I don’t think the Google acquisition of YouTube is in itself an indication of dotcom-bubble-style thinking, as much of the mainstream coverage must inevitably suggest. YouTube is unprofitable — it hasn’t had much revenue to speak of at all till recently, from what I can tell. But it’s a great site and service and has a vast audience. It is, in short, much like Google was for the several years before Google stumbled on the brilliant revenue model that has propelled it to giddy peaks of valuation. Google wants to lead the Net video field; YouTube needs deep pockets to fund its bandwidth bills and build out the infrastructure to support its growth, and corporate help steering through the intellectual-property maze its business represents. It also needs a brain trust that has experience figuring out how to make money from a service with millions of users but no business model. That’s a good match.

$1.65 billion is a lot of money, but the tut-tutting chatterboxes are forgetting that, er, this isn’t cash changing hands, it’s stock. At Google’s current valuation this amount represents very roughly one percent of the company. One of the chief reasons companies like Google go public in the first place — aside from rewarding early investors and management — is so it can leverage market enthusiasm for these sorts of acquisitions. Google’s leaders know — or they ought to know — that its stock won’t stay over $400 forever. They’re doing the smart thing, playing their cards while their deck’s value is high.

No, neither Google nor YouTube is engaging in bubble-think — but watch for the onset of that condition in coming days and weeks, as the GoogTube deal gets turned into a valuation yardstick by hungry also-rans and competitors. “Let’s see, YouTube had X users and sold for $1.6 billion — therefore my company with 1/20th X users is worth at least $80 million!” That sort of talk is cheap. It was already beginning to turn up on the cover of Business Week, even before this deal. If and when people start investing on the basis of such logic, we’ll know that the awful era of TheGlobe.com has truly been reborn.
[tags]google, youtube, deals, bubble[/tags]

Following up on Business Week’s bubble-logic cover story on Digg, Techdirt offers a good roundup, suggesting that the $60 million figure was the last-minute work of “higher-up” editors, and noting that it does not appear in the text of the print edition, only on the Web (suggesting a late edit).

That’s certainly possible. When I was Salon’s technology editor I had to do my share of reality-checking the direction that “higher-up” editors wanted to take when promoting my stories on the cover. If this is what happened at Business Week, though, it’s really no defense; it’s a sign of organizational dysfunction. Either the “not-so-higher-up” editor of the piece didn’t object to the misleading headline, in which case he is complicit, or he did object and was overruled by “higher-ups” who showed they don’t trust their own people. Neither scenario is to the publication’s credit.

Then there’s a half-hearted effort on the part of Business Week blogger Stephen Baker to defend the $60-million-out-of-a-hat headline itself. My mistaken idea, Baker writes, “shared by many, is that money is not ‘made’ until an asset is sold in one marketplace or another. But if you look at the rankings of everything from executive compensation to individual wealth, they’re based on valuations of diverse assets. Many are open to question and just as tenuous as the valuation of this New Jersey bubble-inflated split-level I’m typing in at this very moment.”

By that logic, then, Business Week is abandoning any attempt at mooring valuation to the reality of market exchange. Companies are worth whatever anyone says they’re worth so long as there is some fig-leaf of math involved. I can say that every visitor to my site is worth X, multiply X by my traffic, and — hooray! — I’ve “made” that amount of money. Why? Because I — excuse me, the phrase from the BW article is “people in the know” — said so. This is how the original Web bubble got blown up, and that’s why so many people who lived through it are appalled at Business Week’s gaffe.

Sober-minded businesspeople, analysts and journalists rely on more stringent standards of valuation. Baker and I might each own a “diverse” asset in our homes, but the bank will give us a loan based on that ownership, because there is a reasonable market for homes, even though it may greatly fluctuate. Stock options vary in actual value depending on the ups and downs of a stock price, and executives’ opportunity to exercise them is constrained in various ways, but they bear some relationship to an active equity market, so they’re not entirely vaporous. But an ownership stake in a small private company that’s had great success building Web traffic but little or no record of profitability doesn’t meet the “collateral” test; it’s certainly not something you can count on to buy a house or send kids to college (I don’t think Rose is worrying about that one yet).

Digg is a great site and a great service, and someday it may be worth a big pile of actual dollars, and many of those dollars may end up in Kevin Rose’s pocket. But until then he has simply not “made” millions of dollars. Until then, his share of the company is an asset, certainly, but not one anyone should hang a dollar figure on, and Business Week should never have tried, or taken a wild speculative guess and turned it into a sure-thing headline.

