Web valuations again

Reader's Digest, more than 80 years old, was sold last week for $1.6 billion. In contrast, the one-and-a-half year-old YouTube was recently acquired by Google for the same amount ($1.6 billion). You could argue that the Reader's Digest enterprise value (including the debt taken on board by the buyer) comes to $2.4 billion. Still, the contrast should set investors and media entrepreneurs thinking. For there is also Myspace, a social networking site that was recently acquired by Rupert Murdoch for $580 million. If Mr Murdoch's reported presentation to investors in Australia is anything to go by, it could now fetch a staggering $6 billion. These figures highlight how new economy valuations are being turned on their head in cyberspace, and hark back to the mood at the start of the decade when a relatively young company like AOL could buy up the venerable Time-Warner.

Reader's Digest is a family magazine with a global following over several decades. It has over 80 million "die-hard" users who are not going to desert it in a hurry. YouTube, on the other hand, has over 70 million videos (now estimated to be 100 million) daily. Do the maths and you get to a figure of 2.1 billion videos being watched monthly, which is many times the size of the Reader's Digest franchise. Even if you assume multiple readers per copy of Reader's Digest, the total is almost certain to be smaller than the YouTube franchise. Will these comparisons hold over time? Reader's Digest readers are "die-hard" and "active", not "fickle" like users of YouTube. However, even if you discount for 25 per cent users being "fickle", the franchise is still substantial.

What is the market telling the media business about the future? While many have termed the valuations as "bizarre", the fact is that just as in the dotcom era, these social networking, interactive or community sites (also classified as Web 2.0 companies) are gathering steam.

One may argue, though, there is a problem with copyrights of the uploaded material on these sites. In fact, Universal Musical Group has sued MySpace, alleging the site infringes on the copyrights of thousands of songs and videos. YouTube, on the other hand, has struck deals with the Universal and Warner music groups. Besides, these sites are experimenting with technologies (as in the case of MySpace) to eliminate unauthorised music and clippings from being uploaded. Sooner or later, they are bound to find an answer just as Napster did.

Their business models (where they exist), though, may not make sense to many. Even Microsoft CEO Steve Ballmer recently told BusinessWeek, "[You've got to ask] could Google do whatever it is they're hoping to buy without paying $1.6 billion?" But did Microsoft itself miss the bus when it reportedly lost the $30 million Flickr deal to Yahoo, and can it create or buy another YouTube? Remember, YouTube was set up with just $11 million of venture capital money.

As for valuation models, some of them certainly remind people of the methods and numbers used, and the assumptions made, at the height of the dotcom madness""combined with very high price-earning multiples. If that invites scepticism, there is the question of first mover's advantage and barriers to the entry of potential competitors. Duplicating the YouTube technology is easy. Replicating the brand and community will be much more difficult, because in some senses the space is already taken. That brings up another point""have Indian dotcoms too missed the bus? India's Web 2.0 sites will have to do more than merely ape a YouTube, MySpace or Facebook to get these valuations. Finally, here's some more food for thought: in September, RBC Capital analyst Jordan Rohan predicted that MySpace would be valued at $15 billion over the next three years.