wider audience than anything else, and has fewer intermediaries taking a cut. Stuck in the middle is YouTube/Google easily (and happily) collecting its margin. It’s only a matter of time before more artists follow Louis down this path.
And YouTube’s appeal isn’t limited to music, comedy and entertainment. The Khan Academy is using YouTube as platform to disrupt education. While it is a non-profit that produces free, high quality educational content for view via the YouTube platform, let’s not dismiss the fact that the Khan Academy is proving the power of the platform as a way to not only reach those interested in learning, but to fundamentally change the way eager students learn. TED Talks has also used YouTube in a similar manner as a platform to bring informative, educational videos to the masses. We’re only just beginning.
YouTube and the Innovator’s Dilemma
YouTube is following the path of the Innovator’s Dilemma, and all of the dominant market leaders in the sectors impacted by the company are already on high alert (if you haven’t already done so, goread the book now, or for a short-cut read my blog post on it). YouTube has firmly entrenched itself on the low-end of the video-watching marketplace, and I mean this both in terms of Internet video, and video in the broadest possible terms. Further, YouTube has significantly deflated the cost of distribution and consumption, making both effectively free in many contexts for the content producer and the viewer respectively. In doing so, YouTube generates a fairly high margin on its advertising dollars on.
As YouTube has earned more and more money on the “low hanging fruit” (aka the free stuff) they have been able to step up their acquisition of premium, higher quality content. Some of the aforementioned deals are evidence of this. In other words, the company is using its entry level product, which has helped it gain market share, in order to fund its climb higher up the distribution tree. As a result, the company is in the midst of a further pivot up its S-curve (H/T to Your Brand is Showing for the graph).
The current technology is the combination of TV/Cable/Internet that we presently view video on, while the emerging technology is YouTube. In my imprecise opinion, right now YouTube is somewhere around the big red dot that I drew on top of the chart. The company is on its parabolic ascent, but has yet to reach and cross the current technology in its prowess, largely due to the defensive posturing of the existing infrastructure. But that can’t last forever. As the chart indicates, and as is typical with disruptive innovation, YouTube’s day is coming rather quickly. Keep in mind we’re talking about a company and technology barely more than six years old. It was within the past two years that we were introduced to high definition video for streaming, that we were able to watch YouTube video’s on our television, and even more recently, that content was divided into organized channels.
Not long ago, YouTube had a major success in acquiring streaming rights to a premier Indian cricket tournament for live games. Viewership surged far quicker than anticipated, and was more profitable than anyone expected. Soon many of the major sports leagues will have their television contracts expiring, and one can imagine that YouTube will be a player for the rights, especially considering their already strong relationship with leagues like the NBA and NHL. If YouTube were in fact the first to bring mass-streaming of live sporting events to the American masses, they would be the first to truly liberate video viewing from the existing infrastructure and into the digital age. After all, live sports viewership is probably the single largest impediment to would-be chord cutters today (myself included).
YouTube gets this, as is evidenced by what CEO Salar Kamangar recently had to say: (h/t to New Markets Advisors, I strongly recommend reading their write-up on the disruptive power of YouTube as well):
“When you think about the impact cable had, we think we’re in a position to have a similar impact for video delivery, like what cable has done with broadcast. In the early ’80s, you had three or four networks. Now those three or four networks are responsible for 25 percent of viewership, and the cable networks are responsible for all the rest. Right now, the fraction of traffic that is Web video is small relative to broadcast and cable, but it’s growing at a fast rate. What’s amazing is that the Web enables you to build a kind of channel that wouldn’t have made sense for cable, in the same way cable enabled you to build content that wouldn’t have made sense for broadcast. You couldn’t have done CNN with the broadcast networks; you couldn’t have done MTV with the broadcast networks.”
And here’s a great TED talk with Chris Anderson, Editor in Chief of Wired Magazine, on “How YouTube is Driving Innovation”: (obviously an embedded YouTube video)
Putting the Story in Context with the Numbers
Now that I have established a benchmark for how awesome and disruptive YouTube is, the next step is to take a look at the number. If you’ll remember, my initial premise was that one can buy one of the most disruptive, innovative companies today without taking any of the venture capital risk, for free. This requires that I establish two premises: 1) that Google without YouTube is at most, fairly priced, if not downright cheap, and 2) that YouTube as a stand-alone entity would be worth a sum exceeding $10 billion in market cap, and in a range that reaches northward of $20 billion. For that I will have to follow-up with a second post, but I will not leave just yet before beginning the next step of the argument.
Using consensus analyst estimates on revenue for 2012 (courtesy of Business Week), a 10% WACC and 4% perpetual growth, Google has an earnings power value plus growth of $680, that is a 7% premium to this price. YouTube itself accounts for a mere 4% of Google’s in this estimate, and if you removed YouTube’s revenue contribution entirely from Google, the price drops to $653, a 3% premium to today’s price. From this, we can deduce that YouTube represents about $27 per each share of Google, or a total intrinsic value of $8.7 billion.
Before next week’s post on how to value YouTube, I just want to finish off by stating my belief that $8.7 billion is way too cheap for such a valuable web property, especially when companies with lower revenues like LinkedIn and Zynga are trading for near $10 billion, and Facebook is pricing at over $100 billion. In a recent social brand value analysis by BV4, a brand value ratings agency, Facebook checked in with the highest brand value of any social web property at $29.1 billion, with YouTube in second place at $13.3 billion. Assuming a $100 billion market cap for Facebook, and applying Facebook’s brand value to market cap ratio, that pegs YouTube at a $45.7 billion value.
By Elliot Turner, JD of Compounding my Interests.