Kara Swisher - who is pretty much at the epicenter of any and all rumors (not a knock) - publishes some interesting financials on the Bebo sale to AOL:
According to the several sources who were privy to Bebo’s financials, for example, Bebo’s revenues for 2006 were only $7 million with $3 million in EBITDA (earnings before interest, taxes, depreciation and amortization). In 2007, the results are still small, with $20 million in revenues and $5 million in EBITDA.
For what it’s worth, that is a very healthy growth rate, but what happened to the margins?
This can be explained by further investment in infrastructure and keeping up with the growth rate (Valleywag mentioned their down time, for example, leading all social networks). After all, the fact that this company did not exist 3 years ago is very impressive.
She continues:
Using 2007 results, that means AOL paid a handsome 42.5 times revenues and an incredible 160 times EBITDA.
AOL might assert that it makes Bebo a bargain, given Facebook got valued at 50 times revenue when it got that $15 billion valuation from the $240 million investment from Microsoft last year. Still, Facebook has a huge presence in the U.S. and is growing strongly in Europe, including being just ahead in Bebo’s strongest territory in the U.K.
Projecting outward, the company estimated–remember, these are not actual numbers, but a best guess by Bebo execs–it would have $50 million in revenue and $10 million in EBITDA in 2008; $117 million in revenue and $48 million in revenue in 2009 and $193 million in revenue and $92 million in EBITDA in 2010.
I am pretty wary of any company’s projections. Everyone wants to see a hockey stick, and it’s not very hard to deliver that using Excel. Regardless, here is the projected growth rate and impact on the margins:
Of course, if Bebo was looking at strolling towards an IPO, then they need two things:
- $100M in revenues, and
- the hockey stick.
Let’s look:
I am not saying that Bebo could not have hit these… but realistically… those are massive upticks in growth… and in the social media space, they are unfounded.
Kara continues:
While potential is important, the high price (which was still lower than the $1 billion and above that Bebo might have fetched even six months ago) and its small presence in the U.S. was the reason several companies passed on acquiring Bebo–including News Corp., Google, Yahoo and CBS, said sources close to each of these companies.
Indeed, clearly AOL is buying for the growth. See our commentary on the deal here.
Connecting the dots, both SAI and Giga Om talk about the price AOL paid per user:
- Bebo sold to AOL this morning for $850 million and have about 40 million users, costing $21.25 per user.
- In July 2005, News Corp. purchased the parent of MySpace for $580 million. At the time, MySpace had about 21 million users, costing $27.62 per user.
- Those are as direct as we can make it, but let’s say we bring out a crazy deal where the buying company admitted they overpaid. When eBay shelled out $4.1 billion for Skype, it paid about $52 per user.
I think historical prices and benchmarking Bebo to MySpace and Facebook - 3 and 1 year later - is unfair. Ultimately the Bebo crowd did not need to sell… but at $850M the offer was sound and AOL - despite the haters - remains a pretty solid media company. It just needs to do some soul searching. Here are some options for AOL.
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WatchMojo NewsletterHenry Blodget certainly seems to have a sense of humor…
Overheard - or read rather - on SAI:
Q - blodget, you fraud. when are you going to retire?
A - Thanks for the rave, Rob. About 25 working years left, I hope.
That’s not the first time someone anonymously bashes him, and he responds graciously.
Mind you, this week, with Eliot Spitzer being exposed for being a John… I am sure Blodget is getting the last laugh quite a bit (in case you didn’t know: Spitzer was Attorney General who fined Blodget millions and banned him from working on Wall Street as an analyst).
Referring to the online revenues generated from March Madness, Leslie Moonves, CEO of CBS, stated:
“Made $250k in revenue the first year; it rose then to $4 million and then $10 million. Now, this year, March Madness will give us $23 million in advertising, which fits into our philosophy: it’s content that we already have on TV, added to the internet.”
How does that stack up compared to the benchmark of online video ad sales in the US. Check it out:
Clearly, the increase in revenues from March Madness far outpaced revenues from video advertising as a whole.
[shameless, shameless plug: check out 35 clips on the best all-time college basketball coaches, players and programs, on WatchMojo.com].
Back to the topic:
Superficially, this implies that indeed, premium content is the place to be… and while that makes me happy as founder of WatchMojo.com, that is over-simplifying it, big time.
Why?
Comparing Apples with Oranges
For one, March Madness generated revenues from subscription/downloads and advertising. While CBS has wisely decided to open up the content for free, in an ad-supported environment… those historical prices hailed largely from subscriptions and paid membership fees (I could be wrong on this, but if my memory serves me right, March Madness was historically behind closed walls).
