Going to Pieces: Valuing Users, Subscribers and Customers

Abstract

In conventional valuation, we usually value businesses as aggregated entities, estimating total revenues, earnings and cashflows, across the different businesses and customers that the company has, and then discounting those cash flows back at a discount rate that reflects the weighted risk across the entire company. The reasons for doing so are two-fold. First, the information that we are provided in financial statements, as investors, is often on the aggregated company and not on its constituent parts. Second, again as investors, we are ultimately investing in entire companies, not in their disaggregated units or customers. However, businesses are not only increasingly marketing themselves to investors on the numbers of users, customers and subscribers that they have, but they are building their business models around these constituent parts. While many of them contend that conventional valuation approaches don’t work in this new world order, we disagree and this paper attempts to extend intrinsic value and pricing approaches to value a user, subscriber or member, using Uber, Amazon Prime, Spotify and Netflix as examples. In the process, we lay bare some of the holes in information disclosure and examine the dynamics that drive user/subscriber value.