Tuesday, May 15, 2012

Better Math on Online v. TV / Forgive Me, for I am Mortal

In an earlier post, I did a very rough comparison of the economics of television v. online users. I committed a pretty big mathematical blunder, and, also, found some better data. So let me correct myself.

Apparently, Pinterest users spend about 15 hours a year using the service, which would give a per-hour valuation of ~$1. This would value Mad Men at $42M, using the same math I did in the previous post. However, if you just calculated that Mad Men viewers have the same value as Pinterest users, instead of doing my elaborate (and probably useless) per-user-hour-valuation, that number is $57.5M

It is important to note that these are really from-the-hip estimates. In fact, the mistake I made in the previous post actually demonstrates quite well the problem with doing this sort of comparison: in order to get the value of 37¢ an hour, I just divided user value (16.50) by 50% of the hours spent on Facebook per year (48)†. The fallacy here is assuming that the value is unrelated to the amount of time users spend on the site; in other words, by this logic, if users were to spend more time on the sites, and the user value were held constant, the per hour value would drop. This is almost certainly wrong, as sites that users spend a lot of time on are inherently more valuable than those with a high bounce rate. In other words, the value of a site increases with time spent on it.

So, my point is that this is a really roughshod way of comparing apples to oranges, but it was the easiest way to do a back-of-the-envelope comparison between TV ratings and online users. I think my conclusion stands, however: it is amazing that a show like Mad Men, with 2,640,000-3,500,000 weekly viewers, would be a Network Television failure, in a world where having a few million users for an online service means you have a pretty big success on your hands. Many will say "sure, but internet companies are overvalued," and while I agree that this is probably true, I think the counterpoint is that the dated, legacy ways in which television shows make money undervalues them.

† The mistake I made was using the lower, not the upper, bound of estimated user hours to determine this value. I said I was being disfavorable in this calculation, which means I should have used the upper bound, not the lower one.

Tl;dr If online startups are overvalued, tv shows are probably undervalued, likely as a result of their aging business model.

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