During the 1994-2001 era of the Web, it was unclear whether a paid content/subscription model would prevail over a free, ad-supported one. For a myriad of reasons, one of them being privacy and security concerns, another one being the slow migration of media companies to publish online, piracy and free “good enough” content proliferated online and the paid content/subscription model all but died at the turn of the century.
The Nasdaq crash and subsequent dot com bubble bursting led to the drying up of VC-supported advertising buys, which ushered in an era of performance based campaigns. Obviously, Google won that game, as 40% of US online ad revenues go through its coffers.
Today, any semblance of a paid content/subscription model is scrapped for an ad-supported one, leading many to conclude that the wireless platform too will adopt a similar model.
Will it? I don’t know. Online advertising is possible to the large screen, in mobile, advertising will prove too cumbersome for users to put up with. Bear in mind, for example, that the most successful advertising-supported company, Google, offers rather unobtrusive ad formats.
Mobile devices and cell phones in general are a central communications tool, but of late (last 5 years) they have really fought tooth and nail to earn a central role in content and commerce as well. I am still unsure of when we’ll be able to use our cell phones as virtual wallets, but when you consider that Nokia is in some ways the biggest camera company in the world, or Apple leveraged its iPod to move into phones via the iPhone… you see that wireless devices are strangling content around the neck.
With online video, there is bound to be a bottleneck… as more and more content ends up on wireless devices, I wonder, will it really be ad-supported?
I’d like to believe that, but it’s not a given. In other words, just because ad-supported free models beat out subscription models, does that mean that in the wireless world it will too?
After all, the initial reason why subscriptions never took off was because people did not want to enter their credit card numbers online… but with my cell phone, the carrier’s already got my credit card, so maybe the subscription model might work after all.
Digg this Blog
Share on Facebook
WatchMojo on Twitter
WatchMojo on YouTube
Add to Favorites
WatchMojo NewsletterPoor Fred Wilson… after hits like Feedburner ($100M), Tacoda ($275M) and not to mention Geocities ($2.3B), looks like Fred Wilson has fallen on hard times.
In one day, he’s trying to raise funds, first by unloading a red hot iPhone, then by scalping two tickets to a Neil Young concert. I’ll try to set up a Donate button soon on this post, let’s help Fred out… the man’s got a couple of kids, after all.
Just kidding Fred… you know we’re just having some fun. Jokes aside, we’ll argue that Fred Wilson had the most accurate thing ever to say about why VC-backed firms fail. Check that out here, with our commentary here and here.
Reader question:
I am researching an online video article and based on your blog I would like to ask you a question or two about online video company valuations.
How do you go about calculating the average price paid for online video content companies? Is it a multiple of revenues?
If so, what is the average multiple currently being paid and where do you see the calculations going for figuring out what companies should pay for an online video content company?
Thank you very much for your time and for your great blog - I’ll keep reading you everyday.
Answer:
I’d say right now valuations are driven far more, if not only, by demand and supply mechanisms and recent comparables, than any kind of P/E or P/S or even price/user metric.
Google, for example, bought YouTube for $1.65B, in all of 2006, YouTube did $15M. Did Google really pay $100 per dollar of revenue? Probably not. They looked at that, but they ultimately looked at deals such as eBay buying Skype for $2.6B and MySpace being bought out by News Corp. for $580M and then growing 3x since the purchase.
I am not saying that buyers or investors have once again totally forgotten about fundamentals, but in online video, we are indeed where search was in 2001-03, that is a rapidly growing market that is morphing its business model as we speak. As a result, it simply comes down to leverage: as a buyer/investor, you want to own that growth, and seeing just how insanely large and profitable search became, I’d argue greed is outweighing fear in online video, hence the generous valuations.
But the flip side to that is indeed demand and supply, if you are a file sharing social network for example and count 5, 10, maybe 20 competitors, if you ask for too much and try to justify too rich of a valuation… you might lose the deal as the interested VC or buyer will look at someone else.
So once again this boils down to a demand and supply and leverage factor…
Ultimately the same way that entrepreneurs and businesses can’t be greedy, buyers can’t be too stingy; if an investor or a media company wanted to buy WatchMojo.com (for example) and kept going back to working out a multiple of earnings or sales right now, I’d get up and leave. There’s a lot of money being shifted from TV to the web, the key right now for everyone is to grow their content base, their audience and reach… and not worry too much about revenues because put simply, the market is developing… you cannot possibly chase revenue because you don’t yet know what that revenue would look like. Imagine, for example, if Google would have bet the farm on licensing sales… when in fact a free, ad-supported and revenue share model won. Had Google focused too much on revenues too early it would have missed out. Rightfully, Google focused on everything but revenue.
That, I’d say, is driving valuations: users, content, partnerships, reach etc.
Hope this helps
Ash
I’d love to get stats from eMarketer on video actual and forecast. In fact, eMarketer pegs 2007 video ad figures as high as $775M. Gee, where could I get me those numbers, David Hallerman?
Actually, found them:
Let’s see what share of the online ad market video advertising will get:
Now, how large will online ads become?
So let’s cross-tabulate and see how big video ads will become according to eMarketer:
Side by side to Forrester’s data, we get:
Interesting… so to summarize, here are the actual and projected for search and video, using both Forrester and eMarketer:
PLAY
