Last year, I published the 13 Most Web Explosive Startups of all time and ranked Paypal at #8, ironically, eBay, who bought Paypal for $1.5B, ranked #4. To see who was #1, read the entire post here.
Paypal is king of online transactions, eCommerce in the USA by 2010 will represent a $300B segment. Online advertising is getting everyone excited but will be, at best, a $30-70B industry. As such, Paypal will clearly prove to be a bigger and better acquisition as time goes by.
We’re not alone in that sentiment, one that is obviously shared by Stifel Nicolaus Internet analyst Scott Devitt. In a recent post on Paid Content, it was mentioned that:
Ebay could be contemplating an IPO for a minority stake in its PayPal unit, according Stifel Nicolaus Internet analyst Scott Devitt, reported by TechTraderDaily. Devitt estimates that PayPal accounts for about $7 billion to $9 billion of eBay’s $48 billion market cap; he thinks the company could be worth $15 billion on a stand-alone basis.
Wow. While Rupert Murdoch, god bless his style, likes to argue that MySpace is now worth $10B, I think Paypal could easily be worth the ranges that Devitt throws around. After all, Amazon’s 2006 financials read as follows:
2006 Sales: $10.7B
2006 Net income: $190M
P/S: 2.69
P/E: 108
Forward P/E: 52
Market Cap: $32.5B
I think for Amazon, sales is somewhat irrelevant because their margins are slim. But as an e-commerce play, seeing that they’re worth some $32.5B on $190M in net income is key.
So, what’s Paypal’s contribution?
In “You’ve got Cash: Why eBay Loves Paypal“, we outlined that
“PayPal’s first-quarter revenue grew 31%, to $439 million, at a time when eBay’s core shopping business grew just 23% and active buyers and sellers grew 10%. (…)
Last year, PayPal processed about 6% of all online payments worldwide. And in the first quarter, roughly 40% of the $11.36 billion in payments that PayPal processed originated on sites other than eBay’s shopping properties. “The off-eBay business will, at some point, eclipse the on-eBay business,” says Scott Thompson, PayPal’s chief technology officer.”
So looking at that, Paypal does about $1.5B-$2B in sales, but given its fee structure:
* PayPal is Free for Buyers. Once a buyer sets up a Paypal account, then it costs nothing to send money to other PayPal users. The funds are withdrawn from the user’s credit card or bank account, or both. PayPal does not charge buyers to send money.
* PayPal Charges Sellers 1.9% to 2.9%. PayPal will only charge you to receive funds. Using a special surcharge formula, PayPal will bill you whenever you receive a payment from a buyer.
1. For receiving transfers under $3000 USD: the fee is 2.9% + $0.30 USD.
2. For receiving transfers $3000.01 to $10,000: the fee is 2.5% + $0.30 USD.
3. For receiving transfers $10,000.01 to $100,000: the fee is 2.2% + $0.30 USD.
4. Receiving transfers over $100,000: Paypal charges 1.9% + $0.30 USD.
I think you can easily argue that Paypal’s net income is equal if not higher than Amazon.com’s. I’m not saying, of course, that Paypal is today worth anywhere near what Amazon.com is worth… but over time?
Forget the enormous fact that even eBay’s CTO observes that Paypal will one day be larger than eBay, let’s see just how big Paypal can be.
Just assume that Paypal will in 2010 have 5% of the online transaction business worldwide. We don’t have figures for that offhand, but in the US, online commerce will be a $300B segment, at 5% of that pie, Paypal will generate $15B in the US alone! That’s 10x what it’s making now!
Yes, the multiples are very different, I know, but Google will make $15B this year in ad sales, and sure, it’s got a dominant position and all, but Google is worth $150B. I’m not, in any shape, form or fashion telling you that Paypal will get those multiples etc., but Paypal’s defensible position will be quite strong.
Alas, even at 1x sales, that implies a $15B value for Paypal by 2010. Not too bad… Oh, that is in the US-only… start to play with the variables and you see why Paypal’s future is not necessarily within eBay.
