Set Yahoo's video value in motion

The reports last week that Yahoo was taking a serious look at purchasing the majority of the video site Dailymotion marked the first real sign of a big move by Yahoo chief executive Marissa Mayer.

Mayer has made headlines so far for relatively non-strategic moves; the most prominent being her abolishing Yahoo’s long standing working from home policy. But Mayer was brought up from Google to deliver more than operational tweaks, she was considered the executive that could boost Yahoo’s connection with audiences and advertisers and help the company get out of a 3 year flat spot.

At the completion of 2012 Yahoo had over $1.4 billion of free cash flow available, raising questions about Mayer’s plans for investment and M&A. The reported Dailymotion negotiations are the first indication of what Mayer may plan to do with this money, looking to invest in the high growth and key strategic pillar of online video.

Dailymotion, headquartered in Paris, is a sizeable player in the world of online video, attracting 106 million users a month who view between them over 2 billion video streams. The company also has operations in the United States and United Kingdom as well as sales arrangements in territories such as Australia. Telco Orange is the current owner of Dailymotion, having acquired the group across two transactions in 2011 and 2013 worth a combined $168 million.

Strategically there are multiple reasons for Mayer to pursue Dailymotion. For one, it demonstrates that Yahoo is keen to bolster its video assets and look to become a player in this space. This is likely to appease Wall Street and keep the stock price buoyant, as video is a key pillar for audience growth as well as advertising growth.

Secondly, Mayer will be confident the sizeable global footprint of Yahoo can add users to Dailymotion and boost its already impressive user numbers. Yahoo has significant scale across all major territories and its network will offer Dailymotion exposure to many who would be unfamiliar with its brand. Thirdly, Dailymotion would bring with it innovative video and streaming technology, which should improve Yahoo’s overall video technology suite. Despite not getting the same attention as a YouTube, Yahoo has been experimenting in the video space for the last ten years and has recently been behind online pay per view love concert initiatives with the likes of the Rolling Stones. The Dailymotion technology suite should bolster its kit in this regard and also has an enterprise based cloud solution called DM cloud that serves the b2b audience.

Last, the deal makes a lot of sense in terms of immediate ad revenue potential. Dailymotion is delivering 2 billion video streams globally per month. That number is not insignificant and this inventory sits within the lucrative world of online video where yield is traditionally higher and current advertiser appetite is significant. Dailymotion also has a third party distribution network that operates across the likes of Huffington Post, MSN and Slate. In a world where high quality video content is difficult to find outside of YouTube and VEVO, Dailymotion would immediately bring Yahoo a tonne of video advertising it could monetise. Inventory it could monetise via its own sales team, or throw into ad exchanges or programmatic platforms and monetise via a third party.

It’s for this reason the $300 million price tag being thrown around seems like relatively good value. Two billion videos a month at an average video CPM means that Dailymotion on current usage has the potential to bring in around $20 million per month in ad revenue from in-stream advertising revenue, or $240 million annually. This should be higher margin revenue within an organisation like Yahoo than within Dailymotion on its own – which could at current usage rates add $50-70 million a year in net profit onto Yahoo’s bottom line. Plus it gives it a better suite of products on hand to try and grab a share of the estimated $25 billion in ad revenue that will flow into online video over the next four years in the United States alone.

Compare this with other acquisitions in the digital space: Salesforce acquired Buddy Media for $689 last year, despite the company incurring consistent losses and a loss over $20 million in the first half of 2012. Google purchased failed widget maker Slide for $182 million then shut it a year later. Facebook paid $1 billion in stock for social photo site Instagram despite the service having no advertising model and limited revenues

No, Dailymotion isn’t VEVO or YouTube. But that’s not the point. In Dailymotion Yahoo isn’t buying a destination, it’s buying a video foundation it can look to apply to its varied assets across the board and enrich its content. The thinking is right and it’s definitely time to see Yahoo make some moves in the area of mobile and video.

Ben Shepherd is a media and technology consultant. He blogs at Talking Digital, can be found on Twitter @shepherd and LinkedIn http://linkedin.com/in/shepherdieu