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Yahoo! In Cable Cowboy Land

How is it that Yahooligans are valued at 267% of the average value per user for the top 10 Web sites? And are they worth the same if cable Internet gains in popularity?

Ever since the start of WEBDEX more than a year ago we've noticed Yahoo value per user always at a premium to the others in the top 10 group of sites. Easily 2x to 3x the rest. You've seen that also. The short answer is that investors are paying for the mindshare leader, the pioneer which defines the space more than any other.

In fact Yahoo is the only search engine turned portal turned media company that hasn't yet had another firm come calling for it (at least publicly). The large market cap dissuades anyone but the largest boots to kick its tires.

On a value per unique user (user count by Media Metrix) it shows Yahoo users at $1,043 each, up 3.7% the past week. The amazing part is Yahoo crept higher even after news of its huge insider sales spree to the tune of several hundred million sold a few weeks back. Softbank alone unloaded about $450 million of its position.

Internet.com's January Feb 24 Mar 3 Feb 24 Mar 3 Percent
WEBDEX Users Market cap or PMV* Market cap or PMV* User User change
  (millions) (millions) (millions) Value Value  
AOL.com* 38.0 $8,250 $8,450 $217 $223 2.4%
Microsoft.com* 30.1 $8,750 $9,000 $290 $299 2.9%
Yahoo 29.5 $29,664 $30,766 $1,006 $1,043 3.7%
Lycos 28.5 $3,886 $3,822 $136 $134 -1.6%
GO Network (SEEK) 22.8 $4,331 $4,118 $190 $181 -4.9%
GeoCities 19.3 $2,961 $3,079 $154 $160 4.0%
Netscape.com* 18.0 $3,750 $4,000 $208 $222 6.7%
Excite 18.2 $5,369 $5,740 $295 $315 6.9%
Time Warner web sites 12.2 $1,750 $1,800 $144 $148 2.9%
AltaVista* 11.2 $1,250 $1,350 $111 $120 8.0%
TOTAL 200.1 $69,961 $72,125 $2,752 $2,844 3.4%
AVERAGE 25.5 $6,996 $7,213 $275 $284 3.4%
MEDIAN 21.0 $4,109 $4,059 $199 $202 3.3%
) 1999 internet.com *pmv=estimated private market value for website only; users, media metrix

Our analysis estimates YHOO trades at north of 85x our estimated 1999 revenue for the firm (not factoring Yahoo's pending acquisition of GeoCities revenue).

Observers can come to three conclusions about YHOO: It's #1 overvalued; #2 fairly valued; or #3 undervalued. All three may be correct, depending on your horizon.

Point on #1 - a user is a user is a user, how can one person be valued at $x on one site and $x difference on another? Point on #2 - Yahoo enjoys the best brand name on the Web, with design, look and feel, combined with speed (pages load fast), that users come back to over and over. Point on #3 - Yahoo revenue, earnings, page views per day, brand, mindshare, global presence put it in as a candidate to be a player across multiple mediums and platforms.

The one thing Yahoo lacks -- as does AOL -- is the guarantee of broadband carriage. That's because the cable guys that own the coaxial backbone play by their own rules and @Home has beat everyone to the punch here.

The cable czars' rule is simple: whoever owns the wire makes the rules.

That's why chief Yahoo Jerry Yang told Jupiter's conference yesterday that he's looking into this matter of getting access to the fat wire. Just as AOL's Steve Case has been trying to do for months now with a team of lawyers in Washington, ever since AT&T's first overtures for cable king TCI.

Yahoo's also reportedly working on Turbo Yahoo to meet the needs of the new pipe. We suspect all the top 10 sites are looking at broadband.

The closed nature of the coaxial wire controlled by the cable companies brings to the fore a question central to the value of the Internet as a dial up phenomenon: are broadband users worth more than dialup users? Is the landscape altogether re-drawn as (if) broadband becomes the dominant delivery of bits?

Are there new Yahoos in the wings waiting to emerge in this space? Will the new tools for broadband create a whole new renaissance like we saw with the original Web development market in 1993-94?

I think that the answer to all of these is a resounding "yes" as long as the cable barons don't get in the way, trip over themselves in trying to control coaxial as in the past.

The model for the MSOs (multiple system operators, cable firms with more than one cable system) in the future is probably very much like the phone networks, as wholesalers of bits with some branded retail elements in the mix.

By 'wholesale' I mean selling backbone to everyone, opening up the wire, let all the ISPs pay them for carriage, on demand, real-time spot market. Burstable bandwidth. By 'retail' I refer to programming that users want, similar to how MTV or CNN grew.

But on the new broadband Web programming would be competing against the slew of offerings out there. Search engines are the new program directors, keywords the channel line up, hyperlinks the new remote control itch.

Using Broadcast.com (NASDAQ:BCST) as example, the multimedia Web firm value per user is about $475. That's more than double the median for the top 10 sites (but still under Yahoo's value per user).

Where do values go in broadband? Let's use cable as proxy. Cable subscribers are valued at about $2,500 per subscriber. That implies an average $56 billion for the top 10 Web sites if they were cable systems, which we think is not realistic.

At $1,000 each the average is $22 billion, perhaps more so. All but Yahoo, AOL and AltaVista have cable partners or deals with cable or own cable assets. Disney-Infoseek (NASDAQ:SEEK) Go.com is one example. Excite-@Home another. Lycos-USA Networks ditto. Time Warner (NYSE:TWX) owns cable systems and programming.

There's a reshuffling of platforms happening that we estimate could reshape the Internet experience end to end, and increase values. The timeline we see is by 2002.

The best thing the cable cowboys can do is not get in the way with one-way thinking but sell access on the backbone, move before the FCC starts making rules here. Best thing those large Internet traffic sites without a cable strategy can do is find one or buy one quick.

Yahoo and AOL, for example, may have to buy into cable systems, using their high-valued stock, capital access, and user reach leverage. Cable companies need the cash infusion to roll out two-way coax/fiber Internet. Those in the top 10 left standing when the platform shift is done (if it happens) may be valued higher than those left in the dial up narrowband-land of today's Internet. WEBDEX 2003 may look a lot different.

Accolades for Internet Stock Report:

"Fresh and provocative" -CBS Marketwatch, who named Steve Harmon one of the top Internet stock analysts and only independent one honored

"I am a huge fan of Steve Harmon's analysis" -Kleiner Perkins' John Doerr



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