Transcendental Bloviation

Politics, Space, Japan

Thursday, October 12, 2006

YouTube - eGroups Redux

The buzz around Google's acquisition of YouTube will die down soon. For now, I invite you to consider a precedent: Yahoo's acquisition of eGroups.

How could eGroups have been worth $432 million to Yahoo? That was about $25 per eGroup member--it would take a long time for Yahoo to recoup based on ad impressions. Well, eGroups wasn't worth that much--but I think both sides knew that going in. Yahoo bought eGroups for $432 million in Yahoo stock, which was considerably overvalued in June 2000 ($50-$60/share, down from a bubbly peak over $100). Yahoo is still overvalued, if you ask me, at P/E's of 45-50.

When I heard figures like $1.6 billion for YouTube, I figured it would be a stock-swap deal of some kind. After all, Google is also overvalued. And again, I think both sides know it. It was just lottery ticket swapping among friends. Google will never monopolize search, and thus it will never monopolize the ad-related revenue streams from search. Yes it does dominate search, and maybe it always will. But Intel dominates CPUs, and think of what we'd have to pay for CPU chips if it weren't for AMD, and the occasional "fabless" upstart that briefly (but signally) threatens what would otherwise be an Intel/AMD duopoly. Think: anti-trust. Tech is hardly immune from that. Right now, quite a few firms are focused on SEO and SEM, and improving bang-for-buck on ad impressions, and a lot of them focus solely on Google Adwords optimization. But price competition will enter when hypergrowth ends, and Google doesn't have a lock on this market. Portals are still strong. And the DoJ will still be in business when all other businesses today have succumbed to creative destruction.

P/Es will eventually go below historical norms as the Baby Boom retires. Google earnings will eventually be cut by price competition as online advertising matures. YouTube might be a copyright litigation tarpit, or it might be the future of television. But even if YouTube is the future of television, that doesn't mean it will ever be as profitable as television was at its peak, nor does it mean that it will be the only television network.


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