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Photo Software - Tuesday, May 8, 2007

Analysis: The New Math - How Did MySpace Value PhotoBucket

If we had a dollar for every time we see someone roll their eyes about the return of the "bubble." Folks don't want to see companies get bought at valuations that are stretched thin. They don't want to see another Mark Cuban created. Why? Because the bubble aftermath sucked. We all knew the bubble was nuts at the time but Blodgett, Meeker and Co. told us to chill.

With that in mind, we think the discussions over the valuation of PhotoBucket and other big deals are somewhat important. If the deal is officially confirmed at $300M, that is 50x trailing revenue and over $17 per monthly unique visitor.

Mike Arrington calls the $300M (with earnout) that MySpace paid for PhotoBucket a steal. His logic is that:
+ Google paid $1.65B for YouTube. By the time the deal closed, the Google stock was worth nearly $1.8B.
MySpace paid 1/5 of that. YouTube had little revenue, while PhotoBuckets projects it will make $25M in 2007. Photobucket has 80% of the visitors that YouTube had when it was acquired.

+ MySpace got a discount when it cut off PhotoBucket's users before the deal to show who wears the pants.

+ In a more recent post, he hedges, however, that PhotoBucket and MySpace might have 100% user overlap, so for $250M its gets no new users.

+ Valleywag accuses TechCrunch of being a shill for PhotoBucket's iBankers Lehman Brothers. We don't have any way of assessing this information.

Henry Blodget takes the case even further, arguing that PhotoBucket could barely give itself away, a dramatic statement he agrees.

Counterpoint is Microsoft's Don Dodge who instructs Blodget and Arrington to come to their senses:

"At some point the end user of all these free services is the same user and they can't be monetized any further no matter how many new services are added. Advertisers will eventually figure this out. Ad rates will drop. Revenues will drop...and stock prices will drop. It is all about the stock price. No one cares about real revenues and earnings as long as the stock price is high.When stock prices drop everyone along the chain starts to rethink their assumptions about value and ROI. The changes ripple all the way back up the food chain. The individual stockholders get more conservative and move out of bubble stocks. The Internet companies stop acquiring because their stock price has deflated. The entrepreneurs stop agreeing to acquisitions because the rewards are less. The VCs stop funding new startups because the risk/reward ratio doesn't work.

We have seen this before. It was the nuclear winter that lasted from 2000 to 2003. It is amazing how quickly we forget. As I always say "fear is temporary...greed is permanent"

HipMojo joins the naysers arguing that PhotoBucket is no YouTube. His point here is that Photobucket is just a utility and does not command attention.