comScore and Compete have published the latest video industry stats and there’s plenty of good data there:
From comScore:
More videos are consumed on Google properties (read YouTube) than any other network or property….
and more and more people are watching clips on Google (read YouTube properties):
From Compete:
The findings from comScore also include:
Other notable findings from September 2007 include:
I’ve said this frequently, but YouTube’s $1.65B deal is looking cheap. They not only own search, but their lead in video is pretty commanding, too.
In the greater picture, video is clearly where search was in 1999-2000. In other words, a major part of the online ecosystem, searching for a revenue model.
The business model with regards to advertising is embryonic, but the distribution channels are quite developed…
To further put things into perspective:
“September saw Americans view more than 9 billion videos online”
Now consider the following:
- ComScore recently released worldwide search statistics showing 15B monthly searches in North America, following up on their recent report showing 9.8B monthly U.S. core searches.
You see that video will be much bigger than search pretty soon. Moreover, since 47% of time is spent consuming content vs. 5% searching (report) then it can almost be argued that video has a 9x premium over search.
Of course, something like 7 websites out of 10 are discovered via search and search has proven to be highly monetizable… but no one will tell me that video - powered by TV’s $75B ad market - won’t be as monetized as search. That is sheer folly. Undoubtedly, video will be a far, far greater slice of the total ad market online than search. More on that here.
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WatchMojo NewsletterVC Fred Wilson not only offers some candid insights into his track record as a venture capitalist, but he ponies up the most accurate description of why venture-backed businesses fail:
Most venture backed investments fail because the venture capital is used to scale the business before the correct business plan is discovered. That scale/burn rate becomes the cancer that kills the business.
Read more. But this is pretty much exactly what I mentioned some time ago regarding frugality, one of Sequoia’s main criteria to invest in a management team or business. Peers in WatchMojo.com’s cohort group have raised anywhere from $5-16M in funding… if you include the earlier players who started in the late 1990s, then that amount can go as hugh as $32M.
Madness I tell you. I firmly believe that video content producers can become successful exits in the $100M to $1B range, if not more… but because the broad web video advertising market is so nascent, these companies have built up operations that are too bloated and what not… most of these companies will have burned way too much money and might not even be around to see the day by the time the video ad market develops…
Today Facebook announced that it had closed an additional $60M investment from Li Ka-shing. This is interesting for a few reasons.
For one, it adds one more investor joining MSFT’s $240M investment at the $15B valuation. It’s important to remember than MSFT did not invest $240M, but committed to investing $240M at $15B at the next round (the money might have changed hands, but the paperwork has not).
More importantly, this adds a lot of leverage and gamesmanship to Facebook’s Chinese strategy. Bear in mind that MySpace China has the luxury of being represented by none other than Wendi Murdoch, Rupert Murdoch’s wife. The local representation is a greater advantage than money can buy.
Of course, there’s more to it than that: Facebook was willing to pay $85M for a Chinese site with 10M uniques in China, that deal has not closed, and might not even materialize… In China, 10M uniques is nice but not a winner so I think Facebook might prefer to develop their own site there than acquire or partner… but that means finding a Mark Zuckerberg in China to shepherd the project, which is not obvious because Zuck is a control freak kind of guy… I’m not knocking the guy, but let’s face it: his senior management team is a musical chair and revolving door… part of that reason, methinks, is so Zuck can maintain operational control over all areas of the firm.
Ultimately, Facebook might still buy its way into the market, but with an additional $60M and Ka-shing on board, they’ll have more leverage in talks: we’ll buy you or we’ll compete with you. Usually it’s easier to buy than to build, but the threat alone would scare lesser men.
From a reader: “What do you mean by Redmond outsmarting Facebook in your post and that the $15 billion valuation will come back to haunt them?
By Redmond, I mean Microsoft, of course. There are a couple of statements in my sentence, the first one being that MSFT outsmarted everyone and the second one being that Facebook will one day regret the deal.
WHY MICROSOFT OUTSMARTED OTHERS
MSFT is not an investment company, it really could care less:
a) what valuation was attributed to Facebook and
b) what stake they have in the deal they just made with the social networking site.
MSFT did this to block Google much the same way Google paid MySpace and other Fox Interactive Media sites $900M: essentially to block the competition. Had Yahoo! or Google done the investment, MSFT’s ad deal with Facebook would have been severed for a mere $10M fee, MSFT would have lost a large chunk of its non-MSFT inventory and it would have further trailed Google and Yahoo! in search and online advertising.
So we know why MSFT needed to do the deal. Of course, the alternative was an outright acquisition or a hefty investment. Up to the deal announcement, rumor was that MSFT (or the “winner”, whomever that would be) would have to fork over $500M to $750M. That’s a lot of money. To put it into content, all of MySpace and parent Intermix was bought for $580M, my old employer IGN Entertainment was acquired for $650M.
