Give Me Your Billions: Internet Stock Valuation and Future User Characteristics

by Jakob Nielsen on January 17, 1999

On the first day of trading (Friday, January 15, 1999), MarketWatch.com achieved a stock market valuation of a billion dollars. We all know that Internet stock are over-valued, but MarketWatch's valuation is an example of not just reality-distortion, but reality-denial.

(Update added 6 years later: In January 2005, Dow Jones acquired MarketWatch for $530 million, for an annualized investment performance of -10% per year since the IPO in 1999.)

Fidelity, Schwab, or Vanguard could easily build a financial newsletter site that would be much more valuable to users (because it would integrate with their accounts) and much more valuable to the company (because they would extract some of this value from the customers through the account relationship). More important, anybody who got a billion dollars from gullible investors could build a better site very quickly.

Investors seemed particularly pleased that MarketWatch is getting $30M in marketing on CBS. The New York Times quotes an analyst as saying that "the advertising deal is invaluable". I wouldn't exactly say that $30M is invaluable. I would say that $30M from CBS is worth about $27M. The 10% discount is due to the fact that it is less valuable to be forced to spend the marketing budget on specific media: any good marketing manager could get more benefit from spending the same budget on a choice of media — most likely on direct mail to known investors as well as inserts in investment magazines. (Update: today, I'd mainly recommend search ads, but this article was written in 1999. Search ads really got started in October 2000.)

Note that I am not saying that MarketWatch is a bad site. On the contrary, it looks like one of the better sites on the Web today (which is not saying much, of course). I do find their home page slightly confusing and it is clear that their writers are experienced in print writing and not in the online medium since the content usually violates the guidelines for writing for the Web. MarketWatch is probably worth a pretty penny: I am not putting them down.

I am a firm believer in the value of the Internet and that Web-focused companies will beat legacy companies to a bloody pulp over the next ten years. About two years ago, I predicted that the Web would eventually have revenues of about a trillion dollars per year. But I also predicted that most of this value would accrue to millions of smaller and specialized sites. Big sites will be much bigger than the small sites since the Web follows a Zipf distribution, but competition is harder at the top, so they will not make enough money to justify current valuations.

Remember that the Web is still young. The Web currently has about 150 million users, and since it will eventually have about a billion users (in 5–10 years, depending on what predictions you believe) it follows that 850 million of the users are not online yet . There is no reason to believe that these many new users will necessarily use the same sites as current users. In fact, since they will be late adopters they may well have different tastes than the current early adopters. Thus, current market share predicts very little about a site's future user base. (The design implications of the differences between early and late adopters are discussed in great detail in my partner's book The Invisible Computer.)

Yahoo is one of the best-designed sites on the Web and currently has the highest traffic. But its technology does not scale with the Web, so recently Google has become the best way to navigate the Web. I think Yahoo is likely to survive the onslaught of Google since they have many other services besides navigation, but the fact that a Stanford student can build a better service than the Web's leading site should be a warning to people who think the Web is all locked up.

The Red Herring reports that MarketWatch had 2 million unique visitors with 45 million page views in September and 785,000 visitors with 38 million page views in March 1998. These numbers mean that the original users viewed 1.6 pages per day on the average: probably enough that most of them were indeed loyal users. The 1.2 million new "unique" users only viewed 0.2 pages per day on the average, making them much more likely to be simple tourists who were attracted by advertising but decided not to use the service.

Some analysts were impressed by the 2 million "unique visitors" and the billion-dollar valuation translates into $500 per "unique" user, including the many ones who only looked at the home page once and then decided to use another financial site instead. "Unique visitors" and "reach" are meaningless measures: only loyal users count.

The link to MarketWatch at the top of this article will probably be followed by about 10,000 of my readers, so this Alertbox could well add five million dollars to the market cap of MarketWatch. They are welcome to it: let me repeat that it is a nice site. In fact, MarketWatch has some helpful articles about the Internet stock craze (even if they are written in a print writing style).


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