YouTube Revenues

By September 12, 2006Business models, IPTV, Video

YouTube Logo

The inspiration for this post came from Fred at Union Square Ventures (one of my favourite VC blogs) and the dead2.0 blog (which EVERYone is talking about at the moment) which has two posts on the subject here and here.  This is an elaboration of a post I left on Fred’s blog so apologies if you have seen some of this before (you probably haven’t though, I was the 37th comment or something ridiculous – the penalty of European style holidaying!).

I have blogged previously on social network revenues here, here and here.

The debate started with Fred doing some calculations based on traffic and likely CPMs to estimate YouTube’s potential revenue at $440m.  This fueled a frenzy of speculation about whether it might IPO and some more sensible commentry on whether the $440m number looked high and what might happen if they started putting 10s ads in front of their videos.

First things first – YouTube has a HELL of a lot of traffic 100m videos viewed a day and counting.  That’s gotta be worth something.  And the smart folks at Sequoia who know the whole story there are not funding it for nothing.

Second thing – an IPO is way out of the question.  There has been a lot of discussion lately about whether we are in bubble2.0. In my view there is some evidence of that in the venture world but none in the public markets (and long may that continue…) so the chances of a minimal revenue business like YouTube with massive losses getting anywhere near the valuations that are being talked about even on the AIM market here in London are as close to zero as makes no difference.  (For those of you that don’t know AIM is the London NASDAQ wannabe which offers possibly the cheapest public capital for young companies on the planet.)

Thirdly, the big exits in this space have been at “strategic” valuations and the financial metrics were not drivers of the valuation which was instead the product of a competitive M&A process.  A wise man once told me that “strategic” means “can’t explain it now”.  This is, I believe, true of MySpace where Viacom and News Corp slugged it out and Murdoch was later to say something like “I don’t know what we will do with MySpace”.  And it was definitely true of FriendsReunited – a UK equivalent to Classmates which was bought by ITV for c$320m.

My view is that YouTube is pursuing traffic growth above all else with the hope of getting another result like MySpace of Friends.  That is the only way the absence of any revenue model makes sense to me.  Particularly the way they let other social networks use their site to offer a video service to their members for free.  That gets traffic to YouTube, but surely they would charge some kind of licence fee for that if they were trying to make money?

If I’m right then calculations of revenue potential are a bit beside the point.

On the dead2.0 blog there is a poll over what will happen to YouTube and at the time of writing the leading answer with 45% of the vote is that it will be acquired.  I agree with that and I think because of the big losses it will happen soon.  There is too much traffic here for this to fold – it has got to be worth something to somebody.  The only question is how much.  Regular readers of this blog know I’m a skeptic on the ability to monetise traffic and on some of these valuations but I’ve been wrong before….  What I will say is that to get a big number $500m-1bn they will need to find someone who:

  • Is big enough that this is a small percentage of their market cap
  • Is afraid that their core business will be destroyed by the internet or is an existing internet player that has gone ex growth
  • Needs to be seen to have a (new) internet play – maybe to prop up their valuation/keep the analysts off their back
  • Chris D

    One word: Viacom

    However, with a single bidder with deep pockets, valulation will be kept down. I’m saying $100-150mm range. Maybe $200mm upper limit. That’d still be a nice ROI for Sequoia, maybe 8-10x?

    They need to sell by years’ end, before doing another VC round, which would force them to aim for a higher acquiaition price to get comparable ROI.

  • Chris D

    One word: Viacom

    However, with a single bidder with deep pockets, valulation will be kept down. I’m saying $100-150mm range. Maybe $200mm upper limit. That’d still be a nice ROI for Sequoia, maybe 8-10x?

    They need to sell by years’ end, before doing another VC round, which would force them to aim for a higher acquiaition price to get comparable ROI.

  • nic

    Viacom are definitely hungry for a web2.0 play – but I’m guessing they will only make one big acquisition and it could be Bebo, Facebook or others as well as YouTube. Maybe it is likely to be more of a community play than YouTube.

    8-10x may be about right for Sequoia at $200m exit – they have invested just over $10m and could well have 50% of the company.

  • nic

    Viacom are definitely hungry for a web2.0 play – but I’m guessing they will only make one big acquisition and it could be Bebo, Facebook or others as well as YouTube. Maybe it is likely to be more of a community play than YouTube.

    8-10x may be about right for Sequoia at $200m exit – they have invested just over $10m and could well have 50% of the company.

  • Pat

    Does anyone have a source to compare the growth of the top social networks since their inception?

  • Pat

    Does anyone have a source to compare the growth of the top social networks since their inception?