The Dreaded B Word

Are we in a bubble?

Bankers chase shiny things. They drool over the skyrocketing growth of The Next New Startup, while the Last Great Theoretical Wonder fades from memory.

After the thawing of a nuclear winter, it's hard to ignore the last nine months of unabashedly frothy deals:

  • July 2010: Disney buys social gaming site Playdom for up to $763 million.
  • August 2010: Google buys social gaming website Slide for $182 million.
  • September 2010: AOL buys TechCrunch blog for $25-40 million (depends on whom you believe).
  • December 2010: Living Social raises a $183 million round from Amazon.com and Lightspeed Venture Partners.
  • January 2011: GroupOn raises an earth shattering $950 million round.
  • February 2011: Huffington Post acquired for $315 million by AOL. 

    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."
    -Voltaire
    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.

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    9 comments about "The Dreaded B Word".
    1. Rich Carr from Carr Knowledge , March 10, 2011 at 2:16 p.m.

      Just like 'college radio' used to define the future of popular music, smaller publishing entities online foresaw this change. Check out www.OrtingNews.com in Orting, WA population 5K. Four years ago the city lost its dirty printed paper. This local 'newspaper' generates largely off user generated content, editions are delivered via Email database, school, county, police & fire all provide their updates, etc. This software was then requested by publishers everywhere from magazines to Chambers across the country. Print is dead...except for the occasional good book.

    2. Jeff Pundyk from The Economist Group , March 10, 2011 at 2:18 p.m.

      bubble or no bubble, most traditional publishers are not going to be the winners. as you say, 10 years ago is instructive. back then publishers first panicked at the new medium and new competitors, and then misinterpreted the first bubble as a validation of the old model (as opposed to a brush back pitch.) They spent the next 10 years not innovating as they lost talent and readers. now, faced with new challengers and new opportunities (connected devices, social) they have no history of innovation to draw upon. doesn't look good for the old guard.

    3. David Carnevale from MarketVision Consulting , March 10, 2011 at 2:35 p.m.

      WE are not the market and the jury is still out. Print is only dead if it commits suicide.

      I can still scan/read a publication like the Wall Street Journal print edition faster than the online version, not to mention that it's instant on and never low on battery. Additionally, I always stumble on an article "serendipitously" that I would have never seen online. Online has a place as does the old-fashioned analog world.

      And exactly who is going to pay for the journalists if print goes away? And don't tell me advertising ... which I ignore online.

    4. Doug Garnett from Atomic Direct , March 10, 2011 at 8:45 p.m.

      David: Adding to your list... I can read a print while the airplane is taking off. I can carry around one of (or many of) the crosswords for entertainment. I get to read and scan a concise set of what my local town editor thought were the important stories for our area instead of having to sort through a nearly infinite list of online stories hoping that the important ones catch my eye.

      I know who wrote my stories - don't have to guess whether it's the angry guy with the axe to grind or someone whose writing will enlighten the content.

      AND, I don't have to suffer the horrendously exaggerated and frankly silly headlining that blogs use to hype their stories hoping to attract views.

      I read a LOT online. And, love print.

    5. Jeff Pundyk from The Economist Group , March 10, 2011 at 9:42 p.m.

      Gents,
      The question isn't print vs. digital. It's old business models vs new. Clearly there's a place for print, as there is for radio and live theater and tv, etc. It's not either/or. But there's no turning back from the myriad alternative ways to consume content. it's a multiple media world that demands new value propositions. Print, in this context, is a proxy for old models that have long lost their competitive advantage and those who cling to those old models.

    6. David Koretz from Adventive, Inc. , March 10, 2011 at 11:16 p.m.

      Thanks for the great comments everyone.

      @Jeff, I think there is still a great opportunity for traditional publishers to innovate.

      The Amazon.com of the publishing world simply doesn't exist. Traditional publishers are getting hurt by a 1,000 paper cuts, not a blow to the head.

      If they use their scale to start swinging hard in the right places, things could look very different.

    7. Jeff Pundyk from The Economist Group , March 11, 2011 at 8:38 a.m.

      David...agree there's an opportunity for the amazon of publishing. just don't think it will come from traditional publishing. Where did Amazon come from? thanks for the thought provoking piece.

    8. David Koretz from Adventive, Inc. , March 11, 2011 at 11:18 a.m.

      @Jeff, Amazon was one of the few Web companies of that era that actually pulled it off.

      Wal-Mart, Dell, and several others managed to build incredible Web businesses.

      I think right now the publishers are not doing the right things to become the transformative company in the space, but that's not to say they couldn't.

      They just need the right leadership.

    9. Richard Monihan , March 16, 2011 at 12:08 p.m.

      It's a bubble.
      This craze of searching for "new" is driven by two things:
      the old "new" is not compelling, and is somewhat predictable now. We can all kind've figure out what Amazon is up to, AOL continues to shoot itself in the foot, and Yahoo is dragging its legs to try and get back on track while Google continues to set new marks.
      Therefore, we need something REALLY NEW to get our interest and spend investment money on. Most of it is not really interesting at all. This is bubble mentality - seeking something new where nothing truly new exists.

      The second reason it's a bubble is driven by the Fed. We were/are handing out cash like candy to firms that show the slightest sign of trouble. This money has, for a time, sat in vaults as "profits" increased dramatically and substantially. The lack of movement of this cash has kept inflation low. However, at some point, the money has to go somewhere because sitting in a vault and earning .01% interest isn't as good as the opportunity to double in 3 years....or so it seems.

      This is all fake cash - inflationary in nature. Investing in faux business can do one of two things: grow the market and thereby lessen the stress the current economic doldrums have created (unlikely) or create an investment bubble where things seem to be getting better until they don't and leave us back where we started financially (likely).

      I see very limited upside in many of these investments and alot more downside. The risks are greater today, by many magnitudes, than they were 11 years ago....and we all remember how that ended.