Before we get into the ins and outs of this sale, we need to clarify what it means to actually buy one-fourth of the Internet. Of course, you can’t just own something as large and independent as the Internet. But you can buy a portion of its traffic.

We’ve been recently writing about international telecoms. If you bought up enough of these Internet Service Providers you could potentially own enough Internet traffic to constitute a quarter. But there will soon be another way you can invest in the traffic with just a single click.

About 50% of all Internet traffic is from file sharing– people sharing music, videos, games, and every other type of file you can think of. Regardless of how you feel about Internet piracy, 50% of all bandwidth on the net is made up of this type of activity.

Here’s where the story really starts heating up…

The Pirate Bay: 2009 Has Already Been One Hectic Year

Half of all file-sharing traffic is hosted on a single website. That’s a fourth of all Internet traffic in one place. That site is called The Pirate Bay.

TPB was launched in 2003, less than one and a half years after Napster—the pioneer in music file sharing— was forced to shut down because of court rulings.

TPB operates in Sweden, free from initial U.S. laws. But over the past several years, the European Union and many individual member-countries have cracked down on e-piracy.

In 2006, Swedish police raided TPB’s headquarters, temporarily shutting down its server. April of this year was an even worse time for the organization. Founders Peter Sunde, Fredrik Neij, Gottfrid Svartholm and Carl Lundstrom were sent to prison for one year and slapped with a $3.6 million fine.

TPB’s Next Giant Step Forward

With the founders in jail and facing serious fines, another Sweden-based company, Global Gaming Factory, announced plans to purchase TPB for $7.8 million. GGF intends to turn TPB into a legal, fee-based website. Users would have to pay a monthly fee to share files. This money would then be used to pay copyright fees for each file transfer.

This, again, might conjure up images of Napster, which was bought by Roxio Inc at bankruptcy auction. Roxio rebranded it as Napster 2.0, which began to offer legal, paid transfers. Best Buy acquired Napster last year for $121 million, but is struggling to see profits.

GGF’s plans for TPB, however, aren’t as small as Best Buy’s were for Napster. GGF, almost immediately after announcing its plans to buy TPB, declared its intent to take the website public… on Nasdaq.

If all the legal and technical aspects of this deal work out as expected, TPB’s intial public offering will take place sometime in 2010. This gives us less than 16 months to plan.

But before we start setting aside cash for this IPO, we need to take a serious look at what this deal will look like.

Why You Should Not Buy Pirate Bay… At Least With What We Know Now

It’s safe to assume TPB’s 25-plus million users aren’t all going to start paying the monthly fees. Instead, we can expect more than 75% of these users to stop sharing files. Possibly as little as 10% of TPB’s current user base will be left when GGF starts requiring fees.

This transition is expected to come very soon. On August 27, GGF is holding a press conference to go over the details of this reorganization, as well as its plans for the IPO.

GGF is also working on deals to turn TPB’s enormous share of Internet traffic into a second revenue stream. By setting up deals with ISPs, GGF will trade promised bandwidth usage for cash.

ISPs are starting to sell bandwidth to customers instead of offering unlimited packages. This means that users that transfer a large amount of data packets will have to pay considerably more than those that just us the Internet to check their email.

With this transition from monthly subscriber to pay-as-you-go, ISPs will have an opportunity to make more money off bandwidth use. GGF promises that TPB will provide this.

However, we’re not sold on this business model. Napster 2.0 has not been able to mount a significant attack on powerful rivals such as Apple’s iTunes store. Even web giant Google has not been able to effectively monetize its $1.65 billion purchase of the world’s most popular video sharing site, YouTube.

GGF’s plan might seem enticing to some—don’t buy into the hype. Music and movie pirates will go somewhere else for their illegal downloads. Avoid this IPO at all costs.

Sincerely,
Jim Nelson

August 18, 2009

How You Can Own a Quarter of the Internet… And Why You Don’t Want to was originally featured in the Penny Sleuth.

This week, Solarwinds (NYSE: SWI) became the first venture capital-backed initial public offering (IPO) in more than nine months. That’s a significant event for those who watch the IPO market… it’s also significant for the rest of us – after all, IPOs can be a pretty good indicator of how the stock market is turning.

