BLOG

Google is buying YouTube for $1.65 billion. (Oh, you heard that already?) That seems like a lot of money for a money-losing copyright infringement machine until you compare the value of that company today to its future earning potential as the thing that replaces television. YouTube is an archetype for a content future that everyone sees. I read once that “true vision is seeing what everyone sees but thinking what nobody else thinks.” (I actually just googled the phrase and realized I lifted the quote from Albert Szent-Gyorgy, who said that about discovery, and not vision. I like my version better.) Anyway, someone at Google has vision about the future of content, and that is why YouTube is getting bought for a fairly hefty sum. (But I still think it is a bargain.)

This got me thinking about acquisitions in general.
Whether you are spending big money or comparatively smaller amounts, if you are investing strategically for the long run, the future value of your acquisition target will far outweigh your cost if you are right about the future. The trouble is that most people are not right about the future, seemingly making certainty (in an uncertain world) the most valuable of commodities. Interestingly, publicly traded companies tend toward the lowest risk investments for two reasons:
- management doesn’t actually have a vision of their own
- public companies usually trade at a multiple that is much greater than the value of their cash, which means they can buy the revenue of another company, run it through their revenue multiple and voila, you’ve increased the value of your company

Counterintuitively, Certainty, in the context of an acquisition, usually gets a low multiple compared to other reasons companies get bought. To explain roughly the difference between Certainty and Vision, Certainty is a company that is profitable, requires no additional capital to run or grow, features low threat to disintermediation and has a predictable revenue curve backed up by operational history. Conversely, if you are buying a company for its Vision, it will almost always be unprofitable but will have the potential to revolutionize (possibly through disruption) an industry or segment and accrete value in a synergistic way to its new owner. Google is not paying $1.65 billion for Certainty that YouTube is going to win the web-based user-generated content and distribution race – they are paying for the Vision that it could. (Indeed, it is just as plausible that it will be sued into oblivion for copyright violations.)

I have noticed that acquisition prices, generally speaking, reach their highest levels when built around the Vision of the company being acquired and decrease at various checkpoints down a ladder to Certainty:

Vision
Strategy
Stats
Team
History
Certainty

These are Shawn Conahan’s Observed Rules of Acquisition Multiples:

1) If you have superior Vision, you can command the highest multiple.

2) Lacking Clear Vision, if you have superior Strategy to revolutionize an opportunity (for instance, in the form of unique protectable intellectual property) you can have the second to the highest multiple.

3) Stats do not lie: Even if you became the largest [insert hot topic of the moment] site on the net by accident, you are still the largest, and that is worth a healthy multiple.

4) If your growth is brisk and your Team is brash, famous and/or highly competent, it is assumed that your company has the potential to return a solid multiple on an investment.

5) If you have a long History of steady growth, but no “hockey stick” story, you can still be acquired by a company for your strategic fit, but for a low multiple.

6) If your revenue is predictable and the company stands alone and an acquisition is not particularly strategic for any of the other reasons above, you may find yourself in a buyers market looking for a liquidity event, driving your multiple down to the lowest of all acceptable reasons for acquisition: Because you built an enterprise of Certainty. Certainty is what gives the freshly minted MBA on the M&A team the opportunity to use his super duper Discounted Cashflow model. (Not that there’s anything wrong with that.)

I think many public companies would like to say they start at the top of the list, looking for innovation in small and nimble companies, but mostly they end up at the bottom of the list and never really get to look at anything past Stats, those things they can show their board to objectively justify spending the money on an acquisition. These companies are always following the market rather than leading it with their ability to see how the innovation of the companies in a particular space could be added to their own vision to accelerate their ownership of the future. This is why Newscorp’s bold and insightful acquisitions are both surprising and inspiring - large size does not necessarily map to a lack of vision.

Then I started thinking about the mobile space.
If the web-based vision the thing that replaces television is worth $1.65 billion, what is the mobile-based equivalent vision? Is it similar? How similar? Last week, moconews.net did an editorial about the implications of the YouTube acquisition in the mobile space, calling it GoogTube. On the same day, FierceWireless ran similar editorial calling it YouToogle. Both were good reads. We voted on the catchiness of the respective names on the Mo List (join here – it’s fun and informative) and moconews won by a landslide. James had this to say about GoogTube Mobile: Music videos, as well as the user-generated content which made YouTube so big, is perfect for mobile devices. For me, the question is not “what will they do” but “why haven’t they done anything yet?” Good question, and the likely answer is simply that it is hard to do. For a U.S. carrier to roll out a mobile user-generated video content service, the following would be required:
- 9 months of business development (if you are on the fast-track)
- Executive endorsement and air support
- Tie to group yearly MBO goals
- Typically a 5-stage phased-gate decision making process
- Buy-in from the heads of the following groups: Video, MMS, SMS, PSMS, Community, and the guy who is in charge of unified strategy across the organization
- Victory in an internal political war over one or more of the following: a) who owns the revenue stream, b) the guy who says “fuck them - let’s just do the same thing but with our own brand” or c) whether or not the deal comes with time-limited exclusivity around the holiday ad-spend
- Finance review, modeling and sign-off, usually taking a few weeks to a few months
- Many months of extensive legal review by the most conservative attorneys in the world, the Irritable Bowel Syndrome of whom is exacerbated by frequent chats with the FCC
- Review and cost analysis by Customer Support
- Two months minimum of contract drafting and redrafting
- Integration discussions with the tech folks
- Actual technical integration, contemplating impact to existing carrier-provisioned services like the video offering and the music store
- You want marketing support? Add a couple of months and several more discussions and requirements

