Considering the enormous valuation for Friendster, I decided to take a closer look on the online dating industry. It grew to a rather long entry, but you will like it. And here we go.

The marketLet's start with some projections how this market should develop.

According to comScore Media Metrix, more than 45 million Americans visited online dating sites in May 2003, up from about 35 million in December 2002. The Online Publishers Association projected that spending on Internet dating sites this year would be $100 million or more per quarter, compared to less than $10 million a quarter at the beginning of 2001. The New York Times is forecasting a $400 million market for online personals in 2004.

Online dating has become the major driver in content business. Users could be convinced that services are worth paying for. Even this older but quite interesting study from 2001 concludes that paid subscriptions will become more and more popular.

Although an estimated 40 million people in the US access online personals sites each month, only a fraction of those pay for personals content. Most dating sites offer both free and paid services.
The OPA/comScore Networks report claims that individuals who pay for personals content are likely to spend both more time and more money online. Whereas the average Internet user spent 6,143 minutes online and $83 in e-commerce purchases during the first quarter of 2003, the average personals content purchaser racked up 13,895 minutes and $238.72 online.


In Europe, Jupiter reckons revenues will double this year to �40m and will reach �117m by 2007.

"It's the biggest category of paid content online and will be for the foreseeable future," says Jupiter associate analyst Nate Elliott. "Word of mouth has a lot to do with it. People are talking to friends who have had success using online dating - they see it mentioned on TV. It is entering the mainstream."

The playersDating has become such a good story in any VC chat that an extraordinary amount of sites have sprung up. A simple Google search delivers dozens of good and not so good sites.

The biggest and the most known in US is Match.com. Match.com, owned by Barry Diller's InterActiveCorp, claims to have 9m advertisements posted on its site and currently 857,000 people or 4.76% of its 18 million members paying monthly fees. Users regularly pay $24.95 a month. Match.com had 2002 revenues at $125.2 million, a 154 percent hike over the previous year. Profits in 2002 reached $36.1 million, up from $2.7 million the previous year. Second quarter 2003 revenues have been $48 million.

Yahoo doesn't give membership or revenue figures, but personals are a key component of the company's drive to shift its revenue stream away from advertising and toward fee-based services.

Matchnet a dating conglomerate with sites all over the world had 14,788,008 users in June 2003, up from 7,849,710 a year earlier. Revenue for Q2/ 2003 was $8,7 million. My forecast for the year 2003 is at $40 mio. As this company is the only publicly listed, it has an "official" market cap of 42.45 Mio. EUR as of today.

PlanetOut another provider has figures about advertisements:

"We're generating about 4 million page views a month. And, on those pages, we're serving targeted ads. We have advertising geared to the online dating demographic."

Meetic a French company is active in France, Italy, Spain, Germany, Great-Britain and belgium and has already "seduced" 1.5 million web users. This let's the dating site occupy the first place on the European market. What is most surprising is the fact that Meetic started very late in Q1/2002 after the boom times, but has been exactly in the right time for growth in memberships in Europe. Marc Simoncini, the former founder of i(france), which was later sold to Vivendi Universal for 192 million Euros, launched the concept, which scores well in usability and conversion of contact media.

Valuations

Revenues for all these companies usually derive from advertising in the first stage and membership fees in a later stage. Costs are mainly marketing (up to 50%) - in order to grab the market share - as well as HR & IT.

In order to get some data for the math, I tried to make some rough calculations. InterActiveCorp aquired udate.com in 2002. Udate had revenues for the nine months ending on 30 September of 2002 of $29.2 million. Assuming full revenues in 2002 of $45 mio. and a approximate payment of roughly $100 user/year, Udate had around 500.000 paying subscribers at this time (leaving out any advertisement revenue). InterActiveCorp paid around $150 mio. in stock. If you do the math it divides to $300 per paying user. Taking other revenue channels into account, $225 per paying subscriber are a value we can work with.

Applying this to Matchnet, which conversion and amount of paying customers is not published, they should have around 400.000 paying subscribers or 2.7% of all users. This should value them at 90 mio. So they might be a very cheap buy, considering their roughly $52 mio market cap actually (see above).

This calculation of the $225 per user holds more or less true with Match.com, having 857.000 paying subscribers and $125.2 mio in revenues (which include all revenue channels incl. ads.)

Having done this research we can think about Friendster's monstrous $54 mio. market cap. Friendster actually boasts around 1.8 million users, all free as far as I know. But it had achieved this through viral marketing in less than 9 months, nearly without a marketing budget. Considering the 100% growth in members per year of classic dating sites, Friendster might be able to reach 200% or more on a yearly basis. All this with little expense in marketing, as any value added using Friendster only arrives with invited connections of each user. This is a major competitive advantage to all the classic sites, which invest more than 50% of their revenue into marketing. Assuming Friendster will reach 5 million members next year and 15 million by the end of 2005 while having a conversion of 4% of paying customers, it will have yearly revenue out of subscriptions of $60 mio. (with 600.000 paying users). Considering the valuation figure used above ($225,- per paying customer), Friendster might be worth $135 million. But consider as well, Friendster might reach this with a much better margin. If the Friendster model works, which nobody really knows, it has also has the potential to grow much faster and produce much better conversions as the classical dating communities.

After all and considering a minimum of 3 years timeframe, the very high valuation, which all of us surprised, might be justified. But as it is with all the hockey stick business plans, they are damn risky.

OutlookAnother fact which is interesting: A rule of thumb by several surveys says 15-18% of all trial customers for most ecommerce sites convert into paying subscribers. Even without growth in memberships Matchnet.com might soon have the joy to multiply revenue by 9, match.com by 3.5 times, which makes a nice fortune for them and their shareholders. Friendster might have it even easier to reach such a conversion.

If you want to read further about dating issues, don't miss our Dating Weblog