An odd occurrence took place this past week in the “Land of Unicorns” aka Silicon Valley. The first of what was once described as the “future of social media” canary’s Twitter™, was suddenly struck by the “Where’s The Money” kingdom aka Wall Street. Suddenly, what was once the dulcet tones for acquiring investment capital “eyeballs to monetize” is now being answered by the investment crowd in a much more sobering tone of “Where’s the monetized money?!”
This isn’t just some play on words. As I’ve stated over the years you’ll know that everything has changed when you see the first of these so-called “darlings of Wall St.” within the social media space called out on the carpet (i.e., investors will begin selling or dumping their shares) and their management teams will be pressured to either be; replaced, or the company sold, spun off, or any combination there of.
It’s a little bit ironic that the first would be fitting the proverbial “canary in the coal mine” analogy. Yet, although it’s the first, it’s going to be far from the last. For if awareness, with a reinvigorated quest for generating real profits are not followed immediately by others within this space – the enveloping hazards now forming around, and within the Valley are going to catch a whole lot of them flat-footed with the possibility for disastrous results. For there’s real tragedy beholding for a great many of today’s Unicorns around every bend. (or Quarter)
Many in Silicon Valley for the last 5 or 6 years have felt (as well as acted) with somewhat of a near invincibility not only for their enterprises, but also to the idea that their “social metrics” matter more than basic economics. i.e., Eyeballs trump actual net profits.
This was the storyline that worked when “free money” flowed via The Fed’s QE open spigot. However, since that source has now been closed? The only story line investors want to hear is an answer to “where’s the money?” It’s a far cry from what Silicon Valley has come used to these last few years. And this narrative as well as tone is going to get a whole lot harsher, as well as quicker for anyone who forgot, or never went through the last dot-com bubble.
Many believe because they are the current, Chairman, CEO, Founder, Social Media personality/Superstar, ___________(fill in the blank) that’s been the focus of buzz or rage (past or present) across the media space as today’s Silicon Valley kings and queens, with front page spreads on magazine covers, or “in-depth” cover articles why they’re so “brilliant,” or learning how to speak other languages. Or, now they get to hang out with musicians, hob nob with today’s political figure of the moment, or throw lavishly themed parties, etc., etc. That somehow they are above the fray of fundamental business principles.
In regards to all the calls of “brilliance” or “special.” All of it. And I do mean – all of it – means squat when they’ll be sitting in on future conference calls, and the only thing they can point to as “improvement” in their business is to try and spin why: A smaller than expected loss via Non-GAPP is great news! Rather, than being able to at the very least state; an actual net profit via GAAP that met expectations.
This simple and subtle change will be earth-shattering for some, and for others it’ll usher in annihilation of past heralded performance spin. Regardless how many languages they now speak, clothes they wear, currently hangout with, or magazine covers they may grace.
For years when it came to building businesses that need to produce real profits. Most in Silicon Valley felt this was beneath them, (i.e., they’re changing the world) and expressed it with a tone of: They breathe rarefied air from where they sit.
Little did they realize what they believed was “rarefied air” was actually their own exhaust. And the onslaught of headaches that will result from all this time spent focusing on “eyeballs” rather than actual profits has only just begun.
And about all those eyeballs…
Another story that received little fanfare and in my opinion should send shivers down the backs (as well as potential monetization hopes) of every “unicorn” social-media enterprise, was the story in the WSJ™ on March 31, 2015 stating “Walmart ratchets up pressure on suppliers to cut prices”
At first glance it’s another “Yeah, what else is new.” Yet, if you read into the article you notice one of the main line items arguing to be cut by both the retailer is: advertising. The implications for the bottom lines of many of today’s Silicon Valley unicorns have just monumentally been shifted from under their hooves. And I believe many don’t even realize it.
So why is this such a big deal you might ask? Simple. In the world of advertising there are two types. One is the: Will pay X amount per 1000 viewers. Regardless of interaction. They fall into the “impression” group. The other is the: Pays per click type. i.e., There must not only be an interaction, (e.g., a click) but also a verifiable sale linked to it. There are others but for simplicity these are the easiest to understand.
The former (the impression type) is the life blood of many in social media. This is where eyeballs matter to the calculus. But there’s also a catch. Most of the largest players in this ad spending realm are also the most price sensitive. i.e., Just like Walmart they’re in a race to the bottom to sell for the cheapest because to their customers – price, and only price matters.
