IB Weekly Thoughts < >

If you follow the TMT space (particularly Internet Media), you might, like me, look forward to the time of year when Kleiner Perkins’ Mary Meeker presents the firm’s “Internet Trends” (http://kpcb.com/insights/2012-internet-trends). Kleiner is at the forefront of investing in innovation in the Internet space so it is fair to say that their opinion matters (acknowledging the positive bias, given they have to sell these trends to the public markets eventually).

One of the big themes that KPCM points to as a bullish indicator for internet /mobile media is the discrepancy between media consumption vs. dollars spent on advertising in those mediums.

Medium

% of Time Spent

% of $ Ad Spend

Print

7%

25%

Radio

15%

11%

Television

43%

42%

Internet

26%

22%

Mobile

10%

1%

 

The basic bull case is that eventually $ ad spend should revert to a mean which matches our actual consumption. Kleiner thinks that if this happens, there is $20 billion of opportunity (revenue) for the companies who hold the leading internet and mobile platforms. One point of note here, the top 3 US newspaper companies (NY Times, McClatchey and Gannett) only earn roughly  $4.5 billion of year in revenue from advertising. 

How is the market valuing this opportunity and is it reasonable?

If you take Kleiner at their word, there is somewhere around $20 billion of advertising revenue for these internet / mobile properties to go after. The big question then becomes – how much credit is the market giving these properties for their ability to capitalize on this opportunity: 

Firm

Enterprise Value

Firm

Enterprise Value

Google

$228bln

Pandora

$1.3bln

Facebook

59.6bln

Twitter

8.0bln

Yahoo

22.0bln

Foursquare

0.8bln

AOL

2.7bln

Hulu

2.0bln

TripAdvisor

5.4bln

Spotify

3.0bln

Expedia

8.2bln

Pinterest

1.5bln

Angie’s List

0.6bln

 

 

WebMD

0.7bln

Total:

$343bln

Note: Twitter, Foursquare, Hulu, Spotify and Pinterest all reflect latest private market valuations

The market (public and private) is valuing this group of internet media advertising platforms and properties at $340 billion (Google makes up a large part of the gross number but they should participate in the trend and are clearly being credited for it at 6x revenue). It is hard to adjust these valuations for current revenue because a good number of those big private names haven’t yet posted financials, but if you look at the public names they did about $51 billion of advertising revenue in the past year. Assuming that the private names trade near or close the top-end of the range (i.e. 10x revenue) that would add about $1.5 billion to that number. That means that the market is assigning a ton of value to the revenue opportunity. You can play with the numbers to decide what you think they should trade at in steady state but let’s assume they eventually trade @ 2x revenue in maturity. That means that the market is ascribing $240 billion of value for a revenue opportunity of only $20 billion.

What are some other potential issues?

If you are on Facebook or Twitter, and have been for a while, you’ve probably noticed the large step up in advertising that the firms have undertaken over the past few months. For Twitter, this has come in the form promoted “tweets” from companies that get inserted into your newsfeed. Facebook has done a similar thing with the use of the promoted posts, in addition to their sidebar ads.

These actions are necessary to appease their stockholders, but what do their users think about the changes. One of the interesting “missing” data points from Kleiner’s presentation is how media consumption has evolved in terms of number of hours consumed. In other words, are we consuming more media today because we have constant access to it through our mobile device?

Without data to support this assertion, I think it is probably safe to volunteer a “yes”. One only needs to go to a restaurant or ride the subway to see people glued to their smartphones – trolling Facebook or throwing birds at piles of rocks. Smart phones are taking the place of the private moments we used to have for self-reflection or conversations with friends. But here is the rub – is that time we spend engrossed with a tiny screen really a time where we are open to be advertised to?

Intuitively the best time to advertise to a person seems to be when they are a) engaged in passive media consumption (radio or television) or b) while they are at the moment of commercial intent (i.e a Google search).  When I am looking at my college roommate’s wedding pictures, it probably isn’t the right time to ask me if I want to buy a new pair of shoes. But that is the challenge many of these new internet properties face. They’ve had us move our lives online and created these dynamic communities for us to share the details of our lives with our friends that weren’t feasible before. But that doesn’t mean it is necessarily the time to pitch us. The properties that will and have had an easier time are that of Google (commercial intent), Pandora / Spotify because we are conditioned to be advertised to at those moments.

Summary

First, apologies if this weekly thought was a bit all over the place. The ideas discussed above are more wishy-washy than I prefer but I thought they would be fun to explore it. To try and summarize what I hope are the key points, I would say:

-   The revenue opportunity that internet media bulls speak about is tangible but likely not as big as they
    tout. It is also likely that some of the “old” media properties will maintain that share by moving where
    their audience is

-   The valuation being assigned to this opportunity is very optimistic. If you want to make money but
    take little risk, short a basket of the names (also look at IB reports written on these names for more
    detail – Yelp and Pandora)

-   Another potential flaw with Kleiner’s work could be that the mobile time spent is really more additive to
    total media hours consumed vs. replacement and therefore it is entirely possible that those extra
    moments are good times for advertising

 

- mvrcapPeter