Facebook worth more than YouTube?

The Wall Street Journal says "Yahoos talks with Facebook get bogged down"  Yahoo is reportedly offering $1B for FaceBook. The talks have been on and off most of this year.

Robert Scoble asks "Is Facebook worth as much as YouTube?"  Actually, I think FaceBook is worth more than YouTube. I just don't think YouTube was worth anywhere near $1.6B. See my back of the envelope financial analysis below.

Scoble talks about the "wow!" factor or the "cool" factor. He says it is not just the technology, it is the audience...the cool factor. True, but the problem is that what is cool today will probably not be cool two years from now. Then how much is it worth?

YouTube was built in less than a year for probably less than $1M. They only raised $11M in VC money, and most of that was spent on paying for bandwidth for streaming all those videos. FaceBook was built by one or two hackers in about 6 months for next to nothing. Napster was the same story. The value is in the audience, not the technology. There are reasonable methods to value audience and demographics. In bubble periods these metrics go out the window. Take a look at these recent acquisitions prices;

• YouTube - $1.6B
• MySpace - $580M
• Flickr - $30M - just a guess
• del.icio.us - $25M - just a guess
• Writely - less than $5M
• Picasa - less than $5M

Is FaceBook worth over $1B? The cool factor has already started to fade, and they have fully penetrated the college market. There is no more growth left in that segment. So, it is a simple discounted cash flow exercise, plus some premium for the cool factor.

Facebook advertising revenue is probably around $1M a week during the school year, so lets say $40M for the year. Expenses are probably less than $5M. Great business...but how much is that profit stream worth? With growth rates slowing maybe 20 times earnings is appropriate. My wild guess is that FaceBook is worth about $700M.

This is based on some wild guesses at revenues and expenses. I would want to do some heavy "due diligence" before plunking down $700M. You would need to believe that FaceBook could remain cool for another 15 years or so and consistently grow profits over the current levels.

What is YouTube worth? YouTube has no revenues today but we can make some assumptions based on limited information. Here are my wild guesses;

• 100M videos streamed per day
• 40% of them might be monetizable at $10 CPM
• $400K per day or $150M per year
• Pay 70% of revenues to copyright holders
• Net revenue to Youtube is $45M
• Bandwidth costs, payroll, and overhead is probably $2M - $3M per month
• Net annual profit is between $10M and $20M
• Lets apply a 40X multiple to earnings
• YouTube is worth between $400M and $800M, lets say $600M

Look, I did this in about 20 minutes with almost no information. I am sure there are people reading this who know more about the details than I do, or who understand the advertising business much better.

What do you think? Leave a comment, state your opinion, or correct some of these wild assumptions. I would really like to understand this with some real data or comparables.

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Comments

[Bernard Moon]

Don,

One aspect of your assumptions I would disagree with is your CPM rate of $10. Online video related CPMs are moving higher to around $30+ and will continue to do so across various platforms.

[Joe Duck]

Don! Excellent. Finally a nice short and sweet summary of the actual money items everybody seems to be ignoring in these deals.

As Ballmer noted there's more here than money because part of the game seems to be Google keeping this out of the hands of the competition, but I think your calculations show the pain Yahoo, MSN, and even Google must be feeling as they contemplate paying a premium of *hundreds of millions* for these companies.

[TanNg]

Robert Scoble placed too much enthuasism on social network sites. Chat room was social network, news group was social network, forum was social network, yahoo groups is social networks. They all share the same fate: not last long. Facebook, MySpace, YouTube, Digg, QnA may face same problem.

So what is stregy for Microsoft?
* Dont buy social network but Copy them or Try to invent new kind of social network to disrupt all of them
* Partner with current social network in order to learn and develop business models
* Develop social network themself in order to understand a community and develop skills

[Robert Scoble]

TanNq: your analysis shows a fundamental misunderstanding of what has changed in the past 10 years. A chat room never would get you into a search engine like Yahoo/Live/Google.

If you think MySpace/Facebook/YouTube/Flickr won't last long then I have a bridge in Golden Gate Park to sell you. All four of those have considerable lockin. I'm not going to move all my Flickr photos to Zooomr, for instance, even though Zooomr has better technology. Same with the others.

[Joe Duck]

Robert - you are addressing the key point which is the value of "lockin", but I don't understand why you think people won't shift to better things as they become available.

