YouTube could be a steal at $1 billion

news analysis Sony's acquisition of video-sharing company Grouper could mean big bucks to others in online video.

Greg Sandoval Former Staff writer
Greg Sandoval covers media and digital entertainment for CNET News. Based in New York, Sandoval is a former reporter for The Washington Post and the Los Angeles Times. E-mail Greg, or follow him on Twitter at @sandoCNET.
Greg Sandoval
4 min read
news analysis By agreeing to pay $65 million for Grouper--a profitless video-sharing company with negligible market share--Sony has helped establish a benchmark for other companies in the space and sent industry insiders speculating wildly about what market leader YouTube may be worth.

Sony's acquisition Wednesday of Grouper, which owns less than 1 percent of the online video market, begs a rather obvious question about its far larger rival YouTube, which owns 43 percent market share: If a company were to buy YouTube tomorrow, what would it have to pay?

"The viral video space is so hot right now; it's like Hansel from the movie 'Zoolander,'" said Aram Sinnreich, managing partner of RadarResearch, referring to the 2001 comedy about competition in the modeling business. "I wouldn't be surprised to see (online video market leader) YouTube receive a bid of $1 billion. Whether the company is worth it is another question."

Video-sharing sites allow the public to post homemade videos to the Web, where the videos' creators can be seen dancing, singing, acting, joking and lip-syncing. If that doesn't sound like much of a business, consider that more than 200 companies now present some kind of user-submitted content, and that teens and young adults are flocking to these sites.

How much is too much?
Entertainment analysts have predicted in recent weeks that sites with large followings would command a high price. The Sony deal proved them right. But while the Grouper deal helped establish a benchmark, there is still plenty of confusion about the fair value of online video companies. This is because the typical metrics for measuring a company appear to have gone out the window--just like they did during the bubble years of the late 1990s.

Nobody knows whether anyone can make money by hosting user-submitted videos. (None of the top standalone companies in the sector has reported profits.) Few if any barriers to entry exist. It's unclear which entertainment companies may be in the market for one of these companies. And copyright issues loom for some of the sites. Despite all this, the only thing anyone involved in the sector talks about is "eyeballs."

A large and loyal audience is why News Corp. paid $580 million for Intermix, the parent company of MySpace.com, a move widely ridiculed at the time by the business press. MySpace had only 12 million people logging on to the site each month when News Corp. bought it.

Critics at the time said that Rupert Murdoch, News Corp.'s chief, paid too much. Not anymore. Google agreed this month to pay $900 million over nearly four years to provide search and advertising for MySpace.

Now, compare that with San Mateo, Calif.-based YouTube. The company, which was founded in February 2005, sees 16 million unique users per month.

Another reason YouTube may be a $1 billion company is that Facebook, the second-largest social networking site next to MySpace, has a monthly audience of more than 9 million and has rejected an offer of $750 million from Viacom, according to a BusinessWeek article in March. Facebook is holding out for $2 billion, according to the magazine.

That Grouper drew $65 million with less than a 1 percent market share, according to traffic-tracking firm Hitwise, only fuels speculation about the market value of YouTube and its 43 percent market share.

Those are the kinds of numbers that keep people speculating even while YouTube executives deny that the company is for sale. YouTube declined to comment for this article.

Yet to turn a profit
To be sure, plenty of questions remain about YouTube's business. First, the company has yet to turn a profit even though CEO Chad Hurley has said that YouTube is generating significant revenue.

The company also has a lawsuit hanging over its head. A TV journalist in Los Angeles alleges that YouTube violated copyright by posting without permission a 1992 video he shot of the beating of trucker Reginald Denny. Many YouTube users post copyright works, and legal experts say that this could lead to expensive court battles. Finally, if YouTube is worth $1 billion, then that reduces the number of companies that could afford to buy it.

"The real question is whose lawyers are going to let them make the bid," Sinnreich said. "It's virtually impossible to build a site with YouTube's brand strength, loyal user base. YouTube is a time bomb and a gold mine waiting to happen. The question is which one will be bigger."

As for YouTube's competitors, it's a grab bag of companies shouting over one other about which one has better technology, interface, audience and content.

One thing to keep in mind is that not all video sites offer the same thing. For instance, Guba has begun offering digital movies for download as well as video sharing. Heavy.com and Veoh Networks produce their own content. Their names have been thrown in with the YouTubes and Gubas of the Web, even though they have completely different goals, said Veoh CEO Dmitry Shapiro.

"Two marketplaces are evolving," Shapiro said. "One is Web video sharing...where YouTube dominates. The other is a parallel marketplace that we call Internet TV. Veoh is all about allowing producers to present, in long form, high-quality broadcasting. Video sharing is about video snacks. We're after the cable TV market."

Shapiro said one must remember--when calculating the worth of online video companies--that the cable industry in the United States generates $65 billion a year. He argues that YouTube, Veoh and all the others have begun encroaching on that turf.

"If you really believe these companies are reinventing this gigantic space," he said, "you can argue that they are bargains."