Digg This, HuffPo: What's $200 Million Divided by 2009 Reality?

It's Time to Apply Some Brutal Logic to Web 2.0 Valuations (Sorry, Venture Capitalists!)

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What if the privately held Huffington Post is worth not $200 million -- a cracked-out number floated last year -- or even $100 million, but, say, $2 mil?

This is not entirely an academic question, given that in December HuffPo astonished media watchers by securing $25 million in additional funding from Oak Investment Partners, a Palo Alto, Calif., venture-capital firm. The timing was particularly amazing, given that the lefty uber-blog's traffic has lately been plummeting -- a possibility my colleague Nat Ives examined way back in October. At the time Arianna Huffington insisted to Nat that the "Huffington Post is no longer as dependent on politics," and so she wasn't particular worried about the usual post-election readership swoon of politically-focused publications.

Arianna Huffington
Arianna Huffington
That $200 million figure first appeared in a Brian Stelter piece in The New York Times last spring. "According to one person who was briefed on discussions but was not permitted to speak for attribution," Stelter wrote, "the company has at least looked at the value of the site if it were put up for sale, and a figure around $200 million was used."

Amazingly, that number actually gained currency, though anybody with basic math skills and a halfway-decent bullshit detector knew the figure was nonsense, even before the economy melted down. Consider, for starters, HuffPo's revenue. As Nat reported, from January through August of last year -- the site's most-trafficked year -- "the site collected just $302,000 in ad revenue, according to an estimate from TNS Media Intelligence."

Still, there's a residual assumption that HuffPo must be worth at least tens of millions, especially given Oak's $25 mil investment for an undisclosed stake. Just after December's Oak round, for instance, The Wall Street Journal's "BoomTown" blogger Kara Swisher quoted an unnamed source who put HuffPo's valuation just "south of $100 million." Clearly those Palo Alto VCs are hoping that the blog's expansion plans -- last summer's launch of a Chicago HuffPo edition, for instance -- will some day pay off.

So how'd I come up with my $2 million figure? Well, let me start by saying that I'm not an unnamed source, and I do tend to allow myself to speak for attribution, so take what I have to say with a grain of salt. OK, basically all I did was look at HuffPo's competition, in particular a similarly left-leaning content site that's well-established -- in fact, IPO'd a decade ago. Back in 1999, you may remember, Salon seemed like maybe it was the future of publishing, and it had a lot of investors, including California VCs, plenty excited. Today Salon is traded on the OTC Bulletin Board (SLNM.OB), and as of last week, a single share of Salon was going for about 35 cents. With 2 million shares outstanding, that gives Salon a market cap of $700,000. (Hilariously, in the summer of 1999, when I was staffing a start-up, I had my eye on a Salon editor I wanted to hire. But given that he got stock options and Salon was then trading at more than $9 a share, he was entirely unpoachable.)

Now, HuffPo's traffic is bigger than Salon's. Quantcast estimates 1.9 million monthly U.S. uniques for Salon vs. 7.5 million monthly U.S. uniques for the Huffington Post. Then again, to its credit, Salon had $1.98 million in revenue in its quarter ending Sept. 30 (that revenue wasn't enough to offset expenses, though, and Salon reported a $1.28 million loss to the SEC).

So traffic aside, why give HuffPo a higher valuation? Two reasons:

1. Because master self-promoter Arianna Huffington inspired a "Simpsons" character last year; that's gotta be worth something. (If Salon Editor in Chief Joan Walsh were to inspire, say, a "Family Guy" character, then I'd insist Salon would be worth at least double its current $700K.)

2. Because, unlike Salon, which (naively, old-fashionedly) pays for its content, HuffPo has an ethically questionable content-generation scheme: It doesn't pay most of its bloggers at all. Worse, it sometimes even lifts content wholesale from other sites that do pay for their own content, as the Chicago Reader's Whet Moser noted in a few outraged blog posts that briefly made a ripple last month on Jim Romenesko's media site as well as on Gawker ("Arianna Huffington's Scuzzy Copying Pisses Off Chicagoans"). In other words, the Huffington Post is sort of the Napster-circa-2000 of content sites in that its business model, more or else, is: Only suckas pay for content, baby! And that's gotta be worth something, right?

