YouTube: Worth less than Grouper?

As with MySpace, a YouTube purchase includes the right (obligation) to plow tens of millions of dollars into the Web site to support its free-to-the-consumer infrastructure.
Written by Donna Bogatin, Contributor
Sony’s $65 million acquisition of online video sharing start-up Grouper has ignited another play at the “Who will buy YouTube” game (see my "Top five top reasons NOT to buy YouTube"). This version of the game includes a bonus question: How much will be (over) paid?

CNET’s “YouTube could be a steal at $1 billion” states:

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 someone were to buy YouTube tomorrow, what would they have to pay?

DMReview’s definition of “Market Share”: A company’s sales expressed as a percentage of the sales for the total industry.

YouTube doesn’t have 43% market share of sales for any industry. The only revenues YouTube may have would be from advertising. YouTube’s market share leadership then, includes the dubious honor of being the leader of the free video hosting market!

YouTube’s dominance in free-to-consumer video services is costing the Web site an estimated $1 million in monthly bandwidth expenses. If YouTube has 43 times the share of the “online video market” than Grouper, its expenses may also be 43 times those of Grouper.

As in the case of News Corp.'s purchase of MySpace, an acquisition of YouTube would confer upon the "lucky" buyer the right (obligation) to plow tens of millions of dollars into the Web site to support its free-to-the-consumer infrastructure.

In “YouTube, Digg, MySpace: How much is a non-paying 'user' worth?” I discuss News Corp.’s propping up of MySpace:

It received a $20 million infusion from News Corp. to beef up infrastructure and servers and has doubled its annual operating budget to about $40 million.

MySpace’s recent ad sales outsourcing deal with Google does not validate its $580 million sales price, as I put forth in “Google: MySpace savior?”:

Listening to the joint conference call for financial analysts and press, however, the lack of enthusiasm for the $900 million deal was palpable. The profitability of MySpace was questioned, as well as the quality and salability of its advertising inventory.

By seeming to use the Google revenue share deal to 'justify' its billion dollar plus investments in Web properties, News Corp did not provide a ringing endorsement for the stand alone viability of its Internet sites.

So, whose Tube will YouTube be? Smart money will drive a smart negotiation.


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