August 24, 2006 4:07 AM PDT

YouTube could be a steal at $1 billion

news analysis By agreeing to pay $65 million for Grouper--a profitless video-sharing company with negligible market share--Sony has helped establish a benchmark for other companies in the space and sent industry insiders speculating wildly about what market leader YouTube may be worth.

Sony's acquisition Wednesday of Grouper, which owns less than 1 percent of the online video market, begs a rather obvious question about its far larger rival YouTube, which owns 43 percent market share: If a company were to buy YouTube tomorrow, what would it have to pay?

"The viral video space is so hot right now; it's like Hansel from the movie 'Zoolander,'" said Aram Sinnreich, managing partner of RadarResearch, referring to the 2001 comedy about competition in the modeling business. "I wouldn't be surprised to see (online video market leader) YouTube receive a bid of $1 billion. Whether the company is worth it is another question."

Video-sharing sites allow the public to post homemade videos to the Web, where the videos' creators can be seen dancing, singing, acting, joking and lip-syncing. If that doesn't sound like much of a business, consider that more than 200 companies now present some kind of user-submitted content, and that teens and young adults are flocking to these sites.

How much is too much?
Entertainment analysts have predicted in recent weeks that sites with large followings would command a high price. The Sony deal proved them right. But while the Grouper deal helped establish a benchmark, there is still plenty of confusion about the fair value of online video companies. This is because the typical metrics for measuring a company appear to have gone out the window--just like they did during the bubble years of the late 1990s.

Nobody knows whether anyone can make money by hosting user-submitted videos. (None of the top standalone companies in the sector has reported profits.) Few if any barriers to entry exist. It's unclear which entertainment companies may be in the market for one of these companies. And copyright issues loom for some of the sites. Despite all this, the only thing anyone involved in the sector talks about is "eyeballs."

A large and loyal audience is why News Corp. paid $580 million for Intermix, the parent company of MySpace.com, a move widely ridiculed at the time by the business press. MySpace had only 12 million people logging on to the site each month when News Corp. bought it.

Critics at the time said that Rupert Murdoch, News Corp.'s chief, paid too much. Not anymore. Google agreed this month to pay $900 million over nearly four years to provide search and advertising for MySpace.

Now, compare that with San Mateo, Calif.-based YouTube. The company, which was founded in February 2005, sees 16 million unique users per month.

Another reason YouTube may be a $1 billion company is that Facebook, the second-largest social networking site next to MySpace, has a monthly audience of more than 9 million and has rejected an offer of $750 million from Viacom, according to a BusinessWeek article in March. Facebook is holding out for $2 billion, according to the magazine.

That Grouper drew $65 million with less than a 1 percent market share, according to traffic-tracking firm Hitwise, only fuels speculation about the market value of YouTube and its 43 percent market share.

Those are the kinds of numbers that keep people speculating even while YouTube executives deny that the company is for sale. YouTube declined to comment for this article.

Yet to turn a profit
To be sure, plenty of questions remain about YouTube's business. First, the company has yet to turn a profit even though CEO Chad Hurley has said that YouTube is generating significant revenue.

The company also has a lawsuit hanging over its head. A TV journalist in Los Angeles alleges that YouTube violated copyright by posting without permission a 1992 video he shot of the beating of trucker Reginald Denny. Many YouTube users post copyright works, and legal experts say that this could lead to expensive court battles. Finally, if YouTube is worth $1 billion, then that reduces the number of companies that could afford to buy it.

"The real question is whose lawyers are going to let them make the bid," Sinnreich said. "It's virtually impossible to build a site with YouTube's brand strength, loyal user base. YouTube is a time bomb and a gold mine waiting to happen. The question is which one will be bigger."

As for YouTube's competitors, it's a grab bag of companies shouting over one other about which one has better technology, interface, audience and content.

One thing to keep in mind is that not all video sites offer the same thing. For instance, Guba has begun offering digital movies for download as well as video sharing. Heavy.com and Veoh Networks produce their own content. Their names have been thrown in with the YouTubes and Gubas of the Web, even though they have completely different goals, said Veoh CEO Dmitry Shapiro.

"Two marketplaces are evolving," Shapiro said. "One is Web video sharing...where YouTube dominates. The other is a parallel marketplace that we call Internet TV. Veoh is all about allowing producers to present, in long form, high-quality broadcasting. Video sharing is about video snacks. We're after the cable TV market."

Shapiro said one must remember--when calculating the worth of online video companies--that the cable industry in the United States generates $65 billion a year. He argues that YouTube, Veoh and all the others have begun encroaching on that turf.