In today’s world of the internet, along with the relative fearless shopping on whatever the website. If all that matters is price: one doesn’t need to spend precious ad dollars by either Amazon™, Walmart™, or Who-Cares-Where. Because price is searchable. e.g., Why pay for ads placed on social – when I can pay or maximize search? Maybe with better odds for results. Hello Google™, or Bing™, or ?
Again, if all that matters for the sale is the price. What good does advertising on social do for them? Easy: Nothing. And not only is that a fundamental change to the current ad spending structure or ecosystem. Rather, it changes the whole premise of paying for eyeballs under a totally new light. A light that Silicon Valley has precariously avoided these last few years at all costs – literally. Suddenly, what was thought of and used as “a selling point to sell investors” might have just turned overnight into a selling hurdle that many Unicorns may find impassable.
With a company the size of Walmart openly stating that they’ve come to this same conclusion, (e.g., ads aren’t selling products price is) this shot across the bow should raise concerns for everyone in Silicon Valley. For the model that was touted as “the future” may now be long past its expiration date. And it’s not stopping there because Walmart will far from be alone. This new “meme” is just starting in my opinion. And it will grow is size and scope.
Just to show how quickly things can change when no one expects it. There seems to be another “oh so subtle,” yet “oh so large white elephant” once again entering the room that all too many believed either couldn’t – or wouldn’t be an obstruction to their ad space formulations: Apple™.
As much as a sea change the Walmart example can have and the possible implications going forward for many social media models. The same in-kind is now happening with Apple’s foray into streaming music. Here again, whether or not Apple is, or is not, better than others is inconsequential. What matters is Apple has a history of making real, verifiable, unquestionable net profits. Not only that, they have billions upon billions of those net profits sitting around the globe just looking for ways to be utilized.
Theoretically, all Apple has to do is sit back and offer a similar service to anyone else’s and the investment dollars are going to roll out of today’s “haven’t been able to make a profit yet” and right into “if I’m going to sit and wait, I’m going to sit and wait with a proven money-maker.” Just a rolling from one into the other purely on the basis of “what the heck, can’t do no worse” can start a stampede of nervous bulls running from one pasture to another purely on where others in the herd are heading. Just a 10% shift in ad dollar allocations can have Richter Scale type connotations for this space alone.
What does the above do to the memes of let’s say a Spotify™, or Pandora™, or ___________? And that’s just streaming. What happens further to the value of “eye balls to monetize” when Safari™, the web browser of the Apple ecosystem becomes the predominant ad-blocking portal? Which by the way happens to be installed on the worlds most dominant mobile device that social is trying to hang on to. Not to forget Apple is also partnered with Bing so its reach into search is already established. So possible growth there is certainly plausible needing only a small percentage of “making no money in social now. Why not just pull it from there, and try it here” argument entirely plausible. And it’s not just Apple; but now Mozilla™ is said to be doing the same. i.e., Dedicated ad-blocking web browsers.
Who cares one might say,”Browsers are so 90’s. Everything today is done via an app.” And it’s a fair point. However, who controls the largest and most used app platform? This point shouldn’t be over looked. I’m not saying that Apple is the best, nor will rule in the end, However, what I am stating is what was the dominant meme just 1 year ago i.e., “Eyeballs or users rule first over net profits” is now reversed. i.e., “Net profits rule first over eyeballs or users.” And that is what felled the fate of the first canary in my opinion. And it’s will be far from the last.
At the same time remember, this is only one scenario I’ve toyed with for this writing. I would bet dollars to doughnuts there are thousands of competitors that were previously shut out of ad dollars by the “everything-social-meme” chomping at the bit ready to re-engage with vigor for those precious ad dollars. The coming changes as well as the speed and voracity as to how they’ll be applied will shake the very foundations of what is today known as both Silicon Valley, and the budding unicorns that currently inhabit it.
Add to all of the above many of today’s private valuations for “unicorn” status entities (e.g., BILLION dollar valuations) have been allowed to be touted as “real” and have gone unchallenged. Even though most informed or business inclined people know, and understand, the numbers have more in common with fantasy-land than anything else. For their formulations make Non-GAAP look real. Yet, one thing in business never changes: Sooner or later, whether it’s an Angel Investor, Wall Street, or your sister Sally. Everyone comes back around looking for their money. Everyone.
And with the pool of “free money” tapped out and shut off at the spigot, it seems many of Wall St.’s former darlings are going to be asked one question and one question repeatedly at every future conference call: “Where’s the money?”
If you’re a unicorn in Silicon Valley watching the current debacle at Twitter. And it doesn’t make you worried? You’re not paying close enough attention. Because in the mine – there’s only one canary to warn. After that, it may already be too late.
© 2015 Mark St.Cyr