Internet Outsider

Those Irresponsible Publicity Seeking Analysts

Well, there was a bit of a traffic/linking explosion after yesterday's post about Jordan Rohan's MySpace-might-be-worth-$15 billion musings.  Jordan mostly took it on the chin, as did I for not dismissing his comments as idiotic and irresponsible. 

And maybe the howlers are right.  Maybe Jordan's a braindead moron who just wanted to see his name in print.  Maybe MySpace is such a pile of junk that it will never be worth anything more than Newscorp paid for it (This seems to be the general line of reasoning: Newscorp paid $600 million a year ago, so the property can't possibly be worth much more than that).  Maybe.

But here's the thing: Yesterday, amid the screams, Jordan's comments triggered some intelligent debate.  Could MySpace be worth $15 billion someday?  (The equivalent of about 1/3 of a Yahoo! and 1/10th of a Google)?  If not, why not?  If so, why?  I haven't read Jordan's note, so I don't know what his reasoning was, but I'd be interested in hearing it.  And so, I imagine, would many thoughtful observers, whether they ultimately concluded that Jordan is a far-sighted thinker or a reckless idiot.

Back when Google went public, at $85, the consensus was that this price was absurd: A six-year old search engine worth $30 billion, almost as much as Yahoo! or eBay--how ridiculous was that!?  And, so, dutifully, carefully, terrified of being ridiculed, most analysts painstakingly constructed 10-year DCF models, with perfectly calculated WACCs and terminal multiples, and ventured--to howls of ridicule--that Google might someday, if all went well, be worth as much as...$150!  And then, when Google blasted through $150, the analysts scrambled back to their DCFs, adjusted their assumptions, and carefully, dutifully ventured that Google might someday be worth...$180!  More howls.  Then Google broke $200.  And analysts raised their targets to $220.  And there was pandemonium--those cheerleading idiots were just taking a time-machine back to 1999!  And so on.

Bottom line: Back in September 2004, I, for one, would have appreciated an analyst with the balls to explain why Google could be worth not $150, $180, or $220 after a few years, but $500 in one year.  Even if I decided that the analyst was an imbecile, I'd have been grateful to him or her for helping me think through the extremes. I would have the same admiration for an analyst who made a compelling argument that, say, GE, Microsoft, the DOW, or some other sacred cow was about to drop 90%.

So, here's a toast to Jordan Rohan, prophet or moron.  And here's a toast to any analyst with the guts to say something interesting.

Could MySpace Be Worth $15 Billion? Easy

The most surprising thing about RBC analyst Jordan Rohan's comment that MySpace could be worth $10-$20 billion in a few years is that he deemed this assessment "audacious"--and the press seemed to agree.  Why is this audacious?  In little more than two years, MySpace has come out of nowhere to become the 7th biggest site in the U.S.  Per NetRatings, it now has 50 million monthly users--closing in on half of Yahoo!'s domestic user base--and it is still growing at a fantastic rate (a reported 250,000 sign-ups a day).  MySpace recently signed a $900 million multi-year search deal with Google, showing that the revenue is starting to follow.  Etc.  Given all this, the theory that, in a few years, MySpace could be worth less than half of what Yahoo is worth with its now-battered valuation seems eminently reasonable.  On its current trajectory, in fact, MySpace could end up being worth a lot more.

That said, of course, it is also conceivable that MySpace might not continue on its current trajectory, might not be able to meaningfully monetize the site, might get so clogged with sex-predator and teen-porn lawsuits that advertisers stay miles away, might fail to lock in a fickle user base given to pronouncing formerly cool trends as "so last year," might, in any number of ways, prove a major disappointment.  It might even end up being worth less than Newscorp paid for it (circa $600 milllion).  Right now, however, it is certainly headed in the right direction.

Jordan's careful packaging of a not-so-audacious hypothesis is probably in part the result of a research environment in which analysts are terrified of saying anything bold for fear of getting sued.  For those who have watched the Internet for a while, however, the idea is far from outrageous.  MySpace could easily be worth $15 billion in a few years, or more...or $1 billion, or somewhere in between. 

The key now, for those trying to make a more refined assessment of the property's potential value, is to follow the money--on both sides of the ledger (revenue and costs).  One big search deal--and an obsession with music-related content--will not a $15 billion company make. 

Analyzing More Ad Market Data Points

Ross Levinsohn of Fox Interactive says that Fox is seeing no signs of an advertising slowdown (per Mediapost), a tidbit suggesting that Yahoo!'s problems may be, well, just Yahoo! problems.  Meanwhile, Lowe's preannounced modestly disappointing results and blamed them on the housing market, as did homebuilder Lennar.  Washington Mutual recently said that the inverted yield curve and rising interest rates have dampened mortgage origination (no surprise), and consumer home equity withdrawals are apparently down year over year.  And the American car companies continue to suck wind.

