Bubble hunting

Journalists tend to love two stories: the up trend and the down trend. Particularly in business coverage, and certainly Red Herring of old was no exception, the stories tend to be about the up-and-comers and the on-their-way-downers. While this is a charming construct and provides a sense of drama in what may otherwise be dry reporting on business trends, it is oven a very misleading binarianism (to coin a word.). It's tempting to talk of bubbles growing and bubbles bursting, but the entrepreneurial ecosystem is, IMO, far too complex for bubblism (to coin another.) Still, the urge is seductive. It was one we tried to resist at Herring (I've written before about our attempts at conversational journalism) but not always successfully.

Now my friends, and former "fish," at the alarm:clock think they've spotted a bubble, a scary beast that ought to strike fear in the hearts and minds of imaginative Internet denizens, like Heffalumps in the Hundred Acre Wood. That's right -- you heard it there first: Bloglines' sale to Ask is the first example, according to a:c, of a "valuation [that] was pegged to users not revenues." Here comes Bubble 2.0 -- run for your lives!

It's probably at this point that I should declare for any first time visitors to this blog my absolute and complete lack of objectivity on this issue, since I am co-founder and CEO of Rojo Networks, Inc., a Bloglines competitor. It is decidedly not our strategy to be a non-revenue company. Still, I find the marveling at a "non revenue-based valuation" a bit strange. Don't companies buy non-revenue generating assets all the time? It is not submission to past dot com lunacy to suggest that a company can have value beyond revenues. Bloglines has a well-appreciated service with a healthy membership that Ask does not have, and Ask knows how to generate revenue off this activity -- something Bloglines hasn't done. Yet.

So before we jump to the logical corollary of the Bubble 2.0 hypothesis, which is that Ask foolishly overpaid, (especially given the fact that we don't know yet *what* they paid) how would one value this asset?

Now I don't have any inside information from Bloglines or Ask but consider some publicly available information. Pew estimated that there are 6 million people in the US alone using RSS aggregators. FeedBurner released reader market share numbers that put Bloglines at 33% of the market. It may not follow that Bloglines has 2 million members, but say that it did. Consider that many content sites (just look at the public ones and see how much revenue they generate per unique visitor per year) can generate $6 to $12 per unique visitor per year off of advertising and other revenue streams. A Bloglines member probably generates a lot more traffic than a typical unique visitor to a content site, but let's say Ask could generate $10 per year per Bloglines member. (Ask.com reports 37 million unique visitors per month and reported $86 million last quarter, which is over $9/unique visitor per month.) That's $20 million a year in revenue potential. And what does it cost to run Bloglines? A small fraction of that for sure.

Are these numbers inflated? Well then discount them back: discount the membership, discount how much revenue can be generated per member, discount for the cost and risk of actually generating revenue, discount for competition. But then you have to factor in growth--the fact that this market, again according to FeedBurner, is growing in terms of feed subscriptions at 1% per day. Six million people read feeds now, but 32 million people read blogs and 86 million people read news in this country alone -- fertile markets for feed reading.

Now this analysis is just speculation and I make no claim as to its accuracy. Still, given this data, is it reasonable to believe that Bloglines could generate $1 million in earnings for Ask? Two million? Ten? Twenty?

What *should* Ask pay for a company that *could* generate millions of dollars in earnings? Well with a P/E of almost 30, investors have told Ask that they will pay $30 million for every $1 million in earnings they generate. So tell me again how the speculated $20 million price tag (though a others have speculated it could be $40 million) is a sign of the second coming of the dreaded bubble?

Here's another way to look at it: according to Alexa it looks like Bloglines has around 10% to 20% of the traffic of Ask. Ask is a $1.4 billion company that makes money off of their traffic. What *should* they pay for a company that could increase their traffic by 10% to 20% immediately, with room to grow? $20 million doesn't sound like "fuzzy valuation math" to me. But hey, as I say, I'm not objective.