Internet companies’ valuations –back to the future?

With the recent talk of high profile IPO plans and multi-billion valuations of internet companies I wonder if we are experiencing a second round of the tech bubble. Theory tells us that a company’s worth is equal to the present value of its future cash flows. In practice it is very difficult to forecast cash flows, even for brick and mortar companies with fairly stable revenues. In the on-line realm, forecasting cash flows is only an illusion of due diligence. Amazon lost money in the 90s and now is worth around $85 billion. Some analysts said it would never make money, and certainly it wouldn’t if it had remained selling books on-line. But who did effectively forecast that Amazon would become an e-commerce platform, and even if someone did, how to value that?

Not all companies can replicate the success of Amazon. Take MySpace for example, which was bought in 2005 by NewsCorp for $580 million, it hit a top valuation of $12 billion in 2007, and in 2011 it was sold to Specific Network for $35 million. This illustrates that the perception of MySpace’s ability to generate cash in the future changed dramatically in a short period of time. The overvaluation of internet-enabled opportunities that in the end do not deliver the expected returns are common. The “new media” opportunity in the AOL-Time Warner merger comes to mind, $350 billion made it the largest merger in U.S. history, and a colossal failure.

More recently we have seen several internet companies that command incredibly high valuations in relation to their earnings. Linkedin with a market value of around $9.5 billion has revenue around $200 million. Pandora with a value of around $3.6 billion had revenues of $90 million for the first 3 quarters of fiscal 2011 but still reported a loss of $0.3 million, they don’t expect to report earnings until the end of fiscal 2012. Later this year we’ll see multi-billion IPOs for Groupon and Zynga. Groupon launched in the end of 2008, in two years it had revenues around $700 million, which generated an offer by Google for $6 billion (in the low range of the valuations in the news today). Zynga on the other hand is already very profitable, it generates $17 million of free cash flow each month giving it a valuation of $14.5 billion.

Certainly some of the multi-billion on-line companies will give shape to their respective market segments and be very profitable, others will “pivot” until they figure out a successful business model, and others –most of them– will perish in the attempt. Insofar as investors think these companies can effectively be as profitable as their valuations suggest I wouldn’t say we are experiencing a bubble. Nevertheless, I do believe some companies are overvalued by Venture Capital activity that is betting on selling these companies to the established players (e.g. Google, Facebook, MS, etc.) at much higher prices in the future. This phenomenon has been characteristic of the development of the business models enabled by the internet. Whenever there is an opportunity of something becoming the next big thing a lot of capital flows in and valuations soar when competitors rush to get in first. In the end, some companies turn out to be worth their buzz, and many others don’t.

Is the tablet really more imporatnt the the State of the Union

Apple is supposedly announcing a new device tomorrow, the fabled tablet. The blogosphere and the internet as a whole are going nuts about this. So much so that it is now the #1 trending search topic online. More people are interested in this than in what Obama has to say about health care, the wars, Haiti and all the rest.

http://gawker.com/5456613/steve-jobs-is-walloping-the-president-with-his-magic-tablet

I think it actually makes sense. After all, we all know exactly what Obama is going to say: "Ladies and Gentlemen, the State of the Union is Strong." However, very few people know what exactly is this tablet - is it just a giant iPod touch or is it the device that'll kill all traditional media outlets. Perhaps more importantly, we pretty much know how much the healthcare reform bill is going to cost us. The price of the tablet is still unknown.

Jonathan Shulman

The Current State of Online Media Sharing

Online file sharing is a big business. According to a recent Times Online article, an average teenager’s iPod contains 800 illegal music files. Additionally, DrownedinSound.com reported that 95% of music downloads in 2008 were illegal. With its eyes set on all of this lost revenue, the music industry is successfully fighting back, leaving companies and individuals scrambling and looking for new (and still legal) ways to provide and share media, such as music, online.

Just in the past few years, several media streaming providers have popped up, including Hulu for television shows and Pandora for music.

Hulu, a collaborative effort by News Corp and NBC Universal, has seen rapid growth since its inception. With over 370 million streams each month, Hulu has grown into the largest streaming television site on the Web.

Pandora, a music site offers a novel approach to sharing music online. Labeled as a radio station, Pandora allows its users to create customized radio stations by entering their favorite artists into an engine, which then builds a playlist. While artists don’t seem to make money from the Site, Pandora does by referring listeners to iTunes to purchase music heard on the Site. Other major competitors in this space include Imeem and Last.fm.

As internet properties continue to launch media streaming sites, the industry will need to react. So the questions will remain – how long will these sites be viable, how will these sites impact the music and television industries and will new laws be enacted to stop this type of online streaming?

Steve Jobs' letter against DRM

For all of you that have not clue of what DRM means, let me say that DRM stands for Digital Rights Management. In other words, it's the piece of software that controls the way you share your music, videos, pictures, etc.

For example, if you are a user of iTunes and buy music from the internet store, DRM will set that the maximum number of times that you can copy the music to a CD is 6 and that you can share the music with other 4 computers.

There is a lot of movements in Internet against DRM with the argument that controls your freedom as user to do what you want to do. Seriously, DRM is not Steve's idea or Gates' idea. DRM is an initiative that music companies have put in place.

Recently there has been a lot of talk about it because a) iTunes has been declared ilegal (due to DRM) in Norway, and probably the rest of Europe can follow the idea (same to Vista DRM, ...); b) the implementation of DRM from Vista is really strict.

Steve Jobs has react with this letter showing some interesting points:

1) DRM is not his idea
2) He would support any movement to freeDRM music but the industry doesn't let him
...

I found it really interesting. In other words, SJ is trying to push the users to fight the battle against the music companies, cleaning iPod+iTunes name at the same time :-) Really smart.

Here you have a link with more details.