Put it all together, and Levinsohn's observation does not necessarily support the view that Yahoo!'s recent news is a Yahoo! problem instead of a market problem.  Fox is presumably less dependent on advertising from financial services companies than Yahoo is (specifically, mortgage companies), and, with a younger demographic, it is also presumably less dependent on ad spending tied to the housing market.

Will Yahoo!'s weakness continue?  Is it a market problem that will soon affect other companies, including Google?  Is it the first sign of a slowdown that will spread to other industries?  Still too early to tell.  I continue to think, however, that the Yahoo! news and other data points above are consistent with the start of a general market slowdown, one that will likely gather momemtum if housing prices continue to fall.  The recent drop in rates may help housing prices stabilize (or even rise modestly) in the next few months, but the downward trend will probably resume eventually.

Put differently, I still think the Yahoo! news is a canary in a coalmine--one that the market has, so far, largely ignored.

More on Drooping Ad Spending, Yahoo, Google

Smart debate in the comment section about whether yesterday's Yahoo news reflected a Yahoo issue or a market issue, as well as whether a general slowdown in online ad spending would affect Google.  My take is that it is almost certainly a market issue and that, eventually, it would/will almost certainly affect Google.

As several readers noted, the slowdown was attributed to two sectors, automotive and financial services.  Given what's happening to Ford, GM, and Chrysler, the first isn't a surprise.  Given what's happening to the housing market, the second isn't a surprise either, especially if "financial services" is really a synonym for "mortgage brokers."

A Bloomberg story today reports data from Nielsen that confirms some of the above, but also suggests the problem is worse at Yahoo than elsewhere:

Advertisers reduced the amount they spent on graphical image
ads in the U.S. by 6.3 percent to $163.6 million in the week
ending Sept. 10 after a 2.7 percent drop the previous week,
according to Nielsen//NetRatings...         

Demand for banner ads on Yahoo by financial services
companies fell 4.2 percent to $16.9 million in the week ending
Sept. 10 and 16 percent in the previous week, Nielsen said.
Outlays across the Web rose 2.2 percent for the week ending Sept.
10, after falling 10 percent a week earlier.

The story also notes that, at Yahoo, financial services accounts for an extraordinary amount of revenue.

     Financial services accounted for 33 percent of U.S. display
ad spending on Yahoo at the end of August, the highest of any
category, while automotive took 2.6 percent, according to
Nielsen.

The Bloomberg story focuses primarily on display advertising, and it is possible that, for now, search has been spared.  If the problem is the economy rather than Yahoo, however, as consumer demand falls off, search spending should drop, too.  Less consumer demand will likely translate into fewer clicks (less revenue) or a reduced conversion rate, which will put pressure on advertisers' ROIs (reducing the amount they can profitably pay for clicks).  It is also worth noting that, thanks to their high-ticket sales, both automotive and financial services have extremely high keyword prices, so any fall-off in advertiser spending or end user demand in these categories will have a far greater impact on revenue than on overall clicks.

Bottom line, I have never seen a general industry revenue slowdown that did not eventually affect the biggest player.  If that's what this is, therefore, the safe bet is to assume that Google will eventually be affected, possibly severely.

Yahoo Wilts. Prepare for Won't-Affect-Google Denials

Yahoo's Semel and Decker dropped the bomb this morning at a Goldman conference: Yahoo!'s Q3 is wilting.  Nothing serious yet--just revenue at the "low end of the range"--but still eerily similar to the early warnings from Yahoo 6 years ago, when Yahoo!'s Q3 started looking sluggish in mid-September and then weakened further by the day.  If memory serves, the company just made that quarter (Q3), but severely reduced guidance for Q4 and then bombed Q1.  And the rest of the economy wasn't far behind.

True, Yahoo's revenue is more diversified than in 2000, and there aren't a few hundred etailers about to start reneging on $30 million portal deals, but still: When the economy slows, advertising is one of the first expenses to go, and even the top dogs aren't immune.

Get ready, however.  In coming days, a parade of analysts will eloquently explain why the trends that are hobbling Yahoo! won't affect Google--Google's revenue is pay-per-click, Google is a "must buy" for advertisers, Google has a much stronger market position, etc.  Listen politely, but don't believe it. 

Google is now a $7 billion global business with one primary revenue stream: advertising.  Google may do better in a recession than, say, a television network, but that doesn't mean it will do well.  $7 billion is a significant chunk of not only online advertising but all advertising, and if all advertising slows (or, worse, shrinks), Google's revenue will, too.

Back in 2000, the theory was that, as the dotcom shakeout progressed, the dominant players would slow for a quarter or two but avoid most of the damage.  Yes, it's different now, in some ways, but one lesson from that period should be clear.  Even No.'s 1 and 2 drink from the same stream as everyone else.