Oracle Paul has amazed me no end. So much so that the recent slowdown of my writing ideas got a sudden boost. No I am not amazed by its prediction power. Rather by the amount of interest it has generated among the football lovers, as well as the people who need a daily dose of the crystal ball in their life. I am amazed because while in lesser developed parts of India you do find people worshiping cows with two heads/five legs or asking the talking parrot to predict their future I did not expect the same from that "advanced" part of the world. And then this business idea came to my mind. I might become a millionaire if I am somehow able to buy Paul and bring him to India and start a prediction business. The amount interest popularity that he has generated means my advertising expenses would be minimal. I only would need to announce to the Indian people his arrival.
So how much would I be willing to pay to acquire Paul? Let me start this valuation exercise. Assuming Paul's current value is based on the revenue (Discounted Cash Flow) that is generating/potentially can generate in Germany, I will start with a bid price that reflects this value. And his value to me would be the NPV that I can generate out of him in India taking into account the price that I will pay.
Paul's Value in India:(Ok My target market segment would be mid level SEC)
In month one of operation in India, I can safely assume that demand would far supersede supply. What I mean is I don't need to estimate demand in month one. Rather I need to see how many shifts Paul can work remaining healthy in a day. I am assuming 6 days of weekly work (26 days monthly) 10 hours a day which means 260 hours per month. Depending on Paul's mood I assume that he predicts once in 5 minutes (I don't have any historical data in this regard otherwise I would have been more sure, but 5 mins look reasonable). So he makes 3120 predictions a month. If I charge 50 rupees per prediction (Again my target class is mid level who would be willing to pay this much amount). I am earning 156000 per month. On the cost side I need to feed him. Assuming he eats 2 kg of chicken a day. It comes to 200 rupees a day. 6000 rupees a month. I would need a sales executive who would be paid 10000 per month. (Including his PF, etc). I would also like to rent a multiplex space. My budget would be 20 K per month including beautification and maintenance. So monthly I am making a net profit of 120000. Hey I am not stopping here. Paul is a celebrity, even to watch his prediction games, people need to pay. I charge them a ticket of 5 rs for half an hour. In a mall I expect 300 guests on weekdays and around 1000 in the weekends. Around 10000 guests in the month. Which means 50000 in revenue. I need one more guy for sales. Pay him 5000. . Another 5K goes in Prints. Net profit 40000. So my Cash Flow in the first month would be 160000. Not bad. I hope this to continue for the first three months. Then the fad would die down. Assuming Paul has 50% chance of predicting correctly. I can hope 50% of my customers to come back again for service. Oh common Paul's success rate is 100% in the world cup, I hope he can do 75% for me. So for the next three months My revenue would be around 117000. By then I would fire my second sales executive and make viewership free of cost (which in turn would be a good marketing channel). So net cash flow is 101000. Next three months would 75% of these and so on. I would like to continue with my business for a year and a half and then sell it off, either to a dinner plate or to a museum/zoo. I won't charge for the sell of unit. (There should be a limit to making people fool).
Now about my WACC, I am really confused now. Frankly I don't see any risk in the project apart from that the government takes up my case and bits the hell out of me. However the only way to find Beta for the project is through similar ventures. Has there been any similar venture? I doubt. Still I want to go ahead and take WACC = 15%.
Now what do I offer the current owner? I need a professional in Germany who can value him for me. But then he would charge me a whopping amount of money. I stick to trial and error.10000 Euro. Reasonable? After the calculation I find that NPV of Paul in the Indian market is 605857 and IRR 17%. Not impressive but then this is a very simple business case where Paul is made to sit at a particular location. If he is allowed t make an Indian tour. He would be worth in billions. Someone willing to try that valuation exercise out???
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5 comments:
Let us zero in on a lucrative target segment and Paul's Value proposition (spoken with mouth open 3cm)
Indian Elections - Your own news channel with predictions Octopus Awaaz.
Indian cricket - Private winning consulting to team owners and superstars -esp. SRK for Kolkata Riders, already visualising Katrina , Shilpa and Preity coocci-cooing Paul
Kaun Banega Crorepati - 70% Chance for everyone to be a Slumdog Millionnaire
CAT results - lolz , will u bell the cat or will the cat Bail u
Indian Business - Spectrum kisko milega
Indian movies - Shahrukh better or Amir :D
I would say one major thing we are missing completely..
Arbitrage profit from the prediction of movement of share market/ interest rate..
So the valuation is not possible because it is infinite???
Moreover in the earlier valuation calculation,,why will i charge 50 per customer??It has to be at least a good pie of the value created for that customer..SO the valuation is complex??
Well first of all i think like every startup or a company, Paul is expert at predicting football games ..
So in India, Paul can be used to predict only for local football games which is not going to be a profitable business ...
So given that money is in cricket, if Paul develops some sort of expertise in cricket prediction then the euphoria of this cricket-crazy nation on paul could be seen.
Here are few points which I think can be accounted for :
1) If you think that 50% of the customers are going to come back very time Paul makes a prediction and given that Paul's every prediction is made public, the prediction business will fail in the first few games (also don't forget Indian sports fans are ruthless, you fail once and you become the worst player).
Now if you plan to make Paul's prediction private, then you cannot advertise this business. So Paul should have better prediction power if this business has to succeed.
2) It is not wise to put a label on the poor/developing countries as superstitious. I think you might want to categorize them differently. In developed countries Jews, catholic Christians believes are similar to ones of Islam and Hinduism in Poor/developing countries.
3) Bidding process almost always ends up at a premium to the intrinsic value. The premium over this DCF value i.e. "goodwill" could become so large that it even breakeven will take a good time. I Assuming that Paul is a global celebrity and he will attract bids from all parts of the world especially China (which seems to always out-bid India in most of the recent acquisitions in foreign countries).
One last comment, after paul's success in cricket, you could take him to the world of Bollywood where he predict's box office outcome...
Anyways nice thought :)
We have heard of the bengali proverb - mora haathi laakh taka.. What about the value of dead Paul? :p
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