Now the magazine can either publish a correction, which I doubt it will ever do, or live with the diminished credibility it deserves. Ed Cone agrees: “BusinessWeek’s best bet is to say, ‘We goofed. We wrote an interesting article about an interesting subject, but we made a pretty bad mistake in the way we headlined the story.’ ” Let’s see if they really understand anything about “Web 2.0.”

UPDATE: At a different Business Week blog, Rob Hof takes a more nuanced stance: “Now, reasonable minds can disagree on the meaning of ‘made.’ …But unlike my colleague Steve Baker and some others on the magazine, I think the fact that a lot of intelligent people read ‘made’ to mean something different [from] what the magazine intended to convey is prima facie evidence that the cover language didn’t hit the mark… We hear the criticisms, even if not everyone here agrees with them. I also know that, contrary to the beliefs of some critics, the words on the cover are something that folks here take very seriously and debate vociferously.” Hof’s entry is a good example of how someone blogging from within an institution can tactfully criticize it without getting (figuratively) beheaded.
[tags]Digg, Web 2.0, bubble, businessweek[/tags]

Late last night I clicked on a link to the new Business Week cover story about Digg and its founder, Kevin Rose, and read the cover’s headline: “How this kid made $60 million in 18 months.” Gee, I thought, bleary-eyed, I guess I missed the story about how they sold the company. Good for them.

This morning I started reading the piece, and, after scanning quickly through it hunting for the graph about how Digg had sold out and to whom, realized that the $60 million figure was not the proceeds from a sale, and not even a valuation that a prospective buyer had offered, but an almost entirely fictional number.

Was it something that some irresponsible coverline writer had slapped on the piece, that the responsible writer was horrified to see? I don’t think so. The second paragraph of the article, referring to a recent redesign of the Digg site, reads: “At 29, Rose was on his way either to a cool $60 million or to total failure.”

The $60 million number is never explained in the piece; the only real numbers are contained in this sentence: “So far, Digg is breaking even on an estimated $3 million annually in revenues. Nonetheless, people in the know say Digg is easily worth $200 million.” Elsewhere the article says Rose owns 30 to 40 percent of the company. Hence, $60 million.

There is a word for this kind of business journalism, and it is: awful. The reader has no idea who these “people in the know” are; they could easily be people associated with the company who have an interest in inflating its worth.

There’s no question that Digg is a successful site that might be on its way to building a real business. It might be worth more than $200 million someday. I’m not slighting them in any way; I’ve been visiting the site almost since it started. But plastering imaginary dollar figures on its forehead is not the way to help Rose and his colleagues build a real business. “On paper” means just that. “People in the know” can say whatever they want, but your business, like your house, is only worth what someone is actually willing to pay for it.

The Business Week piece itself acknowledges this in places: “This time around, the entrepreneurs worry that, within a moment, the money — and their projects — could vanish… it’s still only paper wealth, which [Rose] and many others have learned can evaporate.”

Right. So why is Business Week insisting that Rose has made $60 million? If this callow 29-year-old understand that it’s “only paper,” why are the editors of one of our best-known business journals being so stupid about it?

Techdirt calls the article “the ultimate Web 2.0 hype piece,” but I think it’s not even that up to date; it’s the same old dotcom-bubble piece dragged from the attic and retrofitted for today’s Web. It is just as mindless about the nature and meaning of company valuations as the dumbest purchaser of TheGlobe.com IPO shares was.

POSTSCRIPT: Jason Fried of 37Signals comes at Business Week from the perspective of a successful entrepreneur who is also a member of the tech industry’s reality-based community.
[tags]digg, web2.0, bubble[/tags]

Brian Carney’s Wall Street Journal piece about Craigslist wants to know why Craigslist isn’t maximizing its revenue:

Carney is either failing to see or deliberately ignoring a simple element in the equation here: The absence of ads is one of the key factors behind Craigslist’s phenomenal success. No barriers, no annoying popups, no distractions, none of the gaming and manipulation that Google text ads increasingly invite. Instead, simplicity and effectiveness — and trust.

Of course Craig Newmark and Jim Buckmaster could turn on the ads and rake in some cash, short-term, but they would undermine what they’ve built and compromise the principles that have served them so well to date. They’ve clung tightly to those principles, against the conventional wisdom, and doing so has served them too well to stop now.