Of course, anyone who knows the history knows that eBay bought Paypal on its terms because had eBay squeezed Paypal out, then yes, a lot of eBay shoppers would have been upset, but the flip side is that Paypal would have lost a massive amount of business, since it was getting then, as it is getting now, a lot of sales off eBay. This is somewhat similar to what happened to Overture who sold to Yahoo! somewhat cheaply… because the bulk of its distribution came from other sites…
All to say, how much of eBay’s DNA is now in Paypal is a question only insiders know… but it doesn’t take an insider to realize that sooner or later, eBay will spin off Paypal and cash in, big time.
Let that serve as a lesson to buyers, and sellers, worldwide.
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WatchMojo NewsletterSome people would say that I have been a TV bogeyman myself, having penned articles warning TV executives of impending doom and Armageddon day, with posts like:
- Understanding TV executives Angst and Envy
- Web Video Represents $150B market cap in 2011, but not for TV companies
- Digital Revenues are Never Incremental for Old Media
- Will TV companies face same fate at Print Companies?
- If You’re Old Media, What Would You Do?
and more. Of course, as a web video producer, publisher and syndicator, I could be accused of trying to instill a sense of paranoia in TV executives’ minds. Then again, I could simply be voicing that others too see.
Vint Cerf is biased too, no doubt, as VP of google, who recently bought YouTube and became the arch-enemy #1 of TV companies around the world.
Speaking to an audience of media moguls, he said:
The 64-year-old, who is now a vice-president of the web giant Google and chairman of the organisation that administrates the internet, told an audience of media moguls that TV was rapidly approaching the same kind of crunch moment that the music industry faced with the arrival of the MP3 player.
Yikes!
“85% of all video we watch is pre-recorded, so you can set your system to download it all the time,” he said. “You’re still going to need live television for certain things - like news, sporting events and emergencies - but increasingly it is going to be almost like the iPod, where you download content to look at later.”
(…)
Dr Cerf predicted that these developments would continue, and that we would soon be watching the majority of our television through the internet - a revolution that could herald the death of the traditional broadcast TV channel in favour of new interactive services.
“In Japan you can already download an hour’s worth of video in 16 seconds,” he said. “And we’re starting to see ways of mixing information together … imagine if you could pause a TV programme and use your mouse to click on different items on the screen and find out more about them.”
All to say, some TV companies are making changes to their game plan, others are putting their head in the sand. Ultimately, I’ll all but given up watching TV. I get 99.9% of my video consumption from the web there days… and Im probably not alone.
According to Silicon Alley Insider:
NY-based social networking/photo sharing site Fotolog has been acquired by Hi-Media Group for a combination of cash and stock worth $90 million. France-based Hi-Media adds Fotolog to its growing portfolio, which includes an ad network and a micro-payments business.
Invariably, the comparisons to Photobucket will come up, so let’s get that out of the way: yes, Fotolog is “only” getting 1/3 of what Photobucket got, but given its financials and traffic chart, it’s a very good deal.
One VC, Christian Leybold (with probably the best blog address for any VC) jumps in to clarify, however, that:
This is not “just another” photo sharing site, but a communications platform where people communicate through daily uploading of one picture and comment on each others works.
I had not heard of Fotolog until last week, when Valleywag mentioned it might be on the block. Of course, who gives a flying you-know-what if I’d not heard it. The key thing is that many prospective buyers had heard of Fotolog, Silicon Alley reports:
Fotolog estimates 2007 revenue of about $2.3 million. Last month, the company signed a 3-year search and advertising deal with Google that we estimate is worth a total of $75 million. Fotolog says sales have jumped 245% since January and that the company will break even within six months, resulting in positive operating income next year.
Take out your calculators folks, at a forecasted 2007 revenue of$2.3M, a net-of-transaction fee sale of $90M implies a pretty rich 39 prices-to-earnings ratio. Now, it’s one thing for a cash-rich traditional media company seeing audiences and revenue growth rates migrate to the web pay such a premium, but for Hi-Media, a French-based new media entity pay $9/user is impressive.
