Are we in a bubble?
Bankers chase shiny things. They drool over the skyrocketing growth of TheNextNewStartup, 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. advertisement
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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.