C/Net says "YouTube could be a steal at $1 Billion". Grouper, a P2P video sharing company was recently purchased by Sony 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.
I think $65M for Grouper is ridiculously expensive. Four of my Napster buddies could build a P2P video file sharing service in about 6 weeks and have it ready for production in 6 months. Bambi Francisco at Marketwatch says Grouper had signed a term sheet from a venture capital company for $8 million with a pre-money valuation in the $30 million range. But Grouper decided to take the Sony $65M purchase instead.
Sony Pictures bought Grouper for its P2P technology platform which can be used for other things like distributing its vast video and music catalog in a cost efficient way. The Grouper web site and user base were just frosting on the cake...that they may throw away.
I was a VP at the original Napster. There are many similarities to YouTube. I wrote a blog about the challenges facing YouTube and lessons learned from Napster. You can find it here.
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. They are reportedly burning $1M per month in bandwidth fees, and have no current revenue stream. Another hip brand could emerge just as quickly and attract YouTube users over to their service. There is no substitution cost...users can move with a click of the mouse.
How many companies can afford to pay $1 billion dollars for any company, let alone one with no barriers to entry, no revenue stream, and copyright lawsuits hanging over its head? It looks like the Web 2.0 bubble is ready to burst. At least this time the companies are not public so individual stock market investors will not be harmed.
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IMO youtube does have some significant barriers to entry, such as:
1. the audience. whether they are uploading pirated stuff or uploading their own videos, most people do so for the social element. i can go to another random video web site, but if there is no audience for me to interact with, then what's the point?
2. people who upload their videos dont want to have to upload them again (although presumably video sharing sites can find a way around this one)
3. youtube is also following the myspace route, especially with their recent musicians accounts. this also results in some lock in; as more people start handing out their youtube URL, the lock in becomes stronger.
4. depending on what you believe youtube could already be profitable or approaching it -- see http://plentyoffish.wordpress.com/2006/08/24/youtube-is-already-wildly-profitable/
Posted by: kid mercury | August 24, 2006 at 05:10 PM
I usually agree with you Don, but frankly no substitution here is like no substitution for services like Google, eBay or Yahoo. Sure you can go to another site with a click of the mouse, but services like Youtube have reached such a threshold of interactivity, that there's no rationale for making that change. Youtube IS online videos for many, as MySpace IS online social networking for the majority of users...
Posted by: Ro | August 24, 2006 at 05:59 PM
I agree with both of you that YouTube has built a popular service and recognizable name. But, brand loyalty? I don't know how strong it really is after only a year or so.
Both of you mentioned interactivity...but I don't see much of that on YouTube. MySpace is all about interactivity, friends and community. YouTubers sometimes leave comments about videos, but is there really any connection, conversation, or community?
But, my real point is that the suggested market valuation of these companies is just crazy, signalling a top of the market and a bubble that is ready to burst. I am old enough to have seen several of these cycles. There is no such thing as a soft landing...it is always crash and burn.
Posted by: Don Dodge | August 24, 2006 at 06:15 PM
Ro,
"Youtube IS online videos for many, as MySpace IS online social networking for the majority of users..."
Remember when Geocities WAS online communities? Remember when it was The Globe? Remember when Friendster WAS online social networking?
People are quick to move on, especially the kind of teenage audience that Youtube targets. One day Geocities woke up and realized it was 'so last year'. It could just as easily happen to YouTube.
Posted by: Sid | August 24, 2006 at 10:57 PM
Don, In your post you say that youtube doesn't have a revenue stream. However, they have advertisements scattered through out their pages... ?
Posted by: Alex | August 24, 2006 at 11:49 PM
And remember when Napster was p2p music downloads? (Sorry Don, couldn't help myself) Switching costs for free online services is nill. Sure Youtube may be online videos for users who are using it right now, but - believe it or not - there are still a lot of users NOT using online video tools. If a better service comes around - and gets the masses using it - what's to stop your average Youtube user from switching? Gotta agree with Don on this one. The valuations are crazy.
Posted by: Farhan | August 25, 2006 at 05:02 AM
Media companies value content very highly and (still) seem willing to pay a premium on acquiring sources of content - good, bad or otherwise. While most businesses would most likely over-value YouTube at $1B, some media or entertainment company could see it as a property rich in talent and entertainment for the masses. This, I believe, will be a trend in the near future.
Posted by: SethPalmer | August 26, 2006 at 10:08 PM