Of the ad revenues, CBS probably generated the bulk of those revenues from sponsorships, text ads, and good old fashioned display banner ads…
Mistake #1: What Accounts for Video Advertising
So admittedly, when we compare March Madness’ revenues for CBS with online video ad sales in the US, we’re comparing apples with oranges.
Moreover, incorrectly, analysts and pundits usually look at pre, mid and post-rolls as the bellwether to gauge online video revenues. I think this is potentially the single biggest mistake and misconception in the segment. After all, if you watch a video you do not scroll down, so the companion ads placed alongside the video player hold much more value than a similar banner ad in an article. Hitherto, ad buyers argued that the premium in that price derived from the pre-roll to which the companion ad was attached to, but that is a false premise because most users tune out of pre-rolls much the same way we became immune to pop-ups and pop-unders.
How are them apples doing now?
Mistake #2: Performance-Based Metrics Will Lead the Way
Another mistake analysts make is to argue that CPA (or any other performance based metric) would work with video. I’ve covered this before, but in short, when consumers watch video, they press play, lean back and watch the clip in question, hand off mouse. The propensity to click is extremely low, whereas alternatively when consuming text articles, we scroll down, hand on mouse, ready to pounce on a text link… and increase CTRs in the process.
Difference between Search Queries vs. Video Streams
The reason for this, mainly, is simple: while search queries convey intent, video streams convey interest. Performance based marketers care about the former, branded advertisers care about the latter… since the latter will drive online video advertising, place your bets accordingly.
Most media companies will look for micro deals in 2008 to complete their product lines, but today, Time Warner went against the grain by taking out its checkbook and acquiring European-centric social networking powerhouse Bebo for $850M.
Make no mistake about it, this is a sizable deal; after all, MySpace sold for $580M just three short years ago.
Tale of the Tape from Paid Content:
- Bebo.com URL bought for $8,000 in July 2005.
- Bebo.com raised $15M investment in 2006 from Benchmark’s European arm, Balderton
- Benchmark’s cut is $140M (doing the math, they owned 16.4%)
A few things worth emphasizing:
- For February 2008, Compete shows 3.5 million U.S. visitors to Bebo, 28 million to Facebook and 65 million to MySpace. So Bebo is the third-largest social networking service in the U.S. behind MySpace and Facebook, so this catapults AOL into a nice position, but time will tell if this will propel Bebo or slow them down.
- Bebo had been rumored to be on the auction block for $1B, if not more. The fact that they sold for less says something. What? I think that you are seeing financial backers want exits if there is no way for a company to be #1 or #2 in a space. As much as Bebo gets credit for their fantastic track record, there is no way to compete with Facebook’s $300M funding and MySpace’s parent, News Corp.
- Time Warner’s AOL is clearly moving away from destination (AOL) to network (Platform A + Bebo).
- Just yesterday, Time Warner CEO Jeff Bekwes said AOL was on the table. Clearly he knew this deal would be announced shortly, so this suggests that AOL is bolstering its value to others. In a way, it’s gobble or be gobbled… and AOL is both seller and buyer. Om Malik coins it better: AOL is schizophrenic!
- This reinforces the notion that for these massive new media companies, growth is in international, not US: Bebo is tops in UK, New Zealand, Ireland.
- TWX - whose stock is near 52-week lows - essentially took $850M off their balance sheet to help boost their top line (Advertising.com has been driving AOL’s revenues, so this does give Advertising.com more inventory).
- However, there is a risk here: social networking sites remain very challenging to monetize, but thankfully, AOL can leverage Tacoda’s behavioral targeting system, which they bought last year for a cool $275M.
- Bebo has a deal with Yahoo!, but since AOL owns Quigo, I presume AOL will soon swap out Yahoo!’s text ads for Quigo’s. However, Quigo usually partners with solid brands such as SI.com (also a property of TW, incidentally), I am not sure if the advertisers who turn to Quigo will really welcome social media inventory… time will tell.
- Speaking of Yahoo! - AOL has been in talks with Yahoo! about a hookup in the wake of MSFT’s unsolicited $31/share takeover bid. In some ways, this makes AOL more valuable in any merger talk with Yahoo!, but this also frustrates Yahoo! because Yahoo! was looking at buying Bebo itself (allegedly for $1B) and it was already in bed with the social networking site by representing its ad inventory. Not sure if Jerry Yang and company will see this as good news. Mind you, they’ll blame Microsoft for this, too.
Bottom line: this deal captures many of the trends we’re expecting to see in 2008:
- Go big or go home: if you are not #1 or #2, why bother? AOL knows that for it to be more valuable, it cannot be a has-been online.
Live blogging for those who cannot get enough Bebo and AOL here.
Disclosure: I own shares of Yahoo!
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