TechCrunch & Bubbleheads

I've just read an absurd post on Silicon Alley Insider, a new Henry Blodget blog vehicle, saying that TechCrunch might be worth $100 million.

Remember Blodget? He's the former securities analyst who is now banned from the securities industry for life. He's making a living as a blogger. Blodget referred to another article on 24/7wallst.com, which is equally absurd. The analysis of how a blog could be worth $100 million is terrible. In fact, there is no analysis. And the blog doesn't even spell Rupert Murdoch's name correctly.

I find it ironic that blogs are using shoddy analysis to prove that other blogs are worth a lot -- but that's another story.

As somebody who works in the Internet, lives and breathes finance, sees Internet deals all the time, and was a party to the entire M&A process in selling an online media company I worked at for seven years (Light Reading, which was sold to CMP Media in 2005), I can tell you it's absolutely ludicrous to believe that TechCrunch is worth $100 million. Now, that doesn't mean somebody crazy might not pay that -- especially with overinflated equity currency -- but that's beside the point. Our goal here is rational thought, not insanity.

It's all symptomatic of how this Web 2.0 thing is headed for a crazy, nonsensical bubble again.

Here's why it's crazy: It's basic math. All blogs basically sell ads on a CPM (cost per thousand impressions) basis. The CPMs in the blog business are really low, because the ads aren't highly targeted. We're talking like $5 to $6 CPM on a good day, maybe $10 CPM if you are lucky. Most of these blog outfits don't have their own sales infrastructures, so they might rely on outsourced sales outfit like Google, Doubleclick, or Federated Media. In that case, the sales agent takes a big cut of the pie as well. That might only leave you with a few bucks of CPM! I believe that right now, TechCrunch is selling its own ads.

So let's do that math. I have very good sources in the Internet industry  that say that TechCrunch is getting an average CPM of $4. I also know, through the same sources, that the Website has about 6 million page views per month. Of course, these traffic numbers are probably overinflated, as almost everything is overinflated on the Internet -- but let's stick with 6 million.

Let's do the math. Six million divided by 1,000 gives you 6,000 CPM units to sell per month. We know the TechCrunch CPM is $4 or less. Looking at the home page, it appears that they have six or seven ad units to sell, plus any in-article ad-units they might display. Some of those are house ads, though, and it's unlikely that all the inventory is sold out all the time. Let's be conservative and say they're selling five ad units at any given time.

So take the CPM of $4 and multiply it by the monthly CPM units -- 6,000. That gives you $24,000 a month. Now, multiple that by five ad units. $24,000 times 5 = $120,000 per month.

I think this is probably a generous number, because it assumes that everything is just perfect, which, knowing how most fly-by-the-pants blog operations operate, is unlikely.

$120,000 is about $1.5 million in revenue per year, folks. Not exactly Google (Nasdaq: GOOG). Layer in infrastructure, staffing, parties, vacation, and overhead and you are likely to be in the red! TechCrunch has recently entered the very human, not-online, conference business, which may generate some nice additional revenue, but I'm in this business -- it's hard work and difficult to scale any conference beyond $1 million.

The bottom line is I doubt that TechCrunch is doing anything close to $5 million in annual revenue.  In fact, as one executive at my company says, "It's easy to find Mom-and-Pop blogs with a few million in revenue, but I don't really know anybody that's gone beyond $5 million."

So let's take my $1.5 million number, just for chuckles. Let's slap a generous investment banking multiple on that -- like 10x revenue (which is crazy for a media business, if you ask me). That gives you a valuation of $15 million. That's pretty friggin' high, in my opinion. But I could see that property being worth that kind of money if packaged and sold to the right person in the right way.

But $100 million? I just don't see how you get there. Knowing what I know about most blog networks, how they are operated, and the economics behind them, I can tell you that paying $100 would be completely insane.

If CNET paid $100 million, they'd have to be out of their minds. They wouldn't be recognizing a basic element of the business -- that the TechCrunch business model is really an  old-school thing. It's just the media business! It is about people writing stuff, selling ads, and running some conferences. It's publishing that just happens to use the Internet as publishing platform.

Unfortunately for these blogs, they are in the low-CPM media business!

Not only that, but TechCrunch would be very hard to scale, because the brand is largely based on the work of primarily one guy, Michael Arrington. You can't scale one person's time, no matter how hard you try.

It's all pure bubble talk. Nonsense.

— R. Scott Raynovich, Editor in Chief, Light Reading