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Media Blog
As TV viewing habits change, media companies—and
advertisers—are looking elsewhere: They've set their sights on a new breed of
startups Why Online Video Sites Are Hot Targets Mark Cuban, the tech entrepreneur and owner the Dallas Mavericks, said on Sept. 29 that
anyone who buys YouTube, one of the most popular video sites, is a "moron." His
comments came the same week that analyst Jordan Rohan of RBC Capital Markets argued that
MySpace, the social networking site that generates a huge volume of video traffic, could
be worth $15 billion in three years. At its heart, this debate is over what role these
Internet video companies will play in the media world—bit players, important
supporting actors, or the new media stars. Update to this article: Google buys YouTube for
1.65 billion October 9, 2006. Social networking
behemoth Facebook has raised $500 million from Goldman Sachs and a Russian investment firm in a deal that values the company
at $50 billion, The New York Times reported. January 3, 2011 Goldman invested $450 million and Digital Sky Technologies invested $50 million, the
newspaper reported Sunday in its online edition, citing people involved in the transaction
that it did not name. Goldman has the right to sell part of its stake, up to $75 million,
to the Russian firm. The report said representatives for Facebook, Goldman and Digital Sky Technologies
declined to comment. The U.S. Securities and Exchange Commission is reportedly looking into the booming trade in privately held shares of popular social
networking sites. A big reason the SEC may be curious about the trading of these
popular private startups' shares is because once a company hits 500 shareholders, it must
disclose certain financial information to the public, even if it hasn't filed for an
initial public offering. The Times reported that Goldman is planning to create a "special purpose
vehicle" that may be able to circumvent the 500 shareholder rule because it would be
managed by Goldman and considered just one investor, even though it could conceivably be
pooling investments from thousands of clients. Shares of privately held companies can be traded on private stock exchanges such as
SecondMarket, based in New York, and SharesPost, based in San Bruno, California. The
shares are generally sold by former employees or early investors in these companies. Only
institutional investors or high net-worth individuals - those worth more than $1 million -
can buy the shares. But for those who can sell them, the market is on fire. On SharesPost, a completed
contract between a buyer and a seller valued shares of Palo Alto, California-based
Facebook at $25 each. This implies a valuation of nearly $57 billion for the world's
largest social network, with 500 million-plus users worldwide. Facebook recently tightened its privacy settings after criticism that personal
information was being disseminated without users' knowledge or permission. Founder Mark
Zuckerberg was named Time magazine's "Person of the Year" and was the subject of a high-profile movie about Facebook's creation. Zuckerberg, who owns about a
quarter of Facebook's shares, is one of the world's youngest billionaires. The newspaper said the deal may double Zuckerberg's personal fortune, which Forbes
estimated at $6.9 billion when Facebook was valued at $23 billion.
By Steve Rosenbush of BusnessWeek, October
2, 2006
VALUABLE VIEWERS. While the value of each company clearly depends on its
particular performance, the factors that are proving important for Net video players are
quite different from those of traditional media companies. In traditional TV, more viewers
mean more money. The correlation is direct, although advertisers pay a bit more for
younger viewers.
That's not necessarily so online. A smaller audience may be more valuable than a big one,
if the small one does the sorts of things that advertisers like—such as clicking on
ads, buying products, or visiting related content. The bottom line is that Net video
companies can be judged on a wider range of factors than traditional media companies,
which makes some of them worth more and some worth less.
In September, a group of investors, including Maveron, a venture capital firm founded by
Starbucks Chairman Howard Schultz, put $12 million into VideoEgg, a small but promising
video site (see BusinessWeek.com, 9/27/06, "VideoEgg
Gets a Jolt of VC"). One thing that encouraged the VCs was the rate at which
viewers clicked on advertising from VideoEgg's sponsors. The "click-through"
rate, as it's known, was well in excess of 1%, compared with an industry average of a
fraction of 1%. In other words, VideoEgg's audience could be worth as much as a site with
twice the number of viewers, because it delivers so many more of its viewers to
advertisers.
MONEY POURING IN. Investments are pouring into the sector to get a piece
of this emerging media world. Besides the VideoEgg deal, Sony (SNE) paid $65 million for Grouper, a startup
known for its online video audience and its technology. Time Warner (TWX) and Michael Eisner have invested in
online TV site Veoh. The founders of Web phone service Skype, which was acquired by eBay (EBAY) last year, are launching a new online
video site, currently operating under the code name of The Venice Project (see
BusinessWeek.com, 7/24/06, "Kazaa,
Skype, and now 'The Venice Project'").
News Corp. (NWS) undoubtedly got the
bargain of the bunch with its purchase of MySpace for $580 million. While Rohan's $15
billion valuation may be overstating it, there's little question that MySpace is now worth
several times what News Corp. paid for it. News Corp. is now shifting more assets into the
Internet (see BusinessWeek.com, 9/18/06, "Murdoch
to Bid Satellite Goodbye").
