Andrew Chen Archives

Subscribe · Featured · Recent · The Cold Start Problem 📘
Dear readers, I have moved to Substack and I will be writing here from now on:
In the meantime, I will leave up for posterity. Enjoy!

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…

PS. Get new updates/analysis on tech and startups

I write a high-quality, weekly newsletter covering what's happening in Silicon Valley, focused on startups, marketing, and mobile.

Views expressed in “content” (including posts, podcasts, videos) linked on this website or posted in social media and other platforms (collectively, “content distribution outlets”) are my own and are not the views of AH Capital Management, L.L.C. (“a16z”) or its respective affiliates. AH Capital Management is an investment adviser registered with the Securities and Exchange Commission. Registration as an investment adviser does not imply any special skill or training. The posts are not directed to any investors or potential investors, and do not constitute an offer to sell -- or a solicitation of an offer to buy -- any securities, and may not be used or relied upon in evaluating the merits of any investment.

The content should not be construed as or relied upon in any manner as investment, legal, tax, or other advice. You should consult your own advisers as to legal, business, tax, and other related matters concerning any investment. Any projections, estimates, forecasts, targets, prospects and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others. Any charts provided here are for informational purposes only, and should not be relied upon when making any investment decision. Certain information contained in here has been obtained from third-party sources. While taken from sources believed to be reliable, I have not independently verified such information and makes no representations about the enduring accuracy of the information or its appropriateness for a given situation. The content speaks only as of the date indicated.

Under no circumstances should any posts or other information provided on this website -- or on associated content distribution outlets -- be construed as an offer soliciting the purchase or sale of any security or interest in any pooled investment vehicle sponsored, discussed, or mentioned by a16z personnel. Nor should it be construed as an offer to provide investment advisory services; an offer to invest in an a16z-managed pooled investment vehicle will be made separately and only by means of the confidential offering documents of the specific pooled investment vehicles -- which should be read in their entirety, and only to those who, among other requirements, meet certain qualifications under federal securities laws. Such investors, defined as accredited investors and qualified purchasers, are generally deemed capable of evaluating the merits and risks of prospective investments and financial matters. There can be no assurances that a16z’s investment objectives will be achieved or investment strategies will be successful. Any investment in a vehicle managed by a16z involves a high degree of risk including the risk that the entire amount invested is lost. Any investments or portfolio companies mentioned, referred to, or described are not representative of all investments in vehicles managed by a16z and there can be no assurance that the investments will be profitable or that other investments made in the future will have similar characteristics or results. A list of investments made by funds managed by a16z is available at Excluded from this list are investments for which the issuer has not provided permission for a16z to disclose publicly as well as unannounced investments in publicly traded digital assets. Past results of Andreessen Horowitz’s investments, pooled investment vehicles, or investment strategies are not necessarily indicative of future results. Please see for additional important information.