"If you really believe these companies are reinventing this gigantic space," he said, "you can argue that they are bargains."

See more CNET content tagged:
online video, News Corp., YouTube, market share, MySpace

21 comments

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Is our attention span that short?
"Facebook is holding out for $2 billion, according to the magazine."

They are out of their minds if they think someone will pay $2 billion for a company whose revenues are probably in the low millions and losses in the tens of millions. Did we not learn the lessons of the last internet bubble from only 6 years ago???

They are going to regret not taking that $750 million (also way too much) offer.
Posted by ballssalty (219 comments )
Reply Link Flag
100% correct. They're not worth $750M...
They're playing the same game everyone else is playing: who can hold their breath underwater for the longest amount of time... All the players are chickensh__ to be the first to monetize themselves because they wanna learn from someone ELSE'S "growing pains" mistakes and of course they are afraid of knowing the real value of themselves, much much lower than $750M...
Posted by Fictia (32 comments )
Link Flag
After reading all these comments, it looks like Mark Zuckerberg knew what he was doing and now his company is worth 25 BILLION. People calling him a sucker for not taking 750 million? All of you guys are just talk and no brains.
Posted by SpoHH (1 comment )
Link Flag
it's the future, i mean 2011 and facebook is worth 50 billion now,!
Posted by Jerry_A (1 comment )
Link Flag
There's an old saying...
"There's a sucker born every minute" I'm sure someone right now is thinking of buying it.
Posted by thedreaming (573 comments )
Reply Link Flag
It' all about the software
Sony bought Grouper for their P2P software. The site is just a bonus.
Posted by joshhyde (13 comments )
Reply Link Flag
Jean-Pierre Khoueiri & YouTube.com
It seems that youtube.com is interested in selling soon. Maybe
ConstantClick.com will put a bid in. If they bid more than a 1
billion they've pverpaid.
Posted by www.ConstantClick.com (5 comments )
Reply Link Flag
Without Net Neutrality, Video sites will be slaves of TEL-CABLE duopoly.
this morning i saw the first of the deceptive TV ads urging voters to call their congressmen to vote no on NET NEUTRALITY.

It is evilly ironic the the headlines for the commercial shout YOUR CONGRESSMEN WANT TO BLOCK CHEAPER CABLE...

AHAHAHAHAHAHAHAHAAHAHAHAHAAH....
Posted by disco-legend-zeke (448 comments )
Reply Link Flag
saddly, the masses wil believe it
They always do. A snappy advert campain and the intellectually lazy will eat it up.

Gosh, the TV said it was true.. you mean everything on TV isn't true?
Posted by jabbotts (492 comments )
Link Flag
Right On
I use facebook, being a recent college graduate, and when I read they passed up $750 million my jaw dropped. They are just being plan old greedy. Considering that they have such a questionable business model they should have taken the money and run. Even after venture capitalists take their share, the founder (Mark Zuckerberg) will be left with at least a couple hundred million. How much money does he need?
Posted by hybris06 (66 comments )
Reply Link Flag
The more I think about it, the more it sounds like a scam
It has to be that the people at the top of the "bidder" and FaceBook are somehow related. If they had 5 bidders then yeah... How about they put themselves up for sale on eBay and we see their REAL value? ... I personally think they'll take even $200M...of a legitimate offer.
Posted by Fictia (32 comments )
Link Flag
Extrapolating to a billion dollars
Grouper, a P2P video sharing company was recently purchased by Sony Pictures for $65M and they had about 1% market share. YouTube has 43% market share...so they are worth $1B. No, make that $2.6B. This kind of crazy logic is what fueled the last bubble and led to its bursting.

Sony Pictures bought Grouper for its P2P technology platform which can be used for other things like distributing its vast video catalog in a cost efficient way. The Grouper web site and user base were just frosting on the cake...that they may throw away.

Video sharing sites and services are hot now. There are new services emerging every week. The technology is simple. There is no significant barrier to entry. YouTube was founded in February 2005...just 18 months ago.

I was a VP at the original Napster. YouTube has many similarities. I wrote a blog on this subject today. <a class="jive-link-external" href="http://dondodge.typepad.com/the_next_big_thing/2006/08/youtube_worth_a.html" target="_newWindow">http://dondodge.typepad.com/the_next_big_thing/2006/08/youtube_worth_a.html</a>

Will history repeat itself?
Posted by Don_Dodge (64 comments )
Reply Link Flag
Traffic is the New Currency.
in the previous bubble, companies grew valuation on traffic, with no firm future revenue stream.

