360 Degrees of Google

1. Value Per YouTube User

Let's assume YouTube is a mature business and that its user base is set and will not grow considerably in the future. It had 50 million unique visitors in September, so let's say that continues.

Assume also that a decent CPM, or cost per thousand impressions, is $10 for YouTube, and that it can put two ads per page (or per roll). This, by the way, is a fairly low assumption. It can probably get more than $10 CPM and can probably put three or more ads per page.

With these assumptions, that's $20 per thousand impressions. My guess is that each user hits an average of five to 10 pages a visit. How do I arrive at that guess? I've had the opportunity to study traffic records on other video-aggregation sites, and this seems to be the average across them. YouTube, being the stickiest video site out there (in part because people store family videos on the site), is probably more toward 10 pages per visit, but let's take the conservative side and say five pages per visit.

That gives us 50 million unique visitors multiplied by five pages per visit times $20 CPM divided by 1,000, equaling $5 million a month, or $60 million a year.

What's the EBITDA margin on that? It's pretty high, considering that right now it gets to leverage off Google's substantial infrastructure for delivering video. Users generate all the YouTube content for free, and Google is giving it infrastructure now. I'm not sure what its other costs are. (Mark Cuban would say "legal costs," but I'll deal with that in a second.) So let's say YouTube makes $50 million a year. Google's current multiple is 63 on earnings, but let's discount that by half and you still end up with around $1.6 billion in value.

Let's review the assumptions again:

• $10 CPM;
• two ads per page;
• zero growth;
• high margins;
• five pages per visit.

Some of these assumptions might be high, but I don't think so. If anything, my assumptions are low, particularly when you leverage Google's other assets:

• Pre-existing infrastructure for delivering video: Google is already in this business. It is already set up to deliver hundreds of millions of videos a month, if need be. The addition of YouTube to that infrastructure probably only increases the cost incrementally.

• Pre-existing legal strategy: Again, Google is already in this business. It already has relationships and discussions with all of the entertainment companies over copyright issues. And, while entertainment companies might not have a problem bullying YouTube, people are a little more hesitant to mess around with the driver of all of their sites' traffic. YouTube's addition to Google probably won't drastically increase the already ongoing legal discussions that Google is having with entertainment companies.