Friday, May 13, 2011

Tech Valuations: back to big $$$ per eyeballs! (hint: The ARPU isn't there)

According to my calculations in the table below, the best annualized ARPU (Average Revenue Per User) is still in the Telecom business. Though Telecom isn't as sexy as the "visionary potential" of Facebook, but at least it delivers real revenues with the data revenues portion of ARPU getting to around 10-15% now. And since Mobile is the name of the game for social networking and social gaming, Mobile Operators are going to always be in the mix.

So did AT&T overpay for T-Mobile? Not according to the table below. T-Mobile US  acquired by AT&T for $39B for 34M subscribers, that's a $1,147 valuation per subscriber, and these are PAYING subscribers. With 2010 revenues at $17B, Annual ARPU is $500 per subscriber (An average monthly bill of $42 per subscriber). So valuation comes to 2x ARPU.

Microsoft bought Skype for $8.5B for 124M users (source 2010 S-1 filing; not the 600M names in their database), that's a $68 valuation per user. Skype 2010 revenues were about $800M, so that is an annual ARPU of $6.45 (yes, that is 6 dollars and fifity cents!). Worse, out of the 124M only 8M users are subscribers and generate that $800M, so the "effective annual ARPU" is $100. So for the sake of comparison to the T-Mobile Deal, Microsoft paid a $1,062 per Skype subscriber (the 8M paying ones). So valuation comes to 10x ARPU. Or in "PR" terms, $69 per user on the basis of the 124M users, so that still comes to  11x, anyway you look at it.

Similarly, in its IPO, LinkedIn is valued at $3B with 100M users, that's a $30 valuation per user. LinkedIn 2010 revenues were about $200M. Granted in that revenue figure, subscriptions accounted for 25%, advertising for 30% and recruiting for 45%, the fact is the recruiting revenue and the advertising revenue is driven by the 100M users on the network. So it is fair to calculate an ARPU of $2 per user. So valuation comes to 15x ARPU.

Facebook valued at $67B with 600M users, that's $112 valuation per user. Facebook 2010 Revenues were $1.9B. So ARPU is $3. So valuation comes to 36x ARPU.

In the end, bankers, shareholders and acquisitive CEOs always find a way to justify the premium of the "strategic value". Though public shareholders - yes including those of AT&T, of cash-cow Microsoft and of soon-to-be-public LinkedIn, should really analyze the impact on market cap compared to other revenue, margin and cash.