[Editor’s note: We updated this by adding comScore’s numbers, effectively pushing up the value.]
In recent months and weeks, we’ve examined:
- when Google could surpass Microsoft in market capitalization here;
- what Google could generate from YouTube by adding Ad Sense on the social networking video site here;
- what YouTube’s pre-Google acquisition revenues could be here;
- what MySpace’s search business was worth to a partner here.
Today, we look at what Wikipedia.org would be worth - assuming a major thing: if it weren’t a non-profit - as a free, ad supported going concern. We first apologize to the Wikipedia.org community who would view this as heresy or blasphemous. This is strictly for entertainment purposes.
We’ll base our valuation on:
- Wikipedia.org’s traffic
- current advertising rates and
- valuation metrics for publicly traded companies and recently acquired media companies.
Admissions in Shortcomings of Model
Allow us to first state that if Wikipedia.org were a for-profit entity, it would have never enjoyed the meteoric rise in user-generated content, enjoyed the free hyperlinks it gets from other sites, and as such all of the free traffic. But we decided to venture in unchartered territory and make a few simple assumptions and project a value for the free online encyclopedia. As well, we point out one thing: while offline editions of encyclopedias like Britannica did not carry ads and generated revenue from book sales, it’s worth noting that the venerable encyclopedia’s online edition carry ads. So while we are simply suggesting that it is not inconceivable for an encyclopedia like Wikipedia.org to carry ads online, we definitely acknowlegde that if it were to run ads and suddenly become a for-profit media property, there would be considerable revolt by its contributors, readers as well as partner sites (would there? Read on). And, we acknowledge that there must be something in its “charter” that forbids it from being a for-profit, but the question has been asked by some readers of this publication so we took it upon ourself to accept the challenge and come up with this evaluation. You will notice a lot of “we assume” in this analysis… what’s that saying? Don’t assume because you make an ass of u and me. We’ve heard of it, it’s funny… and now that I beat you to that, let’s get on with the analysis.
TRAFFIC
US-based Traffic
According to Nielsen Net Ratings, Wikipedia.org’s US-based Home and Panel traffic for September 2006 stood at 33.3M uniques and 630M pageviews.According to comScore Media Metrix, Wikipedia.org’s Worldwide-based Home and Panel traffic for September 2006 stood at 153M uniques and 2B pageviews.We won’t get into the merits and accuracy of NNR verus comScore Media Metrix or Alexa, we’ll accept them since investors and analysts regularly use these as “God’s word.” We also note that according to Alexa, 55% of its traffic goes to en.wikipedia.org (the English version) while the rest goes to international editions. Assume the 55% English language edition includes traffic from the UK, Australia, Canada, even India and other largely English speaking countries.
International-based Traffic
But for the sake of simplicity, assume 50% of Wikipedia.org’s traffic comes from the US, 50% from the world. So using these stats, using Nielsen NetRatings’ numbers, we project Wikipedia.org to have a worldwide audience of some 66M uniques and whopping 1.2 billion pageviews every month. To get an average between comScore and NNR’s numbers, we derive a worldwide unique count of 109M uniques and 1.6B pageviews.
Display Banner Advertising Impressions
To derive a number for ad impressions, simply multiply pageviews by two, one 728×90 leaderboard and one 250×250 billboard (or island) ad. This means that Wikipedia.org has over 3.2 billion advertising impressions per month to sell.
Wikipedia.org’s Banner Revenue
Allow me now to say that in my years as an online ad sales guy, I managed to sell out the site I represented but it was a much, much smaller site (5M uniques, 50M pageviews, 250M impressions) that Wikipedia.org’s inventory is a very large number of ad impressions for any salesperson or staff to sell, so we assume that Wikipedia.org only sells 75% of its ads (and it hits this mark by using ad networks but even they cannot in aggregate sell everything out).
So:
- 25% of its inventory sells for $2 CPM (Cost per Thousand of Impressions) and generate Wikipedia.org $1.6 million;
- 25% of its inventory sells for $1 CPM (Cost per Thousand of Impressions) and generate Wikipedia.org $800,000;
- 25% of its inventory sells for $0.50 CPM (Cost per Thousand of Impressions) and generate Wikipedia.org $400,000;
- and 25% of its inventory goes unsold. It could then be argued that if Wikipedia.org would open up its site to advertisers, it could generate $2.8 million per month off display/banners advertising.
Wikipedia.org’s Search Revenue
We’ve already looked at the difference in the propensity to search on a search property vis-a-vis a content website. On Google and other search engines, you can estimate that 100% of visits lead to a search query. Total clicks to both organic and paid results might be 95-100% of the total queries (assume up to 5% do not click on anything). On content sites, historically we have seen a 20% proportion between monthly uniques and total search queries. To clarify a point I made in the earlier post, I am not saying that 20% of unique users will search something on a property’s site search box, we are saying that generally speaking, in private and public discussions with people working in search or who work in publishing and have struck search deals, you can see a site approximating a 20% proportion between monthly search queries and unique users.
We would also project that as the unique users and pageview count increases, and in particular on a site like Wikipedia.org where there is excessive amounts of hyperlinks, the number might be lower. But, once again for the sake of this analysis, we project that 20% of the unique user number represents a fair estimation of search queries per month: so 20% times 109M, or up to 21M search queries per month. Note that this translates to 726,666 daily searches.
About 5% of clicks off a search engine go to paid results. This number can go from 1 to 30%, but for this analysis we will project search revenue using a 5% click through rate (CTR) to paid results.
