I can’t help but feel we’re in another dot-com-like bubble: MySpace sold to Fox Interactive for $600 million and now YouTube’s founders are being coy saying that they “don’t think it’s worth $1 billion” but that they’re OK with $600 million.
Ok, now I don’t have a fancy MBA, and it could be that I’m a hick from Newcastle in Australia but YouTube, for all its popularity (and it is popular) has absolutely no business model. Apart from a few google ads on their site, they have no income. Conservative estimates are that serving up five million videos a day (or however many it is this week) costs the site over $1 million a month in bandwidth bills alone leaving out server costs, office space and salaries. The $11.5 million they’ve raised from Sequoia Capital in two rounds ($3.5 and $8 million) isn’t going to last long before the business just stops. At least MySpace generates some income to justify its $600 million purchase price – and even that was treated with raised eyebrows at the value.
Now this week, ZDNet’s Russell Shaw posts “One of these six companies will buy YouTube” and I have to explode somewhere. Why the heck would anyone buy an opportunity to spend a million dollars a month for $600 million dollars with no chance of recovering the investment or ongoing costs?
“But Philip”, you say, “you’re missing the point. In a big company there are synergies that will help them make money.” That may be so, but we’ve heard that line before and the “synergies” between Time Warner and AOL don’t seem to have been that useful. That’s just one example – in general the so-called synergies don’t pan out and someone just loses a bunch of money, while the founders walk away rich. I’ve got no problem with Chad Hurley and Steven Chen walking away with a good portion of someone’s $600 million dollars (after Sequoia take their share). People win the lottery every day.
It’s the mindset/lunacy/sheer stupidity of whoever buys it that I just can’t fathom. The six sites that ZDNet thought might be in the market are Adobe, Time Warner/AOL, Sony, Google, News Corp/Fox and Yahoo. Adobe does not need a showcase for Flash when YouTube and Google Video are already doing that for them, and Time Warner just started its own video sharing site on its AOL property with a “community reporter” video upload site at CNN. Google have Google Video and Yahoo just launched Yahoo Video, neither of which is as popular as YouTube but they didn’t cost $600 million either!
The problem that any large company would have, if they purchased YouTube, would be that they either have to kill YouTube as it is, or fight many long and tedious (and expensive) law suits. YouTube today is popular because it’s full of copyright material uploaded by people without rights to upload it. The copyright owners generally do not approve. A couple of shows, like The Daily Show and Colbert Report have said they have no problem, but most networks and program producers have a problem with it. Even with YouTube’s policy of removing copyright material as soon as it’s pointed out to them, they’re still being sued by an LA-based producer for copyright infringement. (That suit is unlikely to succeed but doesn’t really help YouTube’s new owner.)
When you have an owner with deep pockets – NewsCorp, Sony or Yahoo – the law suits are going to come out of the woodwork and YouTube will have to remove all copyright material without clearances. There goes most of the appeal and value. In order to make some money back, there are two solutions: charge for the download, or add advertising.
Either, or both moves will kill the site’s appeal. What are they going to charge for a 37 second video of some dog biting their male companion in a sensitive spot? It’s not going to be $1.99 that’s for sure. How much advertising can you add to the head, or tail, of a 2 minute video before everyone abandons the site completely?
Personally, I don’t see a way out for YouTube. It’s a temporary phenomena that is too good to be true, because it doesn’t follow the basic tenets of business: income has to (in some way) exceed expenses.
No doubt someone will buy it for some outrageous amount of money – maybe NewsCorp want to add it to MySpace. Sony would want to put root-kit, computer killing DRM around it.
But when they do, I still won’t understand what the business model is nor why it’s being brought.