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Tuesday, October 24, 2006

Average Cost Per Customer For Google & Media Outlets

Stocks: (NWS)(GOOG)(NYT)

By Yaser Anwar, CSC of Equity Investment Ideas

There was a very insightful post over at Information Arbitrage about Google's YouTube acquisition. What I particularly liked was the average cost per customer break down."

2. YouTube - By the Numbers

“The Tube” spends most of its dollars on technology to route, upload, access and search videos, based on user requests. Google paid $1.6 billion for 72 million unique monthly viewers.
That equates to an acquistion cost per customer of $22. You can argue over the 72 million users, so if we cut that in half (to forestall any arguments) to 36 million, that’s a cost per customer of $44. So to Google, a YouTube customer cost somewhere in the $22-$44 range.

3. Other Media Outlets - By the Numbers

Fox’s American Idol has 21.1 million viewers. At $660,000 for a 30 second spot, a 1-hour show would have close to 15 minutes of commercials yielding a revenue of $950 million a year (30 spots a show X 4 shows a month X 12 months), or an implied value of $45 per user.

NY Times
The New York Times Company, has seen better days. In the last 2 years the stock has gone from the low 40s to the low 20s. Imagine that - 50% of its market cap erased in 2 years - a direct result of online media taking its toll on MSM. NYT currently has a market cap of $3.3 billion, Net Income of $259 Million, and a 5% profit margin.
They have 1.7 million print subscribers and 37.7 million unique web viewers per month, which includes For arguments sake we’ll put them together for a total of about 40 million viewers. Using our admittedly rough methodology a NYT customer appears to be worth approximately $82.

The Googleplex
With a market cap of a stunning $144 billion, Net Income of $1.4 billion and 25% Profit Margin, what is a customer worth to The Beast? In the strictest sense Google is all about advertising, and it has rapproximately 380 million unique monthly users according to Neilsen/NetRatings - spending an average of 22 minutes on the site. The market cap divided by the number of unique users per month nets a per customer value of $380. Zowie.

4. YouTube - the Verdict
With YouTube valued at $22-$44 dollars a user, Google must see this and be licking its chops. Or, to me, “This is a grand arbitrage opporunity.” Google knows what it can squeeze from a user, how it can scale users and how much it should pay to acquire users. I’d say that $380 in vs. $22-$44 out represents the kind of margin of safety value investors can get their arms around.

Even if the ad market gets increasingly competitive (say, if Yahoo! can ever post a credible challenge), and they can monetize even at the levels of the NYTimes, that’s a YouTube valuation of $2.8 billion ($82 X low-end 34 million customers). In short, this represents a pretty nice IRR given the likely monetization time horizon. Even a little exposure to the Googleplex can go a long, long way."

Great stuff Roger!

For the complete analysis, click here.

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