment of the users who synthesized these communities.

Long before anyone coined the terms “Social Networking” or “User Generated Content,” one of the first (and still the best*) community sites was www.Craigslist.org. The site was founded by Craig Newmark, an unusual person with an almost unheard of lack of desire to cash in.

Craig has stated on many occasions that the site is nothing without the user community. His title is Founder, Chairman, Customer Service Representative. Craigslist operates as a not for profit entity that has grown organically, with a limited revenue model, a sparse user interface and a fanatically loyal user base who police the site. They have about 20 employees and resist the siren song of growing revenue through advertising, affiliate programs, co-marketing, etc. Ebay bought a minority stake a few years ago but has lived by the agreement they made with the founder to be hands off and not demand a cash return. If Craigslist suddenly sold for the $10-20 billion it would be worth on the open market, the site would have to start generating a few billion dollars a year and fundamentally change the community that created it.