This is a nice payoff for the financial backers, who have put in $12M thus far.
The thing that I don’t get, frankly, is why would Google pay $75M over 36 months, or $2M/month, to simply sell ads if it can pay $15M more and buy the whole darned thing.
I understand all about time value of money… but, you’d think that after paying $900M to MySpace over 45 months (which turned out to be more given MySpace’s torrid traffic and revenue growth) a year after News Corp. bought MySpace parent Intermix for $580M, the brass at Google would be getting its corporate - and not business - development team making these deals.
In fact, Hi-Media is an ad network, much like what Google is today.
Regardless, I think some buyers just understand that some assets will not be cheaper tomorrow, only more expensive, and that’s if they are even still for sale, that is… because we’re in the early stages of a massive consolidation. This is nothing new, at the turn of the 19th to 20th century, we saw something of a similar scale. From Wikipedia.org:
The Great Merger Movement was a predominantly U.S. business phenomenon that happened from 1895 to 1905. During this time, small firms with little market share consolidated with similar firms to form large, powerful institutions that dominated their markets. The vehicle used were so-called trusts. To truly understand how large this movement was—in 1900 the value of firms acquired in mergers was 20% of GDP. In 1990 the value was only 3% and from 1998–2000 is was around 10–11% of GDP. Organizations that commanded the greatest share of the market in 1905 saw that command disintegrate by 1929 as smaller competitors joined forces with each other.
Sure, the dollars today are larger, but guess what, we don’t have 1B people on earth, we have over 6.5B and one - and only one - medium has the ability to connect people: the Web. It’s not so much of a land-grab mentality as one that “only the paranoid survive.” Cash is king, but on a balance sheet, it’s an afterthought. This is a cash and largely stock deal… and if you are a European ad network like Hi-Media that trades on the stock exchange, well, your stock is as good as gold, or cash.
And, of course, don’t kind yourself, the fact that the VCs backing Fotolog will keep their payout in Hi-Media stock implies that Hi-Media is itself potentially positioning itself for a flip. This is clever financial engineering, something I’ve seen in my days: IGN paid my company 11.35 times EBITDA, and my colleagues (who owned the company) agreed, then IGN turned around and sold for 40 times EBITDA, that little bit of financial engineering netted IGN shareholders (including Great Hill Partners) $28.65M more. Of course, paying 39 times sales, it seems unlikely that Hi-Media is doing this for any other reason that getting an asset (10M members) that it feels it can monetize and potentially flip.
Google has filed patents for an application titled “User Distributed Search Results.”
According to Nick Carr:
Google researchers describe the concept of “a universal distributed search system [that] allows users to find and distribute search results (possibly including advertisements) to those with whom they communicate. The search results can be easily distributed by the user via a simple interface that allows the search results to be easily added to the user’s content.” Google has seen that people often put links or other references to related content into emails and other messages they send to friends and acquaintances. The tool described in the patent makes the discovery and inclusion of such content simpler and faster. In essence, it establishes a new way to syndicate Google search results, from friend to friend.
In a second application, titled “Facilitating manual user selection of one or more ads for insertion into a document to be made available to another user or users,” Google researchers describe an associated tool for allowing individuals to insert into their messages ads related to the search results they include. The ads can be either automatically generated, as in the AdSense system, or chosen individually. The tool, as the researchers describe it, “facilitates insertion of manually selected ads into a document that is to be distributed (e.g., transmitted, published, and/or posted) such that the document is to be made available to other users. For example, manually selected ads can be inserted into an email to be sent to another user, a blog to be posted for viewing by other users, a message to be sent to another user, a message board entry to be posted for viewing by other users, a document published and made available to other users, etc. Hence, [user-distributed] ads provide a scaleable advertising platform that achieves at least some of the benefits of manual targeting.”