I use Flickr because others use it , ie community. If there's a migration I'll move too. Doesn't this social and business instability lie at the heart of the Web 2.0 madness and fun?

[Robert Scoble]

Joe: there's a massive amount of lockin. Look when Google came out with Gmail, what percentage of the market switched, even though Gmail had a dramatically better email offering (and still does). Even I still use Hotmail. It just isn't that easy to switch once you've decided to use something. Especially when there's re-engagement costs (moving your photos from Flickr to Zooomr, for instance, takes time).

[Justin Smith]

Don,

Facebook may have more leverage with the way their page view numbers have been looking in the last month. If you're interested, I wrote about that this morning at Inside Facebook (http://www.insidefacebook.com).

-Justin

[Steve Kaplan]

Don -

I like what you've done here too. Cuts through all the crap and gets to the point.

I'm not an MBA, but I think there is also something to be said for the traffic that Facebook could be expected to generate throughout the Yahoo network. As I recall, when these guys were recruiting at my campus, they claimed to have only around 12 million regs but about as many page views as Google per day.

THIS IS A STICKY SITE and would be a great resource to leverage other traffic/revenues to other parts of the Yahoo network. I'm sure that has a lot do with the type of rationalization that is made for a $1 billion valuation.

[TagMan]

Nice to see some quantitative analysis. However, there are some qualitative factors at play here:

1) YouTube beat the pants off Google, Yahoo! and Microsoft. Don't you think you'd want to hire these guys? How much are the people themselves worth?

2) Google could sell contextual advertising in both text ad and video ad form. Text ads could run all over the site and video ads could be embedded into the videos. The trick is to find a way to do this w/o alienating the current user base. If they can, essentially, "double book" ads, what sort of aggregate CPM would that yield?

3) If Google can somehow insert its brand into the YouTube experience w/o damaging the existing YouTube brand, they might get existing YouTube users to use other Google products. IOW, they're buying potential ad revenue beyond the YouTube platform. How would you factor that in?

4) As others have noted, how much is it worth to keep YouTube out of other firms' hands? Does that, in and of itself, explain the premium?

5) How much money will YouTube save if Google engineers redesign the backend to be highly scalable? Short term, this is a cost both in terms of new hardware, software and salaries. Long term, though, how much could they save?

[Joseph Hunkins]

Robert I'm digesting your point, thinking that 1) you will be moving to gmail within a few years as many have done already despite the mild pain and 2) applications have a lot more lockin than something like YouTube where it's mostly the viewers that matter. True, Uploaders are going to put their vids at the biggest sites first but that can change very, very fast. You know better than me but I think part of YouTube's success was simply that they allowed almost instant uploading. Youtube is hardly the robust, loyal community one needs to get good lockin (I'm not convinced there's much loyalty at all - look how fast people went from Yahoo to Google when Yahoo search started to suck just as Google was improving.

[TanNg]

Robert!

I fully aggree with you about locking power of contents and social network. But what I dont aggree with you is how much power they have.

First, with content locking
* Your all content (photo) is still in your hardisk, only portion of this posted to social site (Flick). So if you have a good tool to post them or migrate them, you may try to do it.
* Content (user generated) is aging and losing its value. I have about 100 photo posted to Blogger, but now rarely visited it again, just losing interest about them. I've posted more than 10,000 post in some forums that I participated actively, but never read them again, never visited them again, and no one would read them again. They just become outdated.

Second, with social network locking
* The nature of people is moving from one community to other, old social network just get boring. In 10 years, I have actively participated in 5-6 forum or online community. But as I growth and change my interest now I abandoned them all, and some time do post in blogsphere like this.
* People are not participate in only one community, but tend to participate in many community at the same time. In the offline world this is clear, just ask youself how many online communities you are participated now.

So social network can help keeping people but not forever. Its power may not as strong as you think.

So if new services is innovative and interesting enough they may disrupt all current social networking site. Microsoft is really long term company as Ballmer stated, dont underestimate them.

[TG]

Don:

You are right with your CPM assumptions. People seem to take as a fact what the press is promoting as $30-$40 CPM.. People seem to be confused what preimum providers like Cable Operators can demand vs. UGC and not so premium viewing on IP browsers.