The point is $500-750M buys empires, $240M does not. So for “only” $240M MSFT effectively bought a call option on Facebook giving it the right - but not the obligation - to buy Facebook in the future. Of course, it was not really a call, because even if MSFT wants to buy Facebook, Facebook does not have to sell. But, the upside is that this option does not carry a strike price (the pre-determined price that the holder of the option would have to pay to buy the underlying asset, in this case, Facebook).
If Facebook grows to become the next Google (I’m not convinced it will, because social networking is not search from an economic perspective at all and fanboys really need to wake up and realize this little fact), then MSFT can get some added value from their stake. If Facebook does not grow to be a money machine, then its valuation in the future will remain close to the $15B it got… if MSFT wants to buy it, it can. Don’t forget, eventually Facebook’s investors will want their money back… and their options are now limited to an IPO or a sale to MSFT. An IPO won’t really work, we’ve outlined that before, but the reason is simple: public shareholders will find better financial returns elsewhere in publicly traded online firms.
I think the $240M for 1.6% on a $15B post money valuation had everything to do with the lower investment MSFT wanted to make, Facebook’s desire to hit $15B in paper value and probably, the amount that Facebook investors were willing to dilute.
Yahoo! too could have paid a mere $240M, that is actually an amount Yahoo! could have forked over (though not really the $500-750M) but with MSFT already in bed with Facebook, this deal was MSFT’s to lose, and not Google or Yahoo! to gain. The flip side of why Facebook preferred a deal with MSFT was due to Facebook CEO Mark Zuckerberg desire to surpass Yahoo! and Google, leaders in display/banner online advertising and search. MSFT, in its current incarnation, is not a competitor to Facebook, it remains a software company… so Facebook sees its relative strategic value as being greater to MSFT. Facebook played this card well, but by getting a $15B valuation without actually hitting the cash register, it might come back to haunt them. Which takes us to the second statement.
WHY THE DEAL WILL HAUNT FACEBOOK
The implications for Facebook are simple: they will never want to do a subsequent down round, so any future investment will have to come in at a valuation greater than $15B which is not obvious, especially when you consider that current yearly revenues are $150M and $30M in profit. That implies 100x sales or 500x profit. This might pass when you are growing like crazy, but:
- if that growth rate slows down, or
- MySpace continues to grow as it has (which is rather ferociously), or
- Google actually does something with their OpenSocial strategy, or
- Facebook turns off users with their “let’s monetize users” strategy, or
- difficulty in trying to develop a business model, or
- people get tired of fb app overkill
- or frankly the reality that social networking will remain bottom of barrel ad inventory…
Then Facebook is in trouble. With its ferocious headcount growth, Facebook’s $240M won’t go as far as they’d like. even with an additional $60M, that brings the total warchest to $300M ($340M since inception). That is a far cry from the $500-750M it sought to raise.
Moreover, Facebook is a global phenomenon, yes, but its long term success abroad is anything but established, hence the rumor that Facebook was about to part with 33% of their funding to buy a Chinese social network site with a 10M user base. China, 10M… what is that, like 1% of the population.
Anyway, long term, few companies will be able - or want to - acquire Facebook above $15B… and an IPO will remain the only opportunity. But, in an IPO, seldom do investors and founders totally sell their holdings… so while they might IPO at a high price, their subsequent stock price can falter… and I think with its current financial profile, it probably will.
Of course, they said that about Google, too, at $85/share… but Google was printing money by the time of its IPO, so it’s very premature to talk about that with Facebook.
Ultimately, even if someone else, say News Corp., Google, Yahoo! were to approach Facebook about a sale, MSFT can simply get involved in the process to bid up the price enough to scare away others, leaving Facebook with no one to poke.
In fact, this is why AOL has been a hard sell. Even when Yahoo! or MSFT show an interest, Google’s 5% for $1B on a $20B valuation comes back to haunt them.
One of the best things about starting a company is that you become resilient and patient. I am one of the most impatient people I’ve ever come across (which begs the question, does one actually come across oneself? but I digress).
Last night I met some fellow entrepreneurs and I told them that when you manage a startup and high-growth company, there are really only two things to remember:
If you wake up in the morning and are greeted with bad news, don’t worry too much because you’re bound to get worst news later on in the day…
And if ever you are greeted with some good news, enjoy it cause it won’t last, something is bound to go awry…
If you remember these two tenets of startups, then you will be amazed at how much success you can have because you don’t sweat the small negative stuff and you don’t let the good stuff get to your head.
PLAY