Now maybe the Huffington Post could be worth more if it further cut its burn rate. For instance, rather than not pay its bloggers, it could charge them -- for the privilege of getting to help maintain the jetsetting lifestyle of the Great Arianna, of course. As for some of the people the site does pay, like its tech staff? Those jobs could be offshored to, I dunno, Third World child labor. If HuffPo takes such steps, I could see the site being worth maybe $4 mil. (Then again, there's always the karma risk of exploiting workers. If a disgruntled work-for-free blogger or a slave-driving HuffPo middle manager ended up, say, inserting ground-up melamine into HuffPo blog posts in an attempt to trick people into thinking the content was more substantive than it really is, that might save Arianna some money in the short term. But what if a reader or commenter got poisoned?)

Where is the voice of reason in all this? Well, it's sure as hell not coming from public markets -- one silver lining of the economic meltdown is that it freed us all from blind faith in Wall Street's black magic and reopened our eyes to the obscenely arbitrary "logic" of stock prices -- and it's certainly not coming from Palo Alto VCs. Instead, it's coming from the current dour oracle of the Web 2.0 economy, Gawker Media founder Nick Denton, who is fond of joining the fray as a commenter on the various blogs in his blog network. In a comment he appended to Gawker's coverage of Oak's $25 million investment in HuffPo, Denton wrote, "I suspect the deal owes as much to [HuffPo co-founder] Kenny Lerer's behind-the-scenes dealmaking as to Arianna's election showmanship. For instance, Lerer -- a former PR man for Michael Milken who once boasted that briefing journalists was as easy as 'breastfeeding' babies -- was the one who talked up Huffpo's valuation. Where else did that $200m valuation come from?" (In a subsequent comment, it should be noted, Denton said he got that Lerer anecdote from Nina Munk's 2005 book, "Fools Rush In: Steve Case, Jerry Levin, and the Unmaking of AOL Time Warner," and added that Munk "also ran his denial in the footnotes.")

Thankfully, the breastfeeding-the-press era seems to be mostly over when it comes to bullshit valuation figures. The media are slowly beginning to realize that just because some VC shelled out $1 million for a 1% stake of a start-up, that doesn't mean that the start-up is worth $100 million. Suddenly we're remembering what we realized back when the Web 1.0 bubble burst: A lot of VCs are idiots who are simply flushing money down the drain.

The flushing sound became particularly deafening just before Christmas, when Nick Denton's downsized Valleywag blog (now a subsection of Gawker) racked up more than 100,000 page views for a post by Owen Thomas titled "It Costs Digg $5 Million a Year to Run the Internet." In it, Thomas discussed a BusinessWeek story by Spencer Ante titled "A Wrench in Silicon Valley's Wealth Machine," with a particularly acid take on Web 2.0 darling Digg's "frightful" finances. Thomas' summation: "In the first nine months of [2008], losses grew almost as fast as revenues: Digg took in $6.4 million and spent $10.4 million, resulting in a $4 million loss. At an annual clip, that's more than $5 million out the door a year."

What's amazing about BusinessWeek's story is that it amounted to BusinessWeek calling bullshit on ... BusinessWeek. Back in 2006, the publication put scruffy, baseball-cap-wearing Digg founder Kevin Rose on its cover with the headline "How This Kid Made $60 Million in 18 months" -- a wild guesstimate based on Rose's presumed 30% stake in his company. "People in the know," BusinessWeek declared back then, "say Digg is easily worth $200 million."

Ah, $200 mil. That lovely number again number. And here I come full circle, because back in 1999 -- 10 damn years ago! -- when I was an editor at New York Magazine, I assembled a roundtable discussion of seven Silicon Alley grandees. My moderator was the then-new media columnist for the magazine, Michael Wolff, who'd just published his riches-to-rags new-media flame-out memoir, "Burn Rate." Among the roundtable participants (please, try to stifle your laughter): Todd Krizelman and Stephan Paternot, the Mark Zuckerbergs of their time, who'd founded an early social-networking site called The Globe, a company with a market cap of something approaching a billion then -- and just $3 million today, with shares of TGLO selling for less than a cent.

I edited down the transcript and we ran it in New York under this headline (drum roll please):

"Are These People Really Worth $200 Million?"

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