follow the discussion on Techmeme:
As you know, I'm here at the ETRE'06 conference, and there's a lot of buzz going around about this deal. I got a couple of journalist calls, so here are some quick notes on my immediate thoughts (in bullets for lack of more time):
- ever since Youtube came into the front scene last DECEMBER (3m Video Views/day, 100m/day now), at every single conference I go to, Youtube gets mentionned. This is clearly irrational exhuberance. There are many larger deals happening in LBOs or M&A that get less attention because they tend to happen in another spectrum than the VERY HOT INTERNET CONSUMER space. Hence building up the heat on a company (and the Allen & Co conference a few months ago really ignited the chase for a buyer) usually leads up to this kind of valuation. I grabbed a couple of reactions of VCs today on this deal, and Mark from Mangrove said that indeed it was smaller than his Skype deal... But remember all the hype about Skype before it got acquired ? This is clearly a sign of a bidding war, and we read here and there, than News Corp, Yahoo and Microsoft (among the others Viacoms of this world) fought this fight.
- this deal CLEARLY validates the online video segment as a huge compartment of the Internet and of media in general. No one would pay any $1.6b if there was not much more money to be made in this market. Hence look for a much higher return on this deal for Google in the years to come. Indeed, they share price went up more than $8/share, ie almost $2b in market cap I read, so a cool $400m profit in share price (I didn't bother to check, so double fact check me on this). I remember trying to persuade European investors last year that there was indeed a market for online video for many many months. So much time wasted with folks with little vision. Recent deals such as this one, millions of cash injected later in Veoh, Revver, Videoegg, or the imminent launch of the Venice project, etc. show that being too early to a market doesn't help, and that probably if you don't live near visionnary VCs it's hard. Netvibes pulled it off in our continent, but then, Tariq got help from *THE* visionnary guys over here, Index Ventures and sheer talent.
- the added value of this deal is not only all about cost reduction and scability (more on this later), but on the ADVERTISING market. Clearly, a google/youtube deal shows that the internet video advertising market will explode from now on and I'm delighted to be on the right track about it. More on this at the upcoming Monaco Media Forum, where I shall be on a couple of panels. eMarketer, Jupiter and the likes will have to update their projections shortly to a much larger number than the projected $1.6b in 3 years.
Additional random notes:
- it's an all stock deal. Great, exchanging paper with paper is cheap for Google, locks in the founders of Youtube and has potential upside. I wish we had these kind of liquidity tools for our startups over here. Still it's stock, not cash.
- Sequoia selling to Sequoia. Where we see VCs here syndicating among 3 of 4 of them for just a couple of millions euros, here is a gutsy VC investing in a small company and fostering it to exit. Last year at ETRE, I remember saying that of course, if Sequoia got in this unknown video company, then it was going to be big. Their track record shows it. The trick here is that Sequoia sells to Sequoia backed companies (Google), creating a conveyor-belt ecosytem. They used to do that with Cisco in the old days, when any new network company would be swallowed by Cisco... We talked about this with Fred Destin this morning... Now we also never talk about their losses either.
- it seems that AUDIENCE is the new name of the game, a strategy that Dailymotion is following in France. Who cares now that the audience was built on 22 second clips (really, who cares? as there is no standard to measure video views), on porn, on massive copyright infringment... what matters is the big numbers. AUDIENCE. I believe this is NOT the way to build a SUSTAINABLE business, but hey? if you're going after a quick flip, build an audience, monetize it, sell it, and deal with lawyers later, then maybe it's the right approach for entrepreneurs ? Copyright holders seem to want to have access to a massive new audience. Deals with CBS were announced this morning as well, following other deals with Universal Music Group, Sony BMG, etc. Expect all of them to sign up now, and go compete against other well established platforms such as iTunes.
What's in it for them ?
- For YouTube founders, clearly an exit for a random business model. But in addition, access to great Google engineers to deal with scalability issues (bandwidth, storage, distributed hosting) at a much lower cost (economies of scale and scope); access to fantastic advertising expertise (the GoogleAds guys), combined efforts with the branded content sourcing teams; global reach;
- for Google: another weapon in their global dominance vs. the YHOO, MSFT, NEWS... of this world. A way to compete vs. MySpace; vs. the upcoming VeniceProject from Niklas/eBay; even more buying power for infrastructure from their suppliers; a 46% market share of online video (in addition to their own 10%)
- for Sequoia: it seems a 43x multiple in under 2 years (the New York times is reporting their stake was about $495m).
My bet is that the online video space is just starting to happen. There's a lot of room for different market approaches, products, geographies, etc. Indeed look at how many TV companies there are out there.
But, the number of market consolidators is shrinking. As the number of global media players. Stay tuned.
And, nevertheless, huge kudos to Chad and his co-founders for building a huge brandname, for having disrupted the online video space, and on a fantastic exit in such as short time-frame. Up there in the hall of fame of internet entrepreneurs.