Why not just take the Google Video CPM - last check .... are you ready.... $5 CPM... that's right - Video CPMs have not reached the promised land yet folks.... And Don, you also right with the amount on what copyright holders get - 70 percent - and it will only go higher for deals with the Content Owners like Record Labels... they need the same percentages as they get for the established paid download models

Good analysis DON! In fact I think you are being kind with the valuation you have proposed for YouTube.... you analyis is the high end.

[Lloyd D Budd]

Steve Ballmer in an interview with Business Week [1] took a move out of your play book, "I’m not saying it is a fashion. But every time we do valuations, I wonder if we can keep this hot for 10 years. . . ."

I read this on an excellent distiller of GoogTube [2]

Though I can't help, but wonder if this 10 year rule is now outdated. A lot of money and opportunities can come from a three year fashion.

[1] http://www.businessweek.com/technology/content/oct2006/tc20061011_940241.htm
[2] http://utubeblog.wordpress.com/

[TMan]

After reading don's post I signed up and played around on Facebook. I thought I was on the wrong site. "This is worth 700 million?"

Well its worth whatever someone is willing to pay.

Analyst constantly state that (in a sane world) these kinds of things arent worth squat, then the market teachs that we don’t live in that world.

Facebook seems like a train wreck front to back both conceptually and technically, and I will hereafter refer to it as "Facewreck".

Just one minor example, signed up, got distracted, came back, what was my password? Well who knows because if you sign in incorrectly the page dumps. Sheesh…it's one of the most chaotic and unuseable pieces of junk I have ever toyed with, and it will probably sell for billions.

Someone wrote that maybe they are paying for the people. Well yeah in a way. In my opinion the slack and yawn generation doesn’t relate to anyone but its own and that’s why Google, who are now part of the “Establishment” didn’t really have a chance in my opinion, nor does microsoft or any other big company unless they shed the name. MySpace is a good example of that, it would have had to have been "Microsoft MySpace" been spit and polished and therefore doomed.

Lock in Factors - A few ideas in order of probable importance for this group of target users if you want to grow a community.

Association - here is where Microsoft is going to have issues. They are the "Man" to a lot of this age group. No one likes the "Man", no one trusts the "Man", and no one wants to associate with the "Man"

Hanging out on a Microsoft/AOL/Even Google network is like hanging out with your parents. So maybe Microsoft should figure out what adults want and cater to that instead, or just invest in a twenty something geek and do it via a backdoor like MySpace. This isnt so much of a feature as a barrier to entry.

Credibility – major points, call this the brag factor, Youtube has it "Look at me dudes!" and face book flirts with it, but doesn’t really directly address it, a problem it could and should solve.

Community - major points, people are tribal by nature, younger types even more so, if they feel that they are part of a group they tend to hang.

First on the block - minor points, but accumulates community and credibility points, so it can work if all else is executed correctly.

Laziness - minor points, or should be. A technical problem that can easily be solved by export/import/forwarding tools that the competition should provide. "Single Touch Transfer" should be the norm, to claim this is the core issue is either an indication of stupidity on the part of competitors or a true indication of just how lazy people are.

User Experience - Depends on competition, initially no points, later maybe major if competition can overcome the credibility and community gap, better just to get Community, Credibility and Association down first, and then worry about this, a major issue if you’re a professional because your standards will be way to high.

In some ways "Facewreck’s" crappy interface, chaotic experience, and pointless drivel helps. It establishes them as far away from the "Man" as you can get and puts them squarely in the "Amateur" category and thereby relates well to its audience. It’s the modern day barely put together about to fall apart virtual club house.

---

As far as long lasting worth, well in the end I think this is another narrowly focused .bomb scenario. Every player wanted something with .com in it and now every player wants something with "Community" in it.

The geeks who do their little dance will make a whole lot of cash, as will the savvy investors who pay and don’t care if it plays (so long as it sells, to some big entity) Google might make money off this via stock or even adds, they are focused and very amoral so it’s quite possible.

[D'MA]

As one of the comments pointed out, I believe this was the acquistion for the reason to keep Youtube out of hands of competitors. Knee jerk reaction so to speak. I also completely agree on current CPM for videos. You can get higher rate up to $20 when you very targeted and highly matching demographic profile of the target audience, which I don't believe is the case with Youtube.

[Make Money From YouTube]

great post I really enjoyed reading this. Will definetely bookmark thanks!