Bubble 2.0 ?
Few areas have shown the growth or the robustness that lead generation has. Rising from not just relative obscurity but the dregs of credibility, the model and those in the space have shown they belong in front and among the top tier of firms. That said, it feels as though it has been some time since performance-based Internet companies have grabbed their fair share of headlines, and it might be some time before they do again. This does not invalidate performance advertising; it merely speaks to the focus that the broader market currently has, which in some ways has regressed.
As was the case in the first Internet bubble, much of the focus today is on consumer sites that have valuations exceeding their ability to make money. This certainly seems to be the case with YouTube, the most popular of the video sharing sites. Similar to MySpace, if they aren’t written about at least weekly, it seems that something is not right. The site has incredible amounts of traffic, yet until recently no clear picture on how to monetize its throngs of impressions. The Google AdSense ads certainly weren’t doing the trick.
Many sites today will not make money. YouTube is in a unique position in that, similar to MySpace, they only need the right model to make things work. They built critical mass first in an area that is a no-brainer with respect to future advertising options. Advertisers, especially those in the already struggling movie business, have always sought ways to reach their audience online. The company didn’t need to hurry and rush out a poorly executed ad product, e.g. the direct marketer in me would have the site promoting ringtone and dating offers wherever possible. YouTube’s decision to focus on a video ad platform certainly makes more sense, and all of the sudden vaults them from money loser, to attractive candidate to all types of company, even a Google, looking to own a piece of the video ad market.
YouTube probably feels pretty good about their future, too, after the two day old announcement that Sony purchased the much smaller, not-quite rival, video sharing site Grouper for $65 million. As TechCrunch states, applying the same value per user to YouTube gives that site a multi-billion dollar valuation. And, with MySpace now offering direct to consumer media – not just video ads but the opportunity to purchase parent company Fox’s movies and TV shows, I can’t imagine that it will be too long before YouTube has a similar deal; just as the audience is ripe for incentive promotion and ringtone ads, it is especially ripe for selling shows and movies from studios.
Seeing deals such as the price per user paid by Sony for Grouper, along with valuations for Digg and Facebook – sites that make less per year combined than someone like LowerMyBills does in a month, only reinforces what so many of us feel – that Web 2.0 is more like Bubble 2.0. And it makes many of us ask, not just why didn’t I do that but also why is it worth so much. I can’t answer the first part, and not being a VC, I might provide a poor answer to the second part, but I think it’s worth exploring. Where I start in thinking about the valuation is trying to examine the difference between a lead generation firm for instance and a Bubble 2.0 firm.
It is a fact that lead generation firms do not receive anywhere near the valuations that accompany such as Grouper just did. I think there are two main reasons. The first relates to the notion of a user; the second deals with growth. Regarding users, and this is something I have undoubtedly said before, lead generation firms today are decidedly single serving. A lead is not a customer, not a true user. Some firms will send emails, but very few in the lead generation space, have developed a true user focus. Today’s lead generation companies share more with incentive promotions sites than a true customer site. Today’s lead generation sites earn the vast majority of the lifetime value in the initial transaction. Until they can earn significantly more over time, the way a true consumer site does, that will keep a piece of the valuation in real world terms.
The second contributor to the difference in valuations between a company that actually makes money, i.e. the lead generation firm and those that make buzz deals with growth. Focusing solely on the price to earnings ratio, Google has a higher valuation than Yahoo because, at least in my opinion, because investors feel it has more room to grow. Sites like Grouper, while they don’t make any money really, have, in the buyers’ mind, room to grow. They see these Bubble 2.0 in the context of MySpace. When the advertising forces align, they will make out big, e.g. Google’s $900 million dollar deal with MySpace. In other words, they are willing to pay the seemingly unjustifiable returns now because they feel a windfall will come based on trends in the marketplace. Lead generation firms on the other hand are very straightforward and while there is growth and real profits, the buyers don’t see the mega windfall, and thus they become less sexy. That is until Bubble 2.0 pops and real money becomes important again.
