Eventually, the sale price will come out… but in the meantime, everyone is guessing that Conde Net paid anywhere from $10M to $65M for the Boston-based company.

All right, let’s get one thing straight: if CondeNet paid $65M for the company, I am shorting every single Web stock out there (starting with Google) cause indeed we are in a bubble and things will tank inevitably. 

Of course, I do not think we’re in a bubble (let’s not get into that now), so I highly doubt Reddit sold for anything that high.

There are two schools of thought:

- The first one is that CondeNet feels pretty desperate to inject some life into its growth potential and would overpay for an online asset like Reddit.  In this scenario it is not inconceivable that indeed, Reddit sold for top dollar, but, top dollar would not be $65 million.

(Some background: I was a member of the team that took on CondeNet head on when I was a VP in charge of ad sales, strategy, PR for an online men’s magazine.  We competed with GQ and to a lesser extent, Vanity Fair.  Eventually it put some resources behing Men.Style.com and trust me, it did not seem like a company that was even remotely desperate, it acted like a cool, calm and collected company that knew that it had missed the Web’s first round but knew that the game was in the first inning).

- The second school of thought is that Reddit realized that Digg had a large enough lead, AOL Time Warner was going all out in trying to catch up to Digg with Netscape.  These realities only made things harder for Reddit - even though their growth (after launching in 2005 and being backed by $100,000) is impressive and deserves considerable credit.

But, let’s be realistic for a second, CondeNet has enough firepower thanks to its income statement that if they were desperate, they could have made a major acquisition: we’re talking CNET folks.  Of course, CNET - despite its rush to be more lifestyle oriented - would not mesh with Conde Nast’s more sophisticated positioning.  And, my gut says that Conde Nast is so bullish on the quality of its content that most web-only content it sees is of low quality.  This is why they never made an offer for my old company, our content was a negative in their eyes.  What Conde Net is looking for, I presume, is technology and tech know-how to organize their content and funnel traffic to it.

At the risk of sounding holier-than-thou, sometimes us folks on the Web forget the magnitude and strength of our offline brethren.  The same applies to newspapers, yes, they are in some tough terrain right now, but all they need is one or two key investments and they are going to come back strong in 2007 and beyond.  But that’s a separate post.

Here is CondeNast - CondeNet’s parent - description according to Hoover’s:

While being Wired may hold a certain Allure, traditional publishing will always be in Vogue at Condé Nast Publications. Owned by newspaper publisher Advance Publications, the company publishes one of the most recognizable magazine portfolios in the industry, including fashion magazines Allure and Vogue, as well as cybermag Wired. It also produces newsstand stalwarts Glamour, GQ, The New Yorker, and Vanity Fair and newcomers like the popular Lucky (clothes and shopping). It runs Web sites through its CondéNet unit, including Epicurious (food and fine dining) and Concierge (travel). The company also produces publications aimed at Spanish speakers through Condé Nast Americas.

CondeNet’s parent Conde Nast’s sales for 2005 were $1.5 billion.  Conde Nast’s parent Advance Publications generated revenue of $5.9 billion.  That is as much as Google sold in 2005 and more than Yahoo!

Sure, I know, margins and growth are different; but cash is king and Advance has enough of the green stuff to make a serious run at most companies if it were desperate.  It’s not. 

Translation: there is no way Reddit would get $65 million, or even $50 million.  After all, if you are willing to fork over $50-65 million for Reddit, why not go all the way and pay $150 million for market darling and leader Digg (who according to Tech Crunch was asking that much in a potential sale).  Going for Digg for $150M and not Reddit for $50-65M only makes more sense if Digg claims 20M uniques per month while Reddit’s logs say 70K uniques per day.

So, what did CondeNet pay for Reddit?

True, Reddit’s little icons have grown to be ubiquitous online, but so have links by Del.icio.us, Digg, Blogmarks, co.mments, fark, furl, linksagogo, newsvine, shadows, spurl and Yahoo!  Oh, Google also got into the fray recently with… hmm… Google Base?  No, that was something else.

Point of the story is that in some markets, when all you have is technology and an audience, a founder realizes that the technology is not defensible (’twas quoted that Google would have “only” paid $100 million for YouTube’s technology), its audience is fickle and hard to grow, and it lacks any content.

