BUSINESS BLOGS
BUSINESS BLOGS
category: business
10 Dec 2007

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