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October 09, 2006

$1.65 Billion for YouTube - BTF?

posted by MR WAVETHEORY at 10/09/2006 03:51:00 PM
Built to flip? YouTube got a great exit for about a year's worth of work. The headline number is $1.65 billion. It's an incredible price. The Google YouTube (Nasdaq GOOG) press release says:
“Our community has played a vital role in changing the way that people consume media, creating a new clip culture. By joining forces with Google, we can benefit from its global reach and technology leadership to deliver a more comprehensive entertainment experience for our users and to create new opportunities for our partners,” said Chad Hurley, CEO and Co-Founder of YouTube. “I’m confident that with this partnership we’ll have the flexibility and resources needed to pursue our goal of building the next-generation platform for serving media worldwide.”
YouTube will operate as a standaline company after the acquisition. The deal is all stock which means its value will fluctuate based on the value of Google shares. Many questions remain to be answered. Are there performance guarantees? Vesting schedules? If Google is paying that big of a price, they would want to get some guarantee of revenues, profits, users, etc. Those are all questions that remain to be answered.

Update: I wrote that Google should buy YouTube and how Mark Cuban was wrong about YouTube. My argument is strictly based on valuation of comparable companies in the space - that is a company like YouTube is more similar to Comcast than it is to WPP. In defense of Mark Cuban, I do want to mention that Mark is right about one thing. All of this is being made possible my magical Google stock which is building in very aggressive assumptions about its growth trajectory. Depending on whose numbers you believe at any given them, Google would have to grow 70-90% annually to justify its current valuations. That is a crazy assumption that investors are making. However, if everyone is crazy, some of us are less crazy than others for doing crazy things.
Google, Larry, Eric, and Sergei are not crazy. They are in fact the few who are less crazy than others for doing the deal. The crazzies are the investors and analysts who got the stock to $500 in the first place.

Update: Don Dodge who was VP Of Product Development at Napster writes a very interesting article about music sharing. Dodge speculates that Napster could have been YouTube or iTunes. The gist is that timing is everything.
We had over 50 million users, many of whom were willing to pay $5 per month or $1 per download for digital music. That translates to about $250M a month or $3B per year. Even if Napster kept just 10% of the revenue that would be $300M per year against expenses of less than $10M. At the stock market multiples of the day that would have been a $15B IPO.
There was just one minor hitch. The music industry was not ready to do a deal.
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