Yesterday Joost co-founder Niklas Zennstrom made the announcement that Joost had 1M users. A lot of writers jumped on it to discern whether he meant 1M downloads, 1M users in all since launch or 1M concurrent users.
I have no clue which one he meant. Also, I wish Joost a lot of success, sure, WatchMojo.com is a content provider and all to them, but I wish them well because anything that gets more consumers viewing online video online is a good thing, independent of whether WatchMojo.com’s content happens to be on deck.
What’s interesting about Joost, or Babelgum, or Vuze, is that it will boil down to content. When I read Caroline McCarthy’s take on Zennstrom’s announcement, she too referred to the big C: “The catch is that one million beta testers absolutely doesn’t translate to one million active beta testers. I’ve been playing with Joost since the early days, and I tend to agree with much of the feedback I’ve heard about the start-up: amazing interface, effective peer-to-peer architecture, but a noticeable lack of worthwhile content.”
Caroline, may I sheepishly suggest the WatchMojo.com channel? Anyway, Joost’s 1M mark is impressive regardless of what Zennstrom meant, but it is true that for a company with $45M raised from outside investors (in addition to whatever Zennstrom and fellow Kazaa and Skype co-founder Janu Friis invested, expectations are high.
Which begs the question, are expectations reasonably high? How big can the video market get?
PART I: WHAT WILL BE THE TOTAL MARKET CAPITALIZATION OF VIDEO MARKET IN 2011?
We’ve seen estimates for video advertising surge rapidly. I’ve been keeping track of these, and here they are:
An estimate of the online video ad market for 2009 - set in 2004: $657 million | Source.
An estimate of the online video ad market for 2009 - set in 2005: $1.5 billion | Source.
An estimate of the online video ad market for 2010 - set in 2006: $2.3 billion | Source.
An estimate of the online video ad market for 2010 - set in late 2006: $3 billion | Source.
An estimate of the online video ad market for 2011 - set in 2007: $10 billion | Source.
$10B? That is more than double the highest estimate I had seen up to that one. But $10B is an interesting figure, not because it’s round and 11 digits long, but because that is how much Google generated in revenues in all of 2006 (with a 50%+ market share grip on the search market, mind you).
We’ll examine this $10B figure in Part III.
But, if Google generated $10B in advertising revenue and commanded a $150B market cap to itself, then could be the video advertising - potentially poised to make as much as Google did in 2006 - be worth $150B by 2011?
Of course, the major factor to that - in addition to the accuracy of the $10B figure - is whether or not Web video companies will command the same multiples as do search today?
And… that’s the problem facing TV companies, the projected market value has little to do with revenue, but rather, multiples on revenues. TV is today a $75B ad market, even by 2011, the video ad market on the Web will be a fraction, meaning that TV companies don’t have a reason to get online…
PART II: WHAT IS THE TOTAL MARKET CAPITALIZATION OF SEARCH ENGINE MARKET TODAY?
MSFT’s Don Dodge had argued that 1% share in search translates to $1B. I disagreed to some extent but largely agree that even 1% of market share is quite lucrative… I ran some more numbers are estimated that:
- Yahoo!’s search business is worth half of its market cap, so roughly $17.5B, something I analysed in “Can Google Buy Yahoo!?” - Analysis.
- MSN.com/Live.com - portal and search - was worth some $28.75B, the search component should be at most 1/3 of that, or $10B - Analysis.
- Ask.com was worth $3.15B - Analysis.
- Time Warner’s total market cap is $75B, Google invested $1B for 5% of AOL for an implicit valuation of $20B. Bear in mind that depending on which source you use, AOL’s search market share is less or equal to Ask.com. Let’s just assume for simplicity sake that AOL’s search business is worth exactly what Ask.com’s search business is worth, so $3.15B.
It should be noted that Google, Yahoo!, MSN, Ask.com and Time Warner’s AOL make up about 99% of the market share in search. In other words:
99% of the total market capitalization of the search engine industry is
= Google’s $150B
+ Yahoo!’s $17.5B
+ MSN’s $10B
+ Ask.com’s $3.15B
+ AOL’s $3.15B
= $183.8B.