According to Fathom Online’s Q1 2006 data, the average Cost per Click (CPC) were $1.39. Wikipedia.org can negotiate at least a 50% revenue share from a paid results partner, so it can generate: 21.8M search queries x 0.05% CTR x $1.39 CPC x 50% Revenue Share = $757,550 per month in search revenue. We’ll assume that since it is already heretic to run advertising on Wikipedia.org, there are no revenues from licensing of its content, or sponsorships, video pre-rolls or of course, pop ups and pop unders.
In a given month, Wikipedia.org stands to make $757K in search plus $2.8M in display banner ads, or $3,557,550. Projected over 12 months assuming no growth, that’s a whopping $42M per year in revenues. Yes, not too shabby. Of course, we stress some obvious realities: if Wikipedia.org served ads, only 1% of the sites that currently link to it for free would continue to link to it; this would pummel its PageRank strength (notice how often Wikipedia.org’s result is tops on Google). This would effectively reduce traffic and potential revenue potential.
COSTS
We’ll assume that like today, Wikipedia.org will not spend anything on marketing.
The bulk of Wikipedia.org’s expenses are related to tech (hardware, hosting and bandwidth). On the Wikipedia.org entry on Wikipedia.org, it is claimed that its 2005 4th Quarter expenses were $321,000, of which 60% or $192.6K were related to hardware, per quarter. Project that times four and it’s almost $800K per year. Note that Wikipedia.org’s traffic seems to have grown three-fold since 2005 Q4 (according to Alexa), but since a one unit increase in traffic does not lead to a one unit increase in bandwidth and IT costs, we cannot simply triple that expense. If we did though, it would be $2.4M per year now. For a second metric, let’s use YouTube as a gauge. According to comScore Media Metrix, in September, 2006, YouTube generated 66M worldwide uniques vs. Wikipedia’s 153M worldwide. Yet Alexa ranks YouTube as the 9th largest property and Wikipedia.org as the 15th. But since YouTube hosts video content and Wikipedia.org hosts text-based content, we’ll assume that Wikipedia.org’s bandwidth fees are at the very most 10% of YouTube’s: $100K per month, or $1.2M per year. Add in hardware and everything else and you’re looking at $2M per year in Tech costs. Average out the Wikipedia.org growth model IT cost estimate of $2.4M and YouTube-based model IT cost estimate of $2M and you get annual IT costs of $2.2M. Currently, Wikipedia.org does not pay its contributors.
That’s its appeal. But if it were a for-profit entity, I doubt many people would contribute. But, many would nonetheless: YouTube’s users bulked up its content for free and helped the founders cash in; Digg has seen explosive growth and it’s certainly a business. Point is: on this one, don’t make any assumptions. Here, it can go either way: you can assume that it can still pay $0 or start paying out to regular writers. Estimating how much that would be is hard, sort of. Let’s look at two metrics: Weblogs Inc. pays contributors $500 per month. Wikipedia.org has - according to its own entry - 27,000 users who edit at least 5 articles per month; there are 17,000 English users who edit on the English site. Digging further, we see that 4,000 people edit about 100 articles per month. Clearly, we can estimate that Wikipedia.org can “survive” with 1,000 actual writers who know what they are talking about. This is guesswork, but there could be 1,000 writers and 4,000 editors, over time there’s a churn where editors “graduate” to writers and some writers move on to find new hobbies. So say you were to pay the writers $250 per month, over a year, that’s 1,000 writers x 12 months x $250/month = $3M for content. Play with all the variables if you wish: double the rate, that’s $6M (though I doubt anyone contributes to Wikipedia.org for financial gain). Double the number of writers but leave the rate the same, you’re at $6M again. While many help out with Wikipedia.org pro bono, assuming it was a for-profit, it would probably have to pay for administrative employees (which we assume it does today anyway since only 60% of its budget is spent on hardware). Project $60K per year for 10 full-time people and you have $600K in administrative costs.
You tally all of the costs: + annual IT costs of $2.2M
+ annual administrative costs of $600K
+ annual content costs of $0, $3M or $6M and you are in the $3-10M ballpark for total costs.
The variable clearly is the content. But even if it were at the high end, you can see that with its enormous traffic and quality content, it could generate a yearly profit of $35 million! Of course, this is all for entertainment. So, we know the revenue and profit potential.
VALUATION MODELS
Publicly-Traded Company Basis
Looking at a basket of companies in the content, social networking, user generated content space that could be seen as reasonable comparables of Wikipedia.org, you get a P/E multiple of 30. Of course, you have to add a liquidity discount, so say 50% to be conservative, so a P/E of 15 times earnings. Multiple of 15 x a profit of $35 million = $560M valuation.
Recently Conducted M&A Basis
Last year, the average multiple acquiring companies paid was over 15.9 times EBITDA. This number goes up considerably, News Corp. for example paid 40 times EBITDA for IGN Entertainment, but IGN’s got a deep management bench, a long history of setting and meeting targets (I presume) and it has 300 employees. All to say, let’s be really conservative and estimate that given all of the factors and what if’s we outlined, Wikipedia.org would only get 15 times earnings, awfully close to the publicly-traded multiple after we applied a liquidity factor. That’s a multiple of 15.9 x a profit of $35 million = $600M valuation. Average out method 1 and 2 and you are looking at roughly $580 million market value for Wikipedia.org. Incidentally what News Corp. paid for MySpace’s Intermix last year. Again, we’re only having fun here, but while we’re at it, maybe just maybe we need to take a look at that Wikipedia.org charter again… If you would like other crazy valuation or off-the-wall estimates, email me at ash[at]mojosupreme.com
[Editor’s note: The most interesting thing about this analysis is that the first time we did this exercise, we used Nielsen Net Ratings number, which gave Wikipedia.org a lower unique count, as such, that gave us a valuation under $400M. Adding comScore Media Metrix, the value shot up to $600M, suggesting that indeed, valuations should probably stick to revenues and profits and not eyeballs…]
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