Wow! I’m surprised! Google + YouTube
John Battelle writes on Google’s recent acquisition: First Blush on GooTube.
I have to say, I’m pretty damn surprised at the whole thing, especially
how fast it went. But in particular, I would have guessed that it’d be
Viacom, Fox, Yahoo, MSN, or AOL that would acquire them, for reasons
that I’ve stated before. To summarize my previous analysis, to really
capture the opportunity, YouTube really needs a great brand sales
organization in order to sell pre-roll and/or other brand stuff that’s
integrated into the videos. Google has the weakest team out of all the
other portals/old media. Thus, I’d assume that the synergistic value would be a lot less than someone who thinks they can capture a lot of brand dollars.
That said, one analysis of this acquisition is that it’s just 1-2% of
their market cap, and the transaction was completely in stock, so they
can gain or lose more than $1.6B if YouTube changes hands. For example,
it might be that if Fox bought YouTube, thus gaining a virtual monopoly
on video on the Internet, that might have caused Google stock to drop
$1.6B in market cap. Or, alternatively, if they can show higher growth
by buying all this traffic (and keeping the TAC they’d otherwise pay
out) then it might cause investors to get even more excited next
quarter and the stock would gain the 1-2% to offset the acquisition
cost. Either way, it might make sense.
One interesting point in Battelle’s article is the description by David
Drummond of Google (their General Counsel) that the YouTube valuation
was calculated on a "synergistic model." It may be obvious to a lot of
people what that means, but let me describe it for everyone else.
Basically, the idea is that rather than calculating the value of a
company based on their current revenues and income (of which YouTube
probably had very little), instead, you ask the question: If we bought
this company, and integrated it completely into our operations, how
much could we gain overall? Basically, you take YouTube’s revenue
potential and then amplify it against Google scale, which leads to a
big number indeed!
An hypothetical example of this: Let’s pretend that Joe can come up with a recommendations algorithm that’s 2X better any existing ones, for movies, books, and so on. Let’s also pretend that he’s making $5MM/year running this service. Now, Amazon or Netflix might come along and want to buy them. But even though they’d look at the revenue, they certainly wouldn’t pretend that they were just acquiring an additional $5MM/yr revenue stream. Instead, they’d realize that they could apply the technology to their stores and make an additional $100MM/yr. That would be the "synergistic" part of their modeling, which might get them to pay Joe $200MM for his handy new technology. Obviously I’m simplifying things here, since there’s a build or buy decision, competitive issues, and so on and so forth, but that’s just an example.
This is the kind of approach that ends up justifying
valuations like Skype as well – eBay calculated the strategic leverage
that the platform could bring, rather than a valuation based on
incremental revenue gains. So in the long run, who knows if the $2.5B price tag for Skype of the $1.6B value for YouTube are worth it – they might well be…
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