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Subject: Re: UKNM: Putting a value on users
From: azeem azhar, lists
Date: Fri, 23 Jul 1999 12:50:27 +0100

>Nick Gilbert <nickatnewsnow [dot] co [dot] uk> asks:

>>Does anyone know how Freeserve came up with a value of 1500UKP per
>>subscriber? I seem to remember AOL valuing its users at $8000 per
>>subscriber and can't see why their valuation would be higher than

The brokers used a range of different forecasting methods to come up with
1500UKP per user. Each was as shaky as the next and they typically chose
the high end of their sensitivity analysis.

AOL's valuation per user is simple to work out $110bn valuation (or
whatever, I'm stuck in Munich with *two* broken PSTN modems and a working
ISDN card but no ISDN line, so I can't go online to check) and 20m
customers, therefore about $5,000 per user.

But bear in mind: (1) AOL has far less risk associated with it (longer
operating history, bigger business, proven management: AOL really isn't
dead) (2) AOL's customers are worth more, $240 a year before the
advertising and commerce comes in (3) AOL makes $40-50 (i forget exactly
how much) per customer per year on ecommerce and advertising, freeserve
less than one twentieth that with no sign they understand how to
sustainably raise it (other than to stick "buy here" buttons everywhere)
(4) for what its worth AOL has long term relationships with its users.

In practice, Freeserve's broker notes (from the underwriters) and
prospectus are somewhat schizhophrenic. Freeserve are not asking us to
value them on their current subscriber numbers or their past performance as
a market-leading ISP, but about their future potential to drive more and
deeper ecommerce relationships. (It's like Pat Cash asking not to be
evaluated as a once great tennis player, but as a brain surgeon having to
perform the lobotomy i deserve so much.)

Ray Taylor then piped in:

>Because UK investors are not as crazy as US investors, it is likely that the
>valuation of any UK listed stock will be lower.

. . . although it could be that they haven't (with all due respect to
Easynet and ITG) had sexy nternet stocks (per freeserve) to invest in.

>On the other hand, there is a high churn rate for freeserve customers and
>they at the moment, perhaps understandably, refuse to disclose their traffic
>figures, presumably because they are low. Lots of people check out
>freeserve, go away, and never come back. You'll have to ask freeserve how
>many, I don't know, but I sure wouldn't commit any investment to them unless
>they told me the figure first.

Freeserve's traffic numbers are suboptimal for a business its size. of
their 64m monthly PVs in May, around half were on the portal. You do the

32m PVs over 2m users (mutliple users per account, according to Freeserve's
underwriters) = 16 page views/user/month. This is not great. In fact, if
you accessed the Web every other day defaulting to freeserve...er that's it

>2. Advertise/promote the service very heavily and at high cost. It may cost
>20/50 or even more to acquire a new customer. So if you want 100,000 loyal
>customers, you have to spend 2-5 million, possibly more, on advertising and
>promotion unless you don't mind waiting several years and allowing
>competitors to get there first.
>So to create 1,000,000 loyal users, your ad budget could be 20-50 million
>or more, but then if each customer is worth several thousand, you ought to
>get a listing worth billions.

Advertising, especially in the Internet business, doesn't create loyalty.
It'll help with acquisition. Loyalty comes from the quality of the product
and of customer service.

"Stickiness" is about the quality and nature of the product. Freeserve
could spend all they like on advertising, it'll only encourage sampling and
then nothing at all.

Basically, you can't polish a turd. The product has to be good if it's to
be sticky. (er, that's enough, ed).

>But to reproduce the model with any kind of certainty will require serious
>upfront investment. As long as the big boys in the city are reluctant to
>supply this, it will allow a healthy flourishing startup market. So in fact,
>the longer UK (institutional) investors stay out of the game, the better it
>is for the real entrepreneurs.

Possibly. Except that it is their money which provides entrepreneurs with
the exit...

azeem azhar | www http://azeem.azhar.co.uk/ (*)
tel 07958 544 593 | icq 315460
fax 0207 691 0464 | pgp http://azeem.azhar.co.uk/pgp/

* downdated

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  Re: UKNM: Putting a value on users, Ray Taylor

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