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Sarnoff’s Law and the Media Valuation Shift

Photo of Zach Fuller
by Zach Fuller

The story of David Sarnoff is the archetypal American Dream. A Belarusian child immigrant arriving in New York City at the turn of the 20th century, the ambitious Sarnoff would demonstrate an early instinct for technological shifts with a prescient awareness of the emerging media and entertainment industries. By his early 30’s he had already helped pioneer radio (owed in part to his early recognition of the potential in sports broadcasting), and would later be appointed CEO of RCA, subsequently popularising television throughout North America. By the time Sarnoff died in 1971, he had come to be recognised as one of the most important media tycoons of the era.

Perhaps the most significant legacy bequeathed by David Sarnoff though, was his theory behind media network valuations. Sarnoff purported that the value of a broadcast network is directly linked to the number of viewers, something that would come to be known throughout the industry as ‘Sarnoff’s Law’. Such logic was directly applied to the early Internet media sector and with the benefit of hindsight it has proved to be an inadequate approach. The potential of the internet to reach audiences beyond the TV industry’s wildest dreams, coupled with the dot-com bubble, led to acquisitions such as the $5.7 bn acquisition of by Yahoo, consequently launching the career of co-founder Mark Cuban as arguably America’s second most famous celebrity billionaire. In this post-scarcity content landscape, Sarnoff’s Law now feels anachronistic and here are the metrics that media entities need to recognize have finally displaced the traditional network metrics:

ARPU (Average Revenue Per User): As media and content becomes a harder proposition to sell individually, size becomes a less important factor in determining overall value. A network may have considerable scale, but may also have a lower ARPU if it is not effectively monetizing its most valuable cohorts. ARPU allows companies to recognize how valuable their audiences are and allows for strategic awareness of their actions theoretically resulting in a more valuable customer base.

LTV (Lifetime Value): By accounting for churn rates, LTV is determined by the average total spend of a customer in an anticipated lifetime (or how long they inhabit the network). This is relevant because as the great unbundling of content takes away the power of media entities to control the ecosystem (as content can exist outside of their immediate control), Sarnoff’s Law no longer accounts for how long customers stay within the network and how valuable the customers are that are churning.  LTV acknowledges these crucial factors in monetization, and once again demonstrates the shortcomings of Sarnoff’s Law in modern media valuations.

Engagement: Sarnoff’s Law lacks a consideration of the importance of engagement. With content and physical commerce moving towards ‘the long tail’ distribution of more niche services, the relative value of a user within a network can distort the overall picture. Companies typically go through a pathway of digital maturity in their publically declared metrics, beginning with statistics such as Registrations before moving onto the more relevant metrics of MAU, WAU and eventually DAU (analysts are still waiting on Snapchat to reveal their Hourly Active Users Data.). Highly engaged audiences are both more likely to spend and be monetized within higher spending cohorts – both aspects of the modern content ecosystem that Sarnoff’s law no longer accounts for.

Virality: Sarnoff’s Law does not account for one of the most valuable things a customer can do in the hyper-connected social media landscape – the ability to attract other customers. Virality as a metric became popular within mobile gaming companies for its ability to discern the value of its audience in swelling the overall network. Sarnoff’s Law does not account for this value proposition from certain actors within the network – meaning it would miss the valuation of a particular network of influencers (those with a large cross-platform social media presence that could promote a service) than those without.

A key challenge is that most of a network’s audience can no longer be monetized because they can access much of the content for free. The value therefore lies in monetizing aficionados and superfans within an audience who love what the creators do and have both the willingness and the financial means to pay more than they previously would have. Consequently, Sarnoff’s Law, whilst providing a reasonable framework for media valuations in an era of content scarcity and a less refined approach to individual customer activity, lacks the ability to grasp the true value of a network in the intricate economics of modern content monetization.

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