Even YAHOO was only 23 cents a share. Then, in a mainstream sort of way, advertises saw that they could recapture lost TV eyeballs. Then, the process was egalitized by google adwords and yahoo publishing, so the smallest website can be monetized.

Yes, traffic _is_ the new currency. Content (which users really love to provide for free in utbe, myspage, etc.) is the new Wealth, and bandwidth is the expensive fuel needed to run that engine. I hear YouTube spends a Megabuck a month on bandwidth. That would double if the Incumbents have their way.

&lt;include&gt;my Net Neutrality rant.&lt;/include&gt;
Posted by disco-legend-zeke (448 comments )
Link Flag
Sony just bought YouTube for $65 million
I think that Sony realized that with practically no barriers to entry, they have effectively just bought YouTube for $65 million.

Sony has a huge catalog of film clips, concert footage and music videos. With all that content, it will be a piece of cake to build an audience. All they needed was the technology platform. Sony doesn't need a video of your cat to be popular.

With the loss of so much record store traffic lately (note the Tower Records bankruptcy) and the great in-store promotions that gave sony records, they need more promotion channels. This creats a new one for them on the web.

The extrapolation to $1 billion is silly.
Posted by Jasonkx (1 comment )
Reply Link Flag
Market-share is worthless...
...paraphrasing what you said into my post title. See a more responsible analysis of this acquisition by Cringely here:
<a class="jive-link-external" href="http://www.pbs.org/cringely/pulpit/pulpit20060824.html" target="_newWindow">http://www.pbs.org/cringely/pulpit/pulpit20060824.html</a>

Think of how much Sony will be filing suits against YouTube once users start stealing videos from Grouper and posting them on YouTube.
Posted by Hardrada (359 comments )
Link Flag
I've got a ton of original content I'm holding-on to
Waiting for the bubble to explode and for a sensible online broadcaster to come along and give me the solution I want: I get at least 5% of profit he makes from my content via any means he chooses that'll make my total sum profit highest. Meaning, I'd pick a 5% profit giver over a 50% profit giver if the 5% is smart enough to lure 20x more viewers while sticking to them more commercials at higher cost to the ad company...

YouTube could be worth $1B or it could be worth $50M - the only way to know is once its monetized (via commercials) and REAL supply&#38;demand works its way. Giving stuff for free will ALWAYS have unnaturally high demand.
Posted by Fictia (32 comments )
Reply Link Flag
AD REVENUE SHARING (let google manage it, 3-way split)
The most difficult part of being an artist is finding a way to monetize you creative output.

Since i was already making web pages, when Google adsense came along, the checks started coming in immediately.

I agree with fictia, if you have good content, it is foolish to give it away. I have thought about some kind of ad revenue sharing for my photo web sites. If google would do the reporting and paying, i won't even have to waste hours of time figuring out 1099 forms, etc.

I do use free content sites, however, and in return for my content (i don't see any 5 cents a word checks from CNET for my deathless prose in their comments, for example) i get an increase in "Google Juice" as well as actual traffic.

Giving stuff away free attracts thieves who, after all, are, by definition, people that want things free. It also provides a creative venue and SOCIAL NETWORKING. Myspace is not really "FREE," after all, it is ADVERTISER SUPPORTED. So their problem is to keep advertising revenues ahead of bandwidth costs.

&lt;--! paste net nutrality rant here --&gt;
Posted by disco-legend-zeke (448 comments )
Link Flag
Facebook is holding out..... LMAO
"Facebook is holding out for $2 billion, according to the magazine."

WHAT A JOKE! Viacom must have not even visited the stupid site when they put that bid in. I wouldn't give Facebook a dollar and a pack of gum for their site.

Tell you what, give me $750 million and I'll bet my life I can make a site like MySpace, and get it more hits then Facebook.
Posted by hudsonperalta (7 comments )
Reply Link Flag
Learning from Flickr.. path to profitability
YouTube is an honest to goodness great idea. An idea who's time has come. And after loading a half dozen 5 minute movies to it myself I would easily pay for an escalating range of priviledges/ services in the style of Flickr. Unlimited storage and a few extra services... also corporate licenses are in the offing too.
See examples at richoblog at blogspot.com.
RicRicho is a handle for technologist Ric Richardson.
Posted by RicRicho (2 comments )
Reply Link Flag
Youtubes competition
What do you think about all the new online contest sites like googlesidol.com i think its called nbcs star tommorow myidolworld.com and the other video sites. How will these sites affect the market that youtube has.
Posted by thetiger1974 (1 comment )
Reply Link Flag
 

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