IP Democracy: How to Value Video Sites

Business Week’s Steve Rosenbush has this piece today about the crazy dichotomy that has emerged in valuing video-based web sites. On the one hand, VCs are pumping money into sites like VideoEgg, Sony paid $65 million for Grouper and MySpace has now been boosted (or burdened) with the famed $15 billion valuation.

On the other hand, there’s…Mark Cuban, who tends to spout off in pointed directions and this time Cuban says that only a “moron” would buy hot video sharing site YouTube.

But the truth lies somewhere between these two extremes. As Rosenbush points out, Internet video’s value can be measured along a continuum of criteria, not the simply eyeballs-captured basis used for valuing a traditional video.

While the value of each company clearly depends on its particular performance, the factors that are proving important for Net video players are quite different from those of traditional media companies. In traditional TV, more viewers mean more money. The correlation is direct, although advertisers pay a bit more for younger viewers.

That’s not necessarily so online. A smaller audience may be more valuable than a big one, if the small one does the sorts of things that advertisers like—such as clicking on ads, buying products, or visiting related content. The bottom line is that Net video companies can be judged on a wider range of factors than traditional media companies, which makes some of them worth more and some worth less.

For this reason, namely that the metrics for valuing web-based video are, relatively speaking, all over the map, it’s almost impossible to determine the market value of most Internet video sites. Right now, the market value is whatever the specific buyer and seller agree it is and no two companies seem to be cutting deals the same way.

That’s why worries over YouTube becoming just another Napster, doomed to be brought down in take-no-prisoners copyright litigation, seems somehow misplaced. It’s true that there are similarities between Napster and YouTube, but it’s also true that there are differences. The biggest difference: the record companies have learned, or should have learned, from their file-sharing fights that lodging lawsuits doesn’t boost the bottom-line.

In Rosenbush’s piece, Cuban is far more tempered than in recent days. He merely suggests that the copyright issues need to be cleared away before YouTube can sell it, and on this point he sounds wise.

“I don’t think an acquisition would be smart until all the copyright issues are decided. It would be reminiscent of BMG buying Napster,” Cuban said in an e-mail to BusinessWeek.com. “Personally, I think YouTube, like Napster, can help drive sales of products. But my personal opinion isn’t copyright law. The (unsuccessful) arguments in favor of why Napster should be allowed to continue in 1999 were similar to the ones being made for YouTube (which raises doubt’s about YouTube’s future),” Cuban said.

Posted by Cynthia Brumfield on October 2, 2006 8:34 PM to IP Democracy