Details of the patent include:
Consider, for example, a user that sends an email to members of her book club informing the members of what next month’s book is. Suppose that the user has manually inserted into the email “results” such as an image of the book cover, a UDS search result to a review of the book, and a normal amazon.com search result. When the recipients of this email open it, side-bar, content-relevant ads might also be provided. Such side-bar, content-relevant ads might have been automatically determined using, perhaps among other things (e.g., the textual content of the email message), information derived from the manually inserted “results.” For instance, Amazon might have an ad offering free shipping for purchases made in the next 48 hours.
Naturally, there’s a third application. That one is about:
“Providing rewards for manual user insertion of one or more ads into a document to be made available to another user or users, for distribution of such documents, and/or for user actions on such distributed ads.” Such rewards, according to the filing, “might include one or more of (a) a monetary amount, (b) an enhanced reputation or reputation increase of [the user], and (c) a credit.”
That’s interesting, and it’s a direct answer to Facebook’s eventual plans, that’s for sure. We covered this in “Memo to Facebook’s Ad Sales Team.” As we highlighted in Memo to Facebook’s Sales Team, much the same way that Google looked beyond Yahoo! dominance in CPM-priced banner display ads to master CPC-priced text ads, Facebook can look at maximizing its Database of Connections to fine-tune referrals and recommendations and champion CPA-style ads. Then again, there are a million things that can go wrong with that theory, too. Then again, if I was Facebook’s Chief Revenue Officer, I’d recommend something very very different to hit $10B in revenues by 2014 (ten years after being founded, the time it took Google to hit $10B in revenues).
One thing that has sheltered Yahoo! (if we can call its recent woes “being sheltered”) is the vast amount of user information it has via My.Yahoo and every other single application that requires a signup.
While Google has click-for-click far more data in terms of click stream, user behavior online etc. (mainly because it has a better sense of what goes on on the Web vs. Yahoo! who knows that is going on on its network of sites, which are either #1 or top 3 depending on who you ask).
But one thing advertiser, at least the large, Fortune 500 ones want, is not the kind of data that comes with click behavior, but rather, the kind that comes with being able to target users by demographics: age, gender, interests, etc.
This, and this mainly, is why Google paid $1.65B for YouTube. Sure, the fact that it bought the largest video sharing site was a great motivation too. But Google’s management was probably smart enough to know that a good chunk of the videos were either of dubious quality or copyright nature… the major hedge was that it would get a lot of user data on video-watching audiences. That was the key.
I say all of this against the backdrop of Jeremy Liew’s post on whether contextual ads would work with video. Contextual? Sure. Clickable? No. When you read, your hand is on the mouse, when you watch, your hands tend to be off… as such, clicks are not a good metric at all… but combining Google’s database of clients, its reach, its understanding of surfing patterns with all of the data it now has on YouTube users, then yeah, sure, it can sell plenty of contextual ads.
Social networking advertising revenue is set to become a $2.15B per year segment by 2010. That’s a large number, for sure, until you consider that all of online advertising in 2010 will be anywhere from $30B to $70B, depending who you ask.
Advertising is what we’re all obsessed with now, but e-commerce is by itself a mammoth segment of all online dollars too: e-commerce sales in the US in 2010: $300B, vs. advertising market in the US in 2010: $30-70B.
Today News Corp. announced that it was considering opening up MySpace to allow for commerce to take place. You might recall that just a few years ago, FIM COO Mark Jung had suggested just that, but MySpace founders turned that idea down. Today, with News Corp. becoming more impatient with MySpace’s revenues being far lower than its traffic would suggest they should be, all options are on table.
I think MySpace is, believe it or not, not getting the respect it deserves. Sure, it has problems, a confidence issue and many other core operational things to overcome, but for $580M, it is definitely looking like the best Web M&A deal of all time.
Promising Signs: Got Coke?
Coca-Cola recently paid $1M to sponsor the main page of News Corp.’s MySpace for one day. Coca-Cola’s relationship with News Corp. runs pretty deep, think those little, ok, large cups on American Idol next to the judges.
Coca-Cola’s decision to pay such a symbolically high amount to sponsor on a social networking site is indeed a watershed event, but it does show that MySpace - despite being the largest social networking site around and the largest site period as measured by pageviews - will continue to face many challenges with advertisers.
