[credit provider=”Screengrab from Gerber on YouTube” url=”http://www.youtube.com/watch?v=1LxLpLTBY9o&feature=player_embedded”]
In the wake of Google’s $12.5 billion Motorola acquisition, we noted that for all the reasons why the deal looks like a disaster, Google is usually very good at tech acquisitions.In particular, we pointed to YouTube, which was widely decried as a huge, very expensive mistake and now looks like a masterstroke. We said that if Google put YouTube on the block, it could sell it for a lot more money than what it bought it for.
In the comments, some of you took exception to this, and didn’t think YouTube is very valuable.
We don’t think that’s right. Google is never going to sell YouTube (precisely because it’s so valuable), but we think it’s interesting as an intellectual exercise to think about what Google would get for it on the open market.
First of all, does YouTube make money? Outside Google, no one really knows. But let’s say it’s somewhere around breakeven. In fact, let’s say it loses money.
Ha! It’s worth nothing, then!
But of course, that’s not true. It might be worth a lot of money as a strategic asset. It might also be worth a lot of money if it can make money in the future, since after all an asset’s value is not reflected by its current but by its future cashflows.
So, can YouTube make money?
[credit provider=”Twettey.com” url=”http://www.twettey.com/yahoo-to-sell-delicious-to-youtube-founders/”]
- Usage: YouTube has a network effect. The more people use it, the more people will use it. The more videos there are on YouTube, the more people will watch it, which means more people will upload videos to YouTube, which means more people will watch it. Network effects can be overrated, but YouTube’s are reasonably strong.
- Economics: bandwith is only going to get cheaper and YouTube’s ads are only going to get more expensive. Just like Moore’s Law predicts that computer processors steadily get better and cheaper, so it is for hosting and delivering huge amounts of data over the internet. That cost is only going down because of technology and economics. And YouTube’s ad rates are only going to go up as ad rates for online video go up. And they can only go up because they’re so small today. Dollars are switching from other kinds of online advertising to video, and eventually they’ll switch from TV to online.
And of course more generally as people spend more time online and less time on TV, YouTube increasingly looks like the cable of the future, where everyone will get all their video news and entertainment.
But without that kind of grand vision, it’s easy to see the trends are strongly in the direction of both better usage and better economics for YouTube. Not only is it likely that YouTube will be profitable in the future (if it’s not now), but it’s likely that there will be (or is) a “scissor effect” where its costs keep trending down and earnings keep trending up.
So on pure fundamentals, YouTube looks like a very valuable asset indeed.
One big snag about YouTube as a standalone entity is infrastructure. YouTube can keep its costs low by piggy-backing on Google’s huge infrastructure which is the best in the world at developing video. If YouTube was on the block, any purchase agreement would have it run on Google’s servers for a year or two while the new owner figures it out. Other industry heavyweights like Microsoft or Yahoo probably have the infrastructure to run it. If it was a private equity buyer, it could probably run it on third-party services like Akamai and Amazon’s cloud which, after all, already carries Netflix streaming which is ridiculously huge. There would also be other technology issues like un-linking Google and YouTube accounts. Those things would be annoying (and expensive), but not unsurmountable.
But there would be upsides to YouTube being independent. Namely, YouTube is severely undermonetized.
[credit provider=”YouTube” url=”http://www.youtube.com/watch?v=QH2-TGUlwu4″]
Here are some obvious ways to wring more money out of YouTube:
- Google is just not very good at running a media property. Here from Europe, we’re often struck by how much better Dailymotion is at highlighting “partner content” (i.e. fancy user-generated content they can sell pricier ads again) and generally feeling more “media” than just a huge repository of cat videos and Conan clips. For sure, YouTube is steadily getting better at this, but there’s still a lot of room for improvement. There’s no reason why YouTube can’t look more like Hulu and in the process show users more professional content (and therefore more, pricier ads).
- Premium services. Vimeo seems to be doing pretty well with the freemium model. Google doesn’t care about getting 1% of its users to pay $5/month for premium features, but that would be relatively easy to set up and would be almost pure profit, because YouTube already has to bear the costs of the kind of heavy users who would pay up.
- Related businesses. Professional video hosting a la Brightcove. A video ad network. Video on demand. These are pretty big markets that Google doesn’t care about (or at least, as extensions of YouTube) but where a standalone YouTube could build significant businesses just by virtue of its sheer scale.
We hope we’ve established that YouTube would actually be a pretty great business standalone, and is therefore pretty valuable.
So, how much would YouTube fetch on the open market?
Of course, it’s impossible to tell for sure because we don’t have financials. And there could be a bidding war or strategic premium which would make its price deviate from its “fundamental value.”
But one way to look at it is that, according to Alexa, YouTube is bigger than Yahoo. Yahoo is worth around $17 billion, and it doesn’t have network effects.
Another way to look at it is that Barclays analyst Doug Anmuth thinks YouTube will generate over $1 billion in revenues this year. A 10x revenue multiple, or a $10 billion valuation, looks like a floor because of everything above.
So let’s say YouTube could fetch anywhere between $10-20 billion.
For something Google bought for $1.6 billion.
Previously: Google’s Acquisition Track Record →