YouTube's Magic Number – $1.5 Billion

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I spoke with NYPost writer Sam Gustin for a few minutes last night as he was preparing an article on YouTube. His article is now up – you can see it here. The most interesting part of the conversation was when Sam told me that a source, which he described as “a senior exec at a well known media company that has been in acquisition talks with YouTube”, told him that YouTube is absolutely willing to sell, but that the number must be “at least $1.5 billion.”

There’s been a lot of buzz around YouTube’s destiny and possible valuation over the last few months. It’s an interesting case study that I spoke about earlier today as part of my presentation at the “new new internet” conference in Washington DC. The bottom line is, YouTube has big traction but is also in a very fragile position.

The Good News – Tons of Traffic

First, the good news. YouTube is serving over 100 million videos per day, with 65,000 or so new videos uploaded daily. Things are going so well for YouTube that founder Chad Hurley was recently quoted as saying that they have no plans to sell and that an IPO would be “very exciting for us”.

There’s a potentially staggering amount of revenue that YouTube could generate off of those video views. While today advertising is fairly limited to banner advertising on the site, integration of advertising directly into videos is a significant opportunity. The addition of a simple static or video add into each video that appears at the end (and exactly where viewers eyes are as the video ends) would be easy revenue (see how Revver does this as an example). With 100 million videos viewed per day, assuming 100% sell through (impossible, but useful for analysis) and a $1 CPM, YouTube would generate $100k per day in revenue. As the site grows, this revenue opportunity would grow as well. There’s a probable reason why YouTube hasn’t integrated advertising directly into videos yet – discussed in more detail below.

The Bad News – Copyright Infringement

These 100 million daily video views aren’t people watching kittens fall aleep. Most of the popular videos on YouTube contain copyrighted material that YouTube shouldn’t be presenting in the first place. This isn’t just music videos and Saturday Night Live skits – if music is playing in the background while someone is dancing around, that’s still copyright infringement.

YouTube has some protection under U.S. law since they merely host this material posted by users. As long as they comply with the DMCA and take down copyrighted material promptly when requested, they are protected. That’s why you’ll often find your favorite bookmarked videos have vanished when you go back to the site.

YouTube has made significant efforts recently to reach out to copyright owners and has secured a couple of deals to mitigate the copyright issues they face. Nonetheless, Universal Music Group has recently slammed YouTube as a copyright infringer, and Mark Cuban, among others, has jumped solidly on the anti-YouTube bandwagon.

Adding to the problem is the fact that DMCA protection isn’t absolute. When YouTube puts ads on pages that contain copyrighted materials (see here), they are in risk of losing the protections of the DMCA. See this post for a more detailed description of how the DMCA works in relation to YouTube.

What does all of this mean? It means that YouTube must secure deals with copyright holders if they are going to go big time revenue-wise.

So Is YouTube For Sale Or Not?

Of course it is.

YouTube can’t even think about going public until they fix their copyright woes by securing appropriate deals with the right parties, and then generating real revenues and profits. That’s a long way off. If someone were to offer them $1.5 billion in the meantime…

The valuation isn’t crazy based on at least one comparison, by the way. Grouper’s recent sale to Sony for $65 million suggests a YouTube valuation of around $2 billion when you look at relative traffic. YouTube may get their $1.5 billion in the near future. But first they’ll have to find a buyer with a strong stomach for IP wars, and an even stronger legal team.

Our previous coverage of YouTube is here.

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