For one, no site’s main page will ever get a very high portion compared to the site of internal pages. At my old gig as VP of ad sales for a mid-sized publisher, our main page got 4M pageviews though our entire site got 40M pageviews, so 10%. For some sites, it’s no doubt more, for others, it’s far less. On MySpace, I’d guesstimate the main page is in the 1-3% range, not more. The problem, obviously, is that the main page and channel main pages are probably the only areas of the site where Coca-Cola is comfortable advertising, and that is a problem.
For purposes of illustration, in News Corp.’s recent annual report, they unveiled some very impressive stats, which I outlined in my News Corp.’s FIM: From Concept to Reality post. One of them was that in one day, MySpace did 3.4B pageviews. That’s an insane amount of pageviews for any time period, let alone 1 day. Now assume MySpace’s main page gets 5% of that 3.4B, or 170M pageviews, then the eCPM is $6. It’s nothing that would get Rupert Murdoch’s attention away from his recent acquisition of the WSJ, but it’s certainly respectable. But assuming that $1M/day was spread on the entire site, the eCPM would be $0.29 (or, according to Mary Meeker, $290). Truth is, you can buy advertising on MySpace for CPM approximating $0.01 because there’s just way too much inventory there.
Caught Between a Rock and a Hard Place
Naturally, it’s easy to think of the recent brouhaha on Facebook - the #2 social networking site and Silicon Valley’s darling du moment - where mainstream advertisers yanked their campaigns after discovering that they were advertising alongside some fascist UK party’s profile…
To counter this, Facebook will be rolling out a very targeted ad initiative that will help it in controlling what displays where, but will surely irritate and turn off its users. I for one don’t mind, for example, when I see an ad in Gmail, but many do. When Facebookers start to see a feed with targeted ads, their reaction will probably be negative, and swift.
Both MySpace and Facebook will be introducing plenty of bells and whistles to tighten targeting of ads and control of dubious material, but the truth is that dubious material becomes a very subjective.
Hip Factor
Om Malik recently mentioned that Facebook is striving to have what MySpace already has, reiterating once again the fascination many in the Valley have over FB, when MySpace is still clearly much larger and in many ways, more hip.
Of course, who is hipper is even more subjective, but it’s indeed true that anyone who was in college over the past few years will have become comfortable with Facebook’s ability to keep one’s friends connected, but by and large, the people that kids look up to as being cool and in will still favor MySpace for years to come. We’re talking bands, movies etc. This was very well articulated, in fact, by a commenter on the above-linked GigaOm post.
And this raises an interesting progression in MySpace: when I first saw MySpace ages ago, it was a social network for individuals. Today you’d almost think that it’s become a major commercial tool to create an online hub for artists, musicians, actors, movies, fashion brands, consumer goods etc. So over time, sure, MySpace loses some of its soul but by the same token, it becomes even more known as a place where artists turn to to create online personalities, and that is what really drove MySpace’s viral effect early on.
Clean up Your Act
I think that much the same way Google’s decision to run ads on YouTube [disclosure: WatchMojo.com is a content partner on YouTube] might inadvertently help Google reduce the amount of copyrighted content and make it more of an ad-friendly forum, MySpace’s continued progression towards being a marketer’s dream to promote acts, artists, products and services might in fact drive the seedier elements away to the netherworlds of the web and help Rupert Murdoch make MySpace’s revenue profile befit its staggering size and reach.
All in all, the future isn’t so promising for rates on social networking sites, mainly because to increase rates, site operators would upset and turn off users. But that does not mean, as the Coca Cola buy shows, that revenues will be disappointing too.
The problem, of course, is that the demand vs. supply is pretty clear: a few winners will generate meaningful revenues in social networking and these are the Myspace, Facebook, Bebo etc., of the crowd, but most of the recently financed social networks will bleed dollars.
And ultimately, it’s all about the size of the pie: social networking remains a $2B in 2010. Given online ads will be $30-60B, that’s a small figure any way you dice it. For that reason, today’s suggestion that MySpace would embrace commerce is one smart path to take.
