Wikipedia:Wikipedia Signpost/2006-10-30/Wikipedia valuation
Hypothetical valuation of Wikipedia scrutinized
A thought exercise on Wikipedia's potential value as a business prompted debate last week, bringing the issue of advertising back into view as well. Valuation estimates tossed about ranged from half a billion dollars (all figures US$) up to five billion. In the end, however, the entire discussion remains strictly theoretical.
The valuation analysis
This all began with a post on Thursday by Ashkan Karbasfrooshan, the operator of a blog network. He wrote up an analysis of the potential value of Wikipedia, "strictly for entertainment purposes", as if it were an advertising-supported business instead of a non-profit organization. (Switching from non-profit to for-profit is not normally allowed—or as Brad Patrick recently put it to Telegraph reporter Mick Brown, it would be "like selling Greenpeace".)
As the business model for this hypothetical for-profit, Karbasfrooshan focused primarily on advertising. He calculated that Wikipedia could bring in $2.8 million every month from display advertising. This was done using publicly available estimates of unique visitors (for example, Wikimedia Foundation projects collectively ranked as the sixth-most-visited network of sites in the world for September according to comScore), although such numbers vary according to who does the reporting, and questions have been raised about the methodologies used to produce them. To this he added more than $750,000 as income from paid search results.
Even without any growth, the revenue projection came out to $42 million per year. With relatively low operating costs, Karbasfrooshan assumed that most of the revenue would be profit and settled on an annual figure of $35 million. Converting the profit calculation into a value of the overall "business", he obtained estimates of $560 million and $600 million using two different methods. He noted that this range was quite similar to the sum paid for the parent company of MySpace.
The question of advertising
The analysis prompted a follow-up from Jason Calacanis, another blogging entrepreneur who now runs AOL's Netscape.com site. Calacanis added a controversial appeal for Wikipedia to accept such advertising, relating that he had proposed this earlier to Jimmy Wales and been turned down. Calacanis called Karbasfrooshan's study a "very, very conservative valuation" and said that Wikipedia would be worth $5 billion as a private company. He argued that a single leaderboard of ads on Wikipedia would bring in more than $100 million annually. (Karbasfrooshan used assumptions based on one leaderboard, or banner ad, plus a smaller "island" billboard. He also expected that the large inventory meant that some ad space would go unsold.)
Karbasfrooshan responded by criticizing the $5 billion valuation as "nonsense", arguing that Wikipedia lacks the track record as a business that investors would look for. He gave his opinion that Wikipedia was better off for now raising funds from donations, and while he thought licensing could help bring in revenue, he doubted that advertising would ever be used. A key concern was the inability to account for a possible "mutiny" by contributors, a real risk given Wikipedia history (the Spanish Wikipedia community divided in 2002 and the Enciclopedia Libre was created as a fork, partly over fears about advertising).
Calacanis's post received considerable attention from other bloggers and was featured on digg as well. Alex Halavais, whose 2004 experiment with inserting false information into Wikipedia was recently exhumed by The Chronicle of Higher Education, called the decision not to advertise "a good stance both ethically and practically." Fred Wilson, a venture capitalist who had brought the valuation exercise to Calacanis's attention, defended the notion of advertising, saying, "Ads are content just like everything else." He thought it would be easy for Wikipedia to have relevant and targeted ads.
The reaction led Calacanis to back down from some of his initial language and proclaim his admiration for Wikipedia contributors. As a revised proposal, he suggested that readers should be given the option to turn off advertising or select different options of how many ads to view. He did not estimate how much money such a system would generate. Another proposal Calacanis offered afterward was to add a function to search the web (not just Wikipedia); his estimate for this revenue was similar to that of Karbasfrooshan.
The figure Calacanis cited as potential advertising revenue, $100 million, coincidentally was the same as the amount Wales mentioned in asking what copyrighted material people would most want to have freely licensed (see archived story). This confused some people into thinking the two ideas were related. In reality, the effort Wales contemplated to spend such a sum freeing up proprietary content has no connection to any advertising, and there are no plans in the works to place advertising on Wikipedia.
Discuss this story
Thanks to persons involved in analysing the issue of valuation. I always thought that Wikipedia must be very valuable. The analysis proved it. However, it has more value than the possible commercial use. Apart from its commercial value, it is the best example of creativity of a large virtual community. --Bhadani 01:49, 5 November 2006 (UTC)[reply]
Calacanis has posted even more follow-ups, one with a complimentary mention of this story, and another suggesting yet more ways advertising could be implemented. --Michael Snow 04:54, 5 November 2006 (UTC)[reply]