Ah yes, content.  I firmly believe that content is king, distribution is queen but either one represents a monarchy and monarchies tend to be bloody and messy.  CondeNet/Conde Nast/Advance Publications has content galore but no way to really create an ecosystem for the content to flourish and jive together.  Enter Reddit.  CondeNast probably approached Digg too, but if they want $150M, there was no need to have that conversation go anywhere.

(When I set up the multi-branded network of Mojo Supreme (XMojo, YMojo, ZMojo, etc), I partially inspired myself from Conde Nast’s vast arsenal of brands… but online, this is trying to build an empire by building on a foundation that is 100 miles by 100 miles; you are better off building on a foundation that is 1 mile by 1 mile and you will be amazed at how fast you can build the tallest skyscraper in the world).

So my rationale is that Conde Net’s management saw a lean team (4 people) at Reddit who had secured enough seed money to get to where they are now, but faced a larger leader (Digg) and a hungry and somewhat desperate media conglomerate (Netscape of Time Warner). 

What CondeNet offers the Reddit guys is to actually leverage their technology, content management know-how and traffic patterns and apply to Advance Publications’ content (which they are a member of) instead of content they do not own the rights to.

This might not be the strategy.  Clearly these people are all smarter than I am.  But if they did not intend to do this, please make a note to thyself: do so, please. 

The lesson in Web 2.0’s current go-go days is that we are seeing a recycling and rehashing of content but there is little proprietary content to actually build a defensive audience around.  YouTube sold to Google because it did not own any of the content and it knew that giving in to media companies’ request to take down the copyrighted content would make it vulnerable to a massive flight of its audience (to other still renegade social network video sites that kept the media companies’ content up on their site).

Digg is probably finding it harder to find new diggers; especially since Netscape is paying Digg contributors to do for $500 what they were doing for free.  Whatever you think of Netscape’s GM Jason Calacanis’ “strategy,” economic determinism suggests it will work.  If it does not, it’s because clearly Netscape tried too hard and Digg found more willing newcomers to its ecosystem than it lost through a churn rate.

Alas, what I think Reddit sold for is a function of three deals:

1- Delicious sale to Yahoo! (direct comparable)
2- MySpace sale to News Corp. (indirect comparable)
3- YouTube sale to Google (indirect comparable)

1 - Delicious probably sold for $17.5 million, tops, and this is using Om Malik and John Battelle’s estimates.  I could be wrong, but these two gentlemen appear to know every single thing and person on the web; what they do not know, Michael Arrington knows 

($10-15 million range source; $17-$19 million range source; Wikipedia pegs it at $10-$30 million but come on, that ain’t no range!).

2 - Myspace’s parent Intermix sold to News Corp. for $580 million.

3 - YouTube sold to Google for $1.65 billion, or 2-3 times as much as MySpace sold to YouTube, but… YouTube was a leader in the red hot video space and had become the leader.  Furthermore, since the MySpace sale, MySpace went on to grow 300%…

Investors, bankers, lawyers, entrepreneurs, founders, management teams are a funny bunch.  Great people.  I have been involved in a handful of financing, M&A deals and trust me, everyone pretends that it’s a science, it’s not.  Warning: Cliche coming up, dealmaking is an art as much as it’s a science.

But like I outlined here, there is certainly - at least subconsciously - a relationship between YouTube’s price tag with that of MySpace; don’t kid yourself: Steve Chen and Chad Hurley did not want to sell too quickly so they integrated this potential growth rate in the sale price.

Similarly, Reddit probably benchmarked itself to Delicious, but there is one major difference in the valuation model: Reddit was not a leader in its space and with Netscape in the mix, it had two competitors (more if you count flip, flop and flap listed above…)

Delicious was an early player in the social bookmarking space.  Reddit (and Digg) are not Delicious clones but they are related in the sense that all three compete in organizing content online. 

Also, Reddit does not generate revenue and it boasts 70,000 uniques and 700,000 pageviews.

Tally all of these factors and you can estimate that Reddit probably sold for $10-25 million.  I’d narrow the range further and say that it was probably something akin to what Delicious got, so $15-20 million. 

In other words, Delicious’ early lead offsets the fact that the Reddit is not a leader (unique, unsystematic factor) but the overall market has risen (market, systematic factor).  These two things balance out.  You can bring in lawyers and accountants to make you feel like this is all a science.

If the Reddit guys got anything more, great for them.  They’re now a part of a major media company that will look to them for leadership online, hopefully the management and bureaucracy (assume one exists) does not drive them nuts. 

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