CHANGING HABITS. Behind the flurry of deals are fundamental changes in
the way consumers use technology and media. Investment bankers say traditional media
companies and older Web portals such as Yahoo! (YHOO) are alarmed by the habits of younger
consumers. Members of the so-called Millennial generation, who were born starting around
1980, don't watch TV the way their parents did.
"We believe the value of (television) station assets will decline as Millennials
become the most powerful user of media and (the) coveted target for advertisers,"
research firm Frank N. Magid Associates said in a report. "Millennials are
multitaskers with cluttered lives, shared attention and a wide array of appliances in
their lives—TV remains one of them, it's just not used in the same manner." The
report said Millennials spend 2.48 hours a day online, the same amount of time they spend
watching TV, and about 2.2 hours a day listening to music.
Media conglomerates are racing to get in front of changing demographic habits. "And
Web portals such as Yahoo, which viewed themselves as the main gateway to the Internet,
are alarmed, too. Millennials don't view the portals in the same way that older users
do," said investment banker Jay MacDonald, of the media banking firm DeSilva &
Phillips. Younger Internet users are more likely to turn to MySpace, Facebook, or YouTube.
ANOTHER THORNY ISSUE. At the same time they're intrigued by the possibility
of online video, investors and potential acquirers are skittish about its uncertainty. No
one knows how much advertising can be generated from online video or which sites will
benefit the most. The rapid rise of sites like YouTube raises fears that such sites could
fall out of favor just as quickly. As a result, most VCs and media companies are sticking
to small deals that get them into the game, without taking on the risk of major moves.
A $20 million or $30 million investment is one thing; a deal for YouTube, which could top
$1 billion, is entirely different. "Buyers aren't just basing these deals on current
revenue or profits, but on a host of things a company might do for them in the future.
That makes them difficult to value, which is why buyers are often more willing to take a
bet on a smaller company," MacDonald said.
Sorting out the intellectual property rights issues of video on the Web is another thorny
issue. That's what Cuban had in mind when he made his comments about why it didn't make
sense to buy YouTube. The site has become so popular with its mix of amateur and
professional video that people view 100 million videos there a day. There have been rumors
that YouTube has been looking to sell itself for $1 billion or more, although the site's
rising popularity has pushed up its operating costs to an estimated $900,000 to $1.5
million a month (see BusinessWeek.com, 9/18/06, "YouTube:
Waiting for the Payoff").
EARLY PAYOFF. Cuban argues that YouTube is at risk of being sued by
content owners who say YouTube violates their intellectual property rights. He thinks that
it could be sued just as media giant Bertelsmann was sued in early 2003, after it acquired
file-sharing pioneer Napster. "I don't think an acquisition would be smart until all
the copyright issues are decided. It would be reminiscent of BMG buying Napster,"
Cuban said in an e-mail to BusinessWeek.com. "Personally, I think YouTube, like
Napster, can help drive sales of products. But my personal opinion isn't copyright law.
The (unsuccessful) arguments in favor of why Napster should be allowed to continue in 1999
were similar to the ones being made for YouTube (which raises doubt's about YouTube's
future)," Cuban said.
Yet MySpace offers an interesting contrast in how online video is already beginning to pay
off. MySpace is used for online distribution of TV and film from News Corp.'s Fox
Entertainment. The site, built around a network of home pages laden with messages and
photos, already generates a huge volume of video, according to comScore Networks. A
comScore report on Sept. 27 said MySpace generated 1.5 billion video streams during the
month of July, beating out No. 2 Yahoo and No. 3 YouTube. The survey only ranks free video
streams. If the market is measured by the number of video users, as opposed to the number
of videos watched, MySpace ranks third behind Yahoo and YouTube.
As film and TV make their way online, advertisers want to take advantage of the rising
popularity. The process has started. "MySpace is currently sold out of video ad
inventory," Rohan said. Advertisers are very excited about online video, which is why
the value of sites that tap into the market is so high, according to Ryan Jacob, manager
of the Jacob Internet Fund. Jacob, who owns shares of News Corp., said video is "very
alluring" to advertisers because it's "easier to monetize" than other forms
of advertising.
"A SHOW-ME PERIOD." Although skeptics may scoff at the idea, advertising
may be integrated into amateur video, too. Maveron partner Jonathan Fram, who led the
firm's investment in VideoEgg, says he thinks the startup could become a very big company.
It has found a niche helping individuals and companies that can't afford or don't want to
manage their own video infrastructure put video on their sites.
There are plenty of compelling investment ideas, media executives say. "I think there
is some really great innovation going on out there. I continue to be amazed by some of the
creativity of these companies," says Ross Levinsohn, president of Fox Interactive
Media, which includes MySpace. "But the jury is out when it comes to the question of
how any Web 2.0 property is going to make money. We're all in a show-me period."
The last bull market in the Internet sector ended in disaster for many companies. But for
all the failures, a few winners such as Yahoo and Google (GOOG) emerged. Despite the risks of
investment, few big media or Internet companies are willing to sit back as the next group
of leaders emerges.