And in 2009, things haven’t been turning very fast…

In the first quarter of 2009, there were only two new IPO deals done globally; that’s compared to the 100 deals done in the first quarter of 2007. It wasn’t for a lack of eligible companies either: all told, 26 firms withdrew or postponed their initial public offerings this year. That’s no surprise given the global economic slowdown that started last year.

When companies are considering going public, how the market’s faring can have a big effect on them. That’s because the market dictates just how much capital a newly minted stock is able to raise. Investors in bear markets are a lot less likely to pony up as much cash to buy and IPO stock than those who are investing during a market rally. And studies have shown that the owners of private companies going public (venture capitalists and entrepreneurs) are much less likely to start the expensive underwriting process when times are tough.

Things haven’t been helped by the shakeup in the investment banking world. Since the financial meltdown started, some of the biggest underwriters (the firms that help take private companies public) have closed up shop – Lehman Brothers and Bear Stearns among them.

A Turnaround for the IPO Market?

Despite all of the barriers to new public companies right now, it looks like the IPO market is starting to catch some momentum once again. While Solarwinds may be the first venture-backed IPO in three quarters, it’s far from being the first IPO in 2009.

Since January, six large IPOs that have taken place in U.S. markets. Of those six, four have gone public in the last five weeks… That’s a pretty substantial increase in tempo.

And while other economic factors send mixed messages to investors on a daily basis, the warming up of the IPO market is one signal that’s decidedly bullish.

Small-Caps Lead the IPO Rally

Of the six new issues that have hit the markets this year, every single one has been a small cap. The names include highly anticipated offerings like language software developer Rosetta Stone (NYSE: RST), satellite imaging firm Digital Globe (NYSE: DGI), and for-profit college company Bridgepoint Education (NYSE: BPI).

Overall, these IPOs are a big win for small-cap investors. Not only do they provide exciting opportunities to invest in companies that have until now been private, they also suggest that the markets are receptive to a continuation of the rally that took a break last week.

Cheers,
Jonas Elmerraji

May 22, 2009

Selling the Solarwinds IPO was originally featured in the Penny Sleuth.

We all know that print advertising is dead, and the economy is putting a major strain on television advertising. But one small segment of the marketing/advertising arena is still growing at a supersonic pace… internet commercials.

Even that segment may be a bit too generalized. I’m talking about the advertising you see before and during videos on sites like Hulu.com and YouTube. These two are the behemoths of the industry, but their strategies and business models couldn’t be further apart.

YouTube still has the no. 1 spot in the online video market. With over 100 million monthly viewers, YouTube will retain its top spot for a while. Unfortunately, the company, owned by Google Inc. (NASDAQ: GOOG), can’t seem to make any money from this powerful position.

Less than 10% — some estimate as low as 3% — of its content is equipped with ads. That’s a very difficult business model considering Google has to pay for the company’s enormous bandwidth and storage expenses. According to Credit Suisse, YouTube is expected to lose nearly a half a billion dollars in 2009.

Hulu, which should pass Yahoo! as the no. 2 online video supplier when the April numbers come out, is a very different animal. Most — if not all — of its content is attached to ads. You have to sit through 10-50 seconds of commercials before you ever see any Hulu content.

YouTube made its mark by allowing millions of wannabe stars upload their own amateur video free of charge. While this is what drives the majority of YouTube’s traffic, it doesn’t provide any revenue.

Hulu is still a private company. It just landed a huge deal with Disney to start featuring its content on Hulu’s site. This deal is similar to its initial deal with NBC and its deal with News Corp (owner of Fox Broadcasting Company). The deal also gives each of the three investors a 27% share of Hulu.

That doesn’t mean, however, that you won’t be able to cash in on this up-and-coming giant. In the next few years, once the IPO market recovers, there’s a good chance we’ll see a Hulu IPO.

The company doesn’t release any financial numbers to the public, but that hasn’t stopped many media speculators from venturing a guess. The number we see most often is $1 billion in ad revenue per year and growing — already about five times YouTube’s revenue.

That’s simply not enough for us to go on, but it does give us hope that an IPO is coming down the pipeline. If there’s actionable advice, we’ll let you know.

Sincerely,
Jim Nelson

May, 1, 2009

Could a Hulu IPO Decimate Google’s YouTube Franchise? was originally featured in the Penny Sleuth.