The Dreaded B Word
Are we in a bubble?
After the thawing of a nuclear winter, it's hard to ignore the last nine months of unabashedly frothy deals:
Yet, while online media deals happen fast and furiously, the traditional news outlets continue to be left for dead.
How do you reconcile the enormous chasm between the depressed old media stocks with the stratospheric valuations in the Web world?
The Bubble Shall Burst
The easy answer is to believe we are in a bubble. Many industry pundits have claimed this is the case. Unfortunately, this is an oversimplified assessment that concludes it is merely a problem of online media valuations being too high.
It's not. It is more akin to a reality distortion field.
And publishers are likely the losers short-term. Over the last three years, investors have started to gain clarity about the impact of the Web on publishing, and are reaching three basic conclusions:
1. Print is dead. There is a small percentage of the population that still likes to dirty their hands, but unfortunately it's not enough to support a large-scale printing press.
2. Momentum is not on their side. Any finance geek will tell you that the value of a company is simply defined as the sum of all future cash flows, discounted to account for risk. It is impossible to place a high multiple on shrinking companies. As a result, high growth companies are being valued at higher valuations than much larger legacy competitors.
3. Reinventing yourself is tough. The technology industry is littered with once-hot companies like Atari, Silicon Graphics and Cray that were thought to be invincible. It is incredibly hard for traditional companies to reinvent themselves, and the historical track record is poor at best.
While these three challenges are all very real, I believe the market is dramatically overreacting, and making a severe error in judgment.
Online media valuations are high because of stratospheric growth rates coupled with meaningful revenues. These valuations are largely deserved; however, they are happening at the expense of traditional media.
That last part makes no sense.
"He Was a Great Patriot, a Humanitarian, a Loyal Friend - provided of course, that he really is dead."
When the dot-com boom was at its peak, conventional wisdom was that the Internet would transform every business, and traditional companies would be killed. Everybody raced for the exits. Retailers like Target clung to Amazon.com for help, while K-Mart and Walmart spun off Internet companies, only to buy them back less than 18 months later. Sure, Amazon.com managed to kill Borders and maim Barnes & Noble, but it took them more than a decade.
The list gets really short after that.
Ten years later, the same thing is happening again in publishing. Behemoths in publishing are being intimidated by tiny blogs with equally tiny revenues.
Like The Brick & Mortar Scare of '99, two things will ultimately prove to be true:
1. Many traditional publishers will figure out how to throw around their considerable assets to react to this new form of competition, and will thrive in a Web-centric world.
2. In the market's rush to chase the new, they have mistakenly undervalued the old.
The Old Guard has yet to really take the gloves off. When they do, they will leverage their balance sheets to invest in or acquire hot technologies, invest in their advertiser relationships, their editorial strength, and their sales organizations, and differentiate their brands. This fight is only getting started, and the winner is far from obvious.