Then for each similar partner the carrier wants to do a deal with, repeat this list. This is in addition to the six to twelve months of development required by GoogTube and its various analogs to deliver a mobile product to any carrier. Sound daunting? Maybe, but it really isn’t when you consider the value of doing business with the owner of millions of customers who are accustomed to paying for content and services and do so through a frictionless billing mechanism. It is just the cost of doing business in a space that is controlled by owners of closed networks that are incredibly valuable. I prefer to view it as a vetting process. The process exists to protect these very valuable networks from such technical realities as overloading and from such business threats as disintermediation. Yes, it takes a lot to roll out a carrier-grade offering, but the value of being part of the carrier’s network or even just offering an in-demand consumer application in the wireless space is enormous.

Here’s an interesting observation: Just like people say that traditional media companies don’t “get” the web, web people don’t generally “get” the mobile space. Some of you are reading this and saw the list above and thought it must have been tongue-in-cheek or exaggerated for the sake of humor. It’s not, and I am dead serious. It is just a different environment, and one that does not lend itself to the application of web-based schedules and business models. You can move as quickly as you want on the web, and there are low barriers to entry. It’s the opposite in the mobile space. This leads me to believe that for many companies that have a chance to win in the mobile space in the way I describe, they will happily buy their mobile presence after they figure out how difficult it can be to establish it. (EA/JAMDAT comes to mind.) But what is the right mobile presence to buy?

I have a list from Rutberg of about 300 private companies in the mobile space that I sort of try to keep tabs on. (Get it from them – I’d post it here but the deck says “confidential” all over it and I don’t have time to ask them permission.) Can you identify the next Google-style success story of the mobile space? Can you even pick the likely winners from the losers with any confidence? No. Why? Because it’s early. The mobile space is the wild wild west, akin to the web in the mid-1990’s. But that is actually good, right? It is good that we have seen a recent historical example of disruptive innovation, and it is enticing enough to the companies who should have been big winners on the web (but instead stood by and did nothing at the time while silicon valley created untold personal wealth) to try to get in on the mobile goldrush early.

So we are seeing consolidation in the mobile space as links on the value chain get snapped up and added to someone else’s vision of the mobile future. Who gets to win in that eventual future depends on what they are buying now. Here is the drum that I keep beating: Communication. I know it’s broad, but think about it. If you are a media company trying to figure out a unique mobile strategy, if you are a mobile infrstructure company trying to swim upstream, if you are a carrier looking to increase data ARPU, if you are a VC trying to spot a big trend in the mobile space, if you are an entrepreneur starting a company in the mobile space, listen to me know:
- As obvious as it sounds, the biggest opportunity in the mobile space is communication.
- Not just communication the way it jumped into your mind like someone talking on their phone, but media communication.
- Media communication is multimedia expression, which is possible with a media capture device like a camcorder phone, which represents a much bigger future opportunity than anything on the web.
- Now think not just media communication, but media networking, because after all, the content around the content is what matters most.
- That means the upstream channel is as important or even more important than the downstream channel, but they coexist.
- When that upstream content is created as an extension of a user’s communication hub, it becomes viral media.
- Viral media means the distribution value chain is shifting from a push model to an interactive model via a series of overlapping personal networks.
- That means the media company of the future is going to have to own the distribution of content through these overlapping personal networks. (Fox/MySpace comes to mind.)
- It all starts with the list of friends with whom users will be sharing content/communication.

Find the link on the mobile media value chain that makes that happen and you win. It might be Mobile GoogTube, or it might be something else, but where the lines between media and personal communication are blurring is where the opportunity is. The vision the thing that consolidates the PIM may just be the billion-dollar opportunity in the mobile space.

Compare to the web: The core behavior is looking for websites. At first, when there were a lot of websites but not too many, Directory was the most valuable opportunity, and Yahoo claimed victory because Directory was the on-ramp to the web. Then when the haystack got too big for any directory to effectively organize, the opportunity shifted to Search, and Google claimed victory because Search is the on-ramp to the web.

Well, the core behavior in the mobile space is not looking for websites – it is communicating with people, and now it is communicating with people with multimedia. That makes the on-ramp to the mobile space the Personal Information Manager (PIM) or friends list or address book or whatever you want to call it. Where does that live? Currently, in a lot of places. It’s on your phone, yes, but it is also on your PC, and on your web-based mail service and your IM buddy list and your MySpace friends list and your LinkedIn network. Either the carriers are going to allow companies like MySpace to circumvent their current subscriber relationship or they are going to enable companies like MySpace through a carrier-vetted construct that shares the subscriber relationship. One way is better for the carriers, but regardless, whoever enables the externalization of the PIM will effectively own the on-ramp to the mobile space. How much is that vision worth?