What is a Website Worth?
AOL Purchases the Huffington Post As an accredited business valuation expert, I am frequently asked questions about the value of a website. The purchase by AOL of the Huffington Post website for $315 million certainly caught my attention. What was the logic of the deal, and will it hold up over time? Here are some thoughts, gleaned from the L.A. Times, N.Y. Times, and several popular blog sites.
HuffPo started six years ago as a website devoted to political commentary, but it has evolved into a quick portal to gossip, sports, fashion, books, religion, and more. The focus is on drawing clicks. Its stars are Kim Kardashian, Christina Aguillera, and Jennifer Aniston.
The business model is that of a content factory, designed to generate enough traffic to make a profit from the persistently low advertising rates for online advertising. Success hinges on monetizing the content that other publishers have paid to create. HuffPo has about 100 staffers, which is about 90% fewer than the New York Times. The content is mostly from other sites, reposted to HuffPo and reworded to master search engine optimization.
HuffPo is the 10th most popular news and information site with 24 million unique monthly visitors. AOL News is the 7th most popular news site with 35 million visitors. Other AOL-owned or affiliated websites include MapQuest, TechCrunch (technology news), and TMZ (gossip site). The merged HuffPo and AOL sites will have a total of 117 million visitors. By comparison, the current most popular news website, Yahoo! News Network, has 94 million unique monthly visitors.
Here are the numbers driving the purchase price, as seen by Arianna Huffington. In this deal, she says, 1+1=11.
And here are the numbers as seen by valuation analysts and investment bankers. The $315 million that AOL is paying for HuffPo is 10X the 2010 revenues of $30 million, and is roughly 5X the projected 2011 revenues. The price is about 30X the 2010 cash flow of $10 million. However, AOL expects to achieve $20 million of cost savings by combining HuffPo with the other AOL news sites. Thus, AOL expects the annual cash flow to increase to $30 million by 2012. The $315 million price is roughly 3X the valuation seen at HuffPo’s last capital raise two years ago.
The pro side of the deal: There is an expectation that major advertisers will focus their online campaigns on a small number of prominent sites, instead of spreading their ads across a large number of lesser-known sites. AOL gets something it desperately needs: a voice and a clear editorial vision. Arianna Huffington will be in charge of all of AOL’s editorial content, and she is one of the few people who have managed to create a mass-market general-interest online publication which isn’t bland and which has an instantly identifiable personality.
The potential con side of the deal: The focus on quantity is not considered a sustainable model. HuffPo's facility with search engine oriented keywords seems to be one of the main things that AOL loves about the site. In essence, HuffPo has been taking advantage of the weaknesses in the Google search engine, but these weaknesses aren't permanent. Search engine algorithms are getting better at detecting keyword gaming, and will diminish the weight it now gives to the keywords HuffPo jams in its articles. The methods HuffPo is currently using will get fewer clicks next year, and fewer still the year after.
There is another problem for HuffPo as well. This is the rise of social networks as a replacement for search engines. Those social networking links are becoming a bigger share of every news site's traffic. As Facebook becomes the new Google, will AOL – HuffPo become the new AOL – Time Warner?