Toss in all of the other wannabe’s (including our own MetaMojo.com) who account less than 1% market share for an additional $1.2B (somewhat fair since Dodge argued that 1% is equal to $1B) and then the entire market capitalization of the search market is $185B.
That’s a big number, indeed.
That’s not the volume of sales in search, but the market cap. Search gets 40% of the online ad pie, which in 2006 was $17B for the US, so $6.8B in the US.
The global Web ad market was set at $25B, so 32% of all (over time this will grow, Google is doing just less than 50% right now). So the total global search revenue stream was $10B.
In other words, in search: a cumulative, global $10B revenue stream generated a $185B market cap ecosystem, or roughly 18.5 times sales.
PART III: LESSONS FROM SEARCH FOR VIDEO MARKETWe know that search currently accounts for 40% of the total online advertising market, with video growing.
To put it mildly, video is far more nascent than search:
Search is like the mature, stable, “income” component of online ads, with video being the high-growth, volatile and uncertain revenue stream. Just look at some of the estimates and you see that it’s all over the place, as listed above.
I’ve already stated that I’m not sure how valid that last $10B forecast is, even though as a video producer ’tis music to my ears. But, of course, if it is true, then by 2011 the online video video will have grown over 2,300% from eMarketer’s 2006 figure of $410M. Admittedly, I’m mixing figures here, taking 2006 stats from eMarketer and 2011 figures from U&S, but who believes any of these stats anyway, the point is, if you were to make the case, you could argue that video advertising is about to explode much the same way that Google’s revenues did, leaving MSFT and YHOO’s advertising-based revenue in the dust:
Here’s one visual, taken from SeattlePI:
Here’s another, taken from Valleywag:
I personally doubt some of the numbers that are bandied about, especially over a 4-year period. But, if anyone would have put forth the following numbers, which represent Google’s actual, historical revenue growth, four years ago and said this is what one company - let alone a segment of the fastest growing ad market - would do, I’d be pretty cynical too.
Google had $439M in ad sales in 2002 and $10B in 2006, for a 4-year return of 2,300%.
So, if Google generated $10B in advertising revenue and commanded a $150B market cap to itself, then could be the video advertising - potentially poised to make as much as Google did in 2006 - be worth $150B by 2011?
Considering the market leader YouTube last year fetched $1.65B on $15M in revenues, maybe that deal (which we re-examined 9 months later here) is starting to look increasingly wise and over time might end up on the Top 10 M&A Acquisitions of All Time?
CONCLUSION: ROLE AND PLACE OF CONTENT
In search, the winner was Google because they bundled a good technology with an embedded advertising product. The problem is that Google’s maniacal success will make it harder for any one company to becoming all-encompassing in advertising as Google did. That’s the Google envy phenomena I refer to that seems to create obstacles in terms of standardization: everyone wants their platform to prevail.
So ultimately, I think that to echo the comments pertaining to Joost above, the value we’re placing on content is being underestimated. The natural conclusion is for the high quality content from TV to come online, but it’s not like TV companies will push that onto the Web, for there are technology issues and economically there is little incentive: TV is a far greater revenue stream than online will ever be, and the TV companies will never command the multiples of their online counterparts.
So while the natural conclusion or prevailing wisdom is that TV broadcasters etc. will be all over this growth, I just do not see this happening because as audiences continue to migrate online, so will ad dollars, but the ad dollars will be smaller than what TV is accustomed to now.
If you doubt my conclusion, ask yourself why and how the offline media giants failed to be the leaders online then during the Web’s first 10 years. It was not in their short term interest, and short term revenue and profitablity targets will always trump long term ones when you have to please fickle and near-sighted investors.
Another reason, is that they were slow and reactive. One more, frankly, is that digital revenues are rarely really incremental for traditional media companies, they are usually cannibalistic and take away from their core businesses.
That is why you have to feel bad for TV executives, who look at what happened to print companies (ie. even the companies that generate more revenue command much smaller multiples so they are, in fact, worth less) and understand the angst and envy they have for online content producers and technology platforms who are looking at all of this opportunity and wreaking havoc as the tug of war between old and new media continues to create more casualties.
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