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Mary Meeker’s Fuzzy Math

[This is a fine example of how sell-side analysts are experts at BS, if not much else.]

http://blogs.wsj.com/numbersguy/mary-meekers-fuzzy-math-179/

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August 30, 2007, 3:45 pm

When Google announced last week that its video Web site YouTube would begin incorporating video ads, analysts calculated how much revenue the venture might bring in. And one analyst inadvertently revealed the fluid nature of assumptions underlying this kind of math.

Morgan Stanley analyst Mary Meeker initially projected that the YouTube ads would bring in $720 million next year. But there was one big problem with her calculation: She took the price of the ads, which was reported in several news articles as “$20 CPM,” to mean the price per ad impression, not per thousand ad impressions, which is what CPM means. After Henry Blodget — the former stock analyst who, like Ms. Meeker, was a cheerleader for Internet stocks during the dot-com boom — called out the math mistake on Silicon Alley Insider, Ms. Meeker acknowledged the error.

Simply fixing the number would have reduced the projected revenue by a factor of 1,000, to a piddling $720,000, or about one-sixtieth of Google’s average revenue, per day, in the last quarter. But while Ms. Meeker was revisiting her calculation, she also revised other numbers used in her model [LOL]. The revised report predicted between $75.6 million and $189 million in revenue for the video ads next year. “In fixing the error, we also took the opportunity to dig deeper into our assumptions [LMAO] and … we provide an updated scenario analysis of the opportunity … We apologize for any inconvenience this may have caused,” Ms. Meeker wrote in the updated report.

In her initial report, Ms. Meeker assumed that 1% of YouTube’s estimated two billion monthly U.S. video streams would carry the ads. The second time around, that rose to 15% of YouTube’s 14 billion monthly world-wide streams, in one scenario she calculated, or 30% of 17.5 billion monthly streams in a more optimistic scenario [ROTFL]. That change made up a good chunk of the projected revenue that would have been lost had she just fixed the CPM mistake.

There’s no detailed explanation in the report as to why Ms. Meeker changed the assumptions used to estimate YouTube’s new ad revenue. Ms. Meeker was traveling and couldn’t be reached, according to a spokeswoman, who also declined to comment (as did a Google spokesman). On his blog, Mr. Blodget described the change as “backing into the numbers” and said it was a common practice. “But the episode clearly reveals the risk of blindly accepting what appear to be carefully developed assumptions, not to mention the estimates derived from them,” Mr. Blodget wrote.
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