Tuesday, October 13, 2009

What is it worth?

Maybe this is obvious.

Things are worth different things to different people. Companies, pork bellies, advertising inventory. Any things. If the thing is worth more to someone other than its current owner, the owner might sell it to that person, creating value for both.

The value to the buyer (b in the picture below) has to be greater than the value to the seller (a). At any value between a and b, both parties are better off. So what price, between a and b, will be paid?
One of my mentors in the valuation business insisted that any value greater than a was strategic value and that the seller did not deserve any of it: the price paid should be as close as possible to a. In an efficient auction, however, the price paid is pretty close to b.

Both the buyer and seller do best by figuring out what the value of the thing is to the other party, and negotiating to that value. If both buyer and seller know the value to the other party, the negotiation over price can be very difficult, because there is no right answer*. So people try to hide how much something is worth to them: whoever has better information ends up with most of the excess value.

Advertising inventory is worth next to nothing to the publisher itself. It's worth something to the advertiser. The excess value, the gap between a and b, is very large. The advertiser knows exactly what the inventory is worth to the publisher. But the publisher has no idea whatsoever what it is worth to the advertiser.

Guess who gets the excess value?

* Non-iterated.

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