Scribd
Upload
19 views

Userbased Value

This document discusses user-based businesses and how to value them. It provides examples of both good and bad user-based business models. Some key points made: 1. User-based businesses can be valued by looking at existing and new users, accounting for costs of acquiring and servicing users. 2. Good models have predictable revenue streams, lower costs of acquiring new users, and use data collected to generate revenues. 3. Bad models focus only on growing users, are opaque about data use, and lack clear paths to profitability. 4. Examples like Netflix and Spotify illustrate good models, while MoviePass showed the downfall of an unsustainable model.

Uploaded by

Novari
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
19 views

Userbased Value

This document discusses user-based businesses and how to value them. It provides examples of both good and bad user-based business models. Some key points made: 1. User-based businesses can be valued by looking at existing and new users, accounting for costs of acquiring and servicing users. 2. Good models have predictable revenue streams, lower costs of acquiring new users, and use data collected to generate revenues. 3. Bad models focus only on growing users, are opaque about data use, and lack clear paths to profitability. 4. Examples like Netflix and Spotify illustrate good models, while MoviePass showed the downfall of an unsustainable model.

Uploaded by

Novari
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 18

USER AND SUBSCRIBER

BUSINESSES: THE GOOD, THE


BAD AND THE UGLY
Aswath Damodaran
2

Setting the Stage


Aswath
Damodaran

¨ In a series of posts over the course of the last year, I


argued that you can value users and subscribers at
businesses, using first principles in valuation, and have
used the approach to value Uber riders, Amazon Prime
members and Spotify & Netflix subscribers.
¨ I was reminded of these principles this week, first as
¤ I wrote about Walmart's $16 billion bid for 77% of Flipkart, a
deal at least partially motivated by user numbers, then again as
¤ I read a news story about MoviePass and the potential demise of
its "too good to be true" model and finally as
¤ I tripped over a LimeBike on my walk home.

2
3

User Based Value: The Trigger


Aswath
Damodaran

¨ In a post, about a year ago, I approached Uber, as I


would any other business, and valued it, based upon
aggregated revenues, earnings and cash flows,
discounted back at a company-wide cost of capital.
¨ I was taken to task for applying an old-economy
valuation approach to a new-economy company and was
told that that the companies of today derive their value
from customers, users and subscribers.
¨ While my initial response was that you cannot pay
dividends with users, I realized that there was a core
truth to the critique and that companies are increasingly
building their businesses around their members.

3
1. Valuing Existing Users
4

Aswath Damodaran
4
2. Valuing New Users
5

Aswath Damodaran
5
3. Corporate Drag

6
Drivers of Value

¨ A standard critique that old-time value investors have of


user-based companies is that they lose money, but that
is not true.
¨ There are user-based companies that make money, but it
is also true that the user-based model is still in its infancy
and that many user-based companies are young, and
therefore lose money.
¨ That said, there are elements of the cost structure that
you can look at, to make judgments on which user-based
companies are most likely to grow out of their problems
and which ones are just going to grow their problems.

7
Cost Structure

1. Servicing Existing Users versus New User Acquisition: It


is far better for a company to be losing money, because
it is spending money try to acquire new users, than it is
to be losing money, because it is servicing existing
users. The latter signals a bad business model, at least
for the moment, whereas the former offers a
semblance of hope.
2. Fixed versus Variable Costs: For mature companies with
established business models, it is better to have a more
flexible cost structure. With money-losing, high-growth
companies, the reverse is true, since it is the fixed cost
portion that yields economies of scale, as the company
grows.

8
Growth

1. Existing versus New Users: A user-based model, where


you can grow cash flows from existing users is more
valuable, other things remaining equal, than a user-
based model that is dependent on adding new users
for growth. Since a company already has expended
resources to get existing users, any added revenue it
derives from them is more likely to flow directly to the
bottom line.
2. Cost of New User Acquisition: User-based companies
that are more cost-efficient in adding new users will be
worth more than user-based companies that spend
considerable amounts on promotion on marketing, to
the same end.

9
Example: Netflix versus Spotify

Netflix Spotify
Number of Subscribers 117.6 71
Annual Revenue/Subscriber $ 113.16 $ 77.63
Subscriber Service Expenses (as %) 18.90% 79.24%
CAGR in subscriber count 223.93% 369.86%

Value per Existing Subscriber $ 508.89 $ 108.65


Cost of acquiring New Subscriber $ 111.01 $ 27.30
Value per New Subscriber $ 397.88 $ 81.35

Value of all Existing Subscribers $ 59,845.86 $ 7,714.28


+ Value of all New Subscribers $ 137,276.49 $ 20,764.56
- Corporate Cost Drag $ 111,251.70 $ 13,139.75
=Value of Operating Assets $ 85,870.65 $ 15,339.10

10
Revenue Models

¨ Subscription models tend to be stickier (making


revenues more predictable) but they offer less upside
potential (it is difficult to grow subscription fees at high
rates).
¨ Advertising models scale up faster, since they require
little in capital investment and adding new users is easier
(since they free), but revenues are heavily driven by user
intensity (how much time you can get users to stay in
your ecosystem) and exclusive data (collected in the
course of usage).
¨ Transaction models are the riskiest, since they require
users to use your product or service, but they also offer
the most upside, since your upside is less constrained.

11
Differentiating across User-based
companies

12
When Buzz Words become Business
Propositions
¨ Network benefits refer to the possibility that as you grow
bigger, it becomes easier for you to get even bigger, making it
less costly to acquire new users. That is the promise of ride
sharing, for instance, where as a company gets a larger share
of a ride sharing market, both drivers and customers are
more likely to switch to it, the former, because they get more
customers and the latter, because they find rides more
quickly.
¨ Big data, in a value framework, offers user-based companies
an advantage, since what you learn about your users can be
used to either sell them more products or services (if you are
a transaction-based company), charge them higher premiums
(if you are subscription-based) or direct advertising more
effectively (if advertising-based). .

13
The Pricing Game

¨ As I look at user-based companies, some of which


are being priced at billions of dollars, I am struck by
how few of them are built to be long term
businesses and how many of them are being priced
on user numbers and buzz words.
¨ The drivers of user value also give insights on what
to look for in user based businesses that are headed
for the precipice.

14
Bad User Businesses: Characteristics

1. All about users, all the time: If the entire sales pitch that a company
makes to investors is about its user or subscriber numbers, rather than
its operating results (revenues and operating profits/losses), it is a
dangerous sign.
2. Opacity about user data: The companies that are most opaque are often
the ones that have user models that are not sustainable.
3. Bad business models: A business model that is designed to deliver
losses, not only in its current form, but with no light at the end of the
tunnel\
4. Loose talk about data: The data that they will collect from their users to
make money, without any serious attempt to explain why the data will
give them an edge.
5. And externalities: Their "innovative" twists on an existing business will
both expand and alter the business, leading to benefits for other players
in that business, who, in turn, will share their benefits.

15
MoviePass

16
The Predictable Consequence

17
The Bottom Line

¨ You can build valuable user-based companies, but to


do so, you need to plan for, work on and develop
pathways to profitability.
¨ The most valuable user-based companies, collect
exclusive data from their users that they use to
generate revenues, have significant economies of
scale and networking benefits.
¨ A combination of hubris and laziness has led to user
based companies that are built on bad business
models, talk casually about big data and have few or
no pathways to profitability.
18

You might also like