The Return of Monetized Eyeballs
For highly trafficked websites, bubble-era buyouts are back.
By Om Malik

(Business 2.0) – By late 2001, anyone hawking a business plan that depended on selling online advertising would have been laughed off Sand Hill Road. After all, the idea that Web traffic could be converted into ad dollars--that "eyeballs" could be monetized--led to some of the most overpriced acquisitions of the dotcom era. Remember when ExciteAtHome paid $780 million for BlueMountain.com, the online greeting company with 11 million monthly visitors and negligible revenues?

Now, though, a new wave of deals--from Dow Jones's $519 million acquisition of MarketWatch a year ago to America Online's recent purchase of Weblogs Inc. for a reported $25 million--signal that Internet content is hot again. Even prices for domain names are soaring. (See "Masters of Their Domains," page 138.) Fueling the rebound is the resurgent online ad market, which once again makes Web traffic a prized commodity. This time around, however, investors and acquirers are tempering valuations based on lessons learned. Here's why eyeballs are worth money, and what it takes to cash in on them.

The Market Blinks

Back in 2000, every entrepreneur who started a Web content company carried the same PowerPoint slide. It charted the astounding growth of U.S. online advertising, from next to nothing in 1995 to $6 billion in 1999. Then a dotted line shot up to the projection for 2005--typically the $16.5 billion figure supplied by New York City-based Jupiter Communications. If a website could just attract visitors, the slide argued, advertising dollars would follow.

Venture capitalists and big portals bought in, placing sky-high valuations on sites that promised large audiences. Of course, the market for traffic dried up as online advertising slumped from $8.2 billion in 2001 to $6 billion in 2002. But here's the kicker: Web content deals are on the rise again, and Internet ad spending should reach $12 billion this year, meaning Jupiter's once-ridiculed forecast wasn't far off the mark. Viewers for Sale

With nearly 38 million broadband connections in the United States, consumers now spend three hours a day online compared with 1.7 hours watching television, according to a Stanford University study. Meanwhile, Forrester Research predicts greater than 12 percent annual growth in Web ad spending between now and 2010. And with companies like Ford, McDonald's, and Procter & Gamble announcing plans to do more Internet advertising, content giants are eager to buy audiences. In the past year, the New York Times Co. paid $410 million for About.com, InterActiveCorp acquired Ask Jeeves for $1.9 billion, and News Corp. bought the parent company of MySpace for $580 million. "Media companies are hearing from advertisers who want to spend more on the Internet," says Shelby Bonnie, CEO of San Francisco-based CNET, which earlier this year paid $22 million for four small websites. A Fresh Look at Traffic

Based on recent high-profile Web content deals, the value of a unique monthly website visitor currently hovers around $38 (the average purchase price per unique user of acquisitions during the past year). As a result, those who built popular websites over the last few years look prescient: They "bought" eyeballs when the market placed little value on them--making daily blog posts or encouraging others to upload text and photos--and can now sell their traffic at a markup.

Of course, there are new metrics for valuing audiences. "Not all pageviews are created equal," cautions David Hornik, a partner at August Capital. Hornik and other VCs say the most prized traffic comes from sites that leverage "viral" content to acquire users who are intensely loyal. And according to Weblogs Inc. co-founder Jason Calacanis, the most valuable online media companies are those that are already generating revenue. "Concentrate on selling ads from day one," Calacanis advises. "And build a brand. Because without that, you're going nowhere."

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Eye-Popping Valuations Based on recent acquisitions, the market price for website visitors is rising.

Acquisition price per monthly unique visitor (logarithmic scale)

Brodcast.com $710 Excite $394 Lycos $385 GeoCities $187 MarketWatch $80 BlueMountain.com $71 About.com $58 Ask Jeeves $44 MySpace $36 AltaVista $26 About.com $22 iWon $18 Weblogs Inc. $10 Launch Media $6.60 BlueMountain.com $3.23 Lycos $2.57 MP3.com $1.84 Excite $0.73 DrKoop.com $0.47

Sources: ComScore Media Metrix; 451 TechDealmaker; Nielsen/NetRatings; Business 2.0 analysis

Top Sites to Watch At $38 per monthly visitor (the average for recent deals), popular blogs and social-networking sites look like hot properties. Of course, many factors, including growth prospects and brand equity, can also affect acquisition prices.

[*] Subsidiary of VA Software.

Luring Premium Pageviews Venture capitalists say they look at the following three metrics when valuing an Internet media property.

COST OF ACQUISITION. At the most prized content sites, at least 35 percent of new users are enrolled by existing users--in other words, added "virally." Perhaps the best example is MySpace, where music fans log on to read the latest about their favorite bands.

STICKINESS. A site becomes more valuable if frequent repeat visitors make up a high percentage of its traffic. At college-directory site Facebook, nearly 65 percent of users visit the network daily. User-generated content--such as photos, reviews, and links--tends to increase stickiness.

ADD-ON SERVICES. Sites that offer fee-based premium accounts have more opportunity for future revenues and can therefore command higher valuations. A 1 percent take rate on premium services is considered healthy. For example, Flickr users can pay $25 a year to store more photos.