“It’s Different This Time” or “Same As It Ever Was”

Over the past few years when it’s come to any criticism of business models, valuations, or other concerns encompassing the social media space, along with other dubious “hacking” inspired businesses emanating from Silicon Valley. The immediate rebuttal posed fell along the lines of first being looked as “you just don’t get it” (or just crawled out from under some rock) followed with, “It’s different this time.”

If one posed any real push back as to move nebulous assertions out from the sky and back into more true ledger accounting? Those “looks” turned into outright disdain, and disgust followed with ridicule as the assertions of “It’s different…” and “You just…” morphed into closing statements as to implicitly cement the questioning door closed. For to go any further, it was a waste of their time and/or breath. After all, why try to prove you’re right when today’s version of the teenage “Because! Just because!” works just as handily.

Over the past few years that defense has worked splendidly. Only problem? Just like with teenagers; there comes a time it no longer works. This is where the once go-to responses begin to work against – not for. Welcome to same as it ever was. Or, one could say, “Welcome back to reality.” Where nebulous business plans no longer attract attention never-mind – cold hard cash.

As a matter of fact, what has been recently embraced as some entrepreneurial birthright in Silicon Valley (i.e., VC funding at the whim) seems to be going the way of “Because…” itself.

You’re not hearing precise reasoning or explanations for it (although the reasons are as clear as day: No QE.) However, what you are beginning to now see are the inevitable storm clouds moving from the horizon, and making landfall. All one needs to do is get their heads out-of-the-clouds and start reading the writing on the walls right in front of them. For the messages they portend are writ large – if one wants to see. Here are a few that have caught my attention…

A few weeks ago I was watching a Bloomberg™ morning show where the guest was one of social media’s well-known aficionados. (I’m not being coy by not naming, it really doesn’t matter) During the discussion there were a few things that struck me. One was the on air tension. It seemed the more the questioning – the more antagonist or dismissive the retorts became. Another was in response to a question about Twitter™. The response? “Do people even use Twitter any longer?” For he implied he’d already moved from there to another platform. Which in many ways validates what I’ve stated for years and have been publicly scorned for: “When the price is free – loyalty is as enduring as a Unicorn’s balance sheet is real.”

Another point to ponder is this: Let’s put aside anything IPO for a moment and look directly at the VC funding meme. Remember (for it wasn’t all that long ago) when those in the VC world were being touted as some form of Superheros to the rescue? As a matter of fact one prominent website to this very topic sported a drawing depicting many as just that with capes, costumes, and more.

It seems that maybe there’s just a few too many seeking their birthright VC money in today’s market environment.

Just 12 months ago VC firms and others would be hosting “come one – come all” stylized events or meetings as to vet the latest group to be showered with some form of initial funding. The game (as I had written about previously) had morphed into more of a numbers game funded via the hot money provided by the Fed’s ongoing QE policy. i.e., Throw money at all of them, for the IPO’ing of just one will make all sins disappear. However, that meme is showing signs it to is going the way of “its different this time.”

Today you don’t need to look deep (for it’s everywhere if you want to see.) All you need to do is look. There are articles sporting titles along the lines of “Why you shouldn’t seek VC money” and more. And not from obscure names. Some are from the very people who only months ago were depicting as VC superheros. Quite a shift and peculiar timing one might infer, no?

So what about “everything social?” After all, social media is the “be all – end all” platform in which all dreams are made (and cashed out.) Again, after all, everyone still instinctively points to Facebook™ as the continuation of promised milk and honey. “Just look at their stock price!” is shouted. Another is “Just look at mobile: they’re killing it!” “You don’t understand: it’s different this time!” Sure it is. All I’ll point to for a contrasting argument is AOL™.

Facebook currently sports a market cap larger than GE™, Johnson & Johnson™, Walmart™, and a host of others. These are not trivial companies by any stretch. However, there is one very distinct difference that should not be lost. They sell products and buy ads. Facebook primarily sells only ads (and all your data but that’s for a different discussion.) In the last bubble AOL also fell into this same paragon of ad-based business models. It was unique, email was “the hottest thing.” Banner ads (remember those) was the next be all, end all to advertising. Till – it wasn’t.

AOL-Time Warner™ stood with a market cap of some $350 BILLION dollars in 2000. It was for all intents and purposes “the king” of ad sales in the every growing, and developing, tech based medium. Then, the bubble burst (i.e., the recession took hold) and ad sales literally dried up crushing AOL and anyone else supported purely on an “ad” model.

Yet, let’s not forget about the one thing that takes place right before such a hatchet bears down on ad revenues that many just don’t contemplate. For AOL did have real ad sales as does Facebook. And right before the bottom fell out AOL was also (much like Facebook is today) being pushed ever higher in valuation.

That “thing” is this: Right before the axe falls – the preceding volume of ad buying becomes more concentrated. Any and all peripheral ad money gets bundled and focused into one medium more than the others in what could be classified as a “Hail Mary” seasonal cycle buy. This is how I look at Facebook’s latest earnings report. The meme of “they’re just killing it/firing on all cylinders” hearkens to my ears just what happened before the implosion of “everything dot-com.”

I am still of the belief the “everything social” is not “it’s different this time” but more of “the same as it ever was.”

The latest retail sales report wasn’t bad – it was horrible. Once again missing expectations. But there’s a much bigger problem. More and more retailers are reporting abysmal earnings reports. Macy’™, Nordstrom™, Walmart™ and others are reporting nothing more than anyone with a shred of common sense knows intuitively as summed up so succinctly by retail maven Howard Davidowitz when speaking on the challenges of retail malls: “…what’s going on is the customers don’t have the fucking money. That’s it. This isn’t rocket science.”

Current ad spending by retailers as of this writing I believe fits into the same description echoed by Mr. Davidowitz: It’s not rocket science.

Facebook and a few others are going to be the go-to recipients of any and all “Hail Mary” ad buys for this coming earnings quarter and holiday season. Just like with what has taken place with previous assigned “Holy Grail” inspired ad platforms.

If retail sales for this shopping season mirror anything close to what this past report portends? Again, just look to AOL post 2000 for hints. Ad revenue went from robust to abysmal in the blink of an eye.

In 2001 AOL was still considered “the hottest, biggest, bad ass of everything ad/internet generating revenue.” By 2002 it’s $2.3 BILLION in ad revenue would be cut in half. Then just a year later it would fall even further to nearly cutting itself by another third if not half once again. Till finally AOL became “Who?”

For comparison: Facebook is now just about the same size in market cap as AOL was in 2000. The parallels are striking if one dares to look back with any quantitative as well as qualitative analysis eschewing any “it’s different this time” reasoning.

For further clues I’ll only point just a few more…

First: Isn’t it just a little odd or, at the least something that makes you go Hmmmmm when none other than one of the most prominent cheerleaders of everything VC and/or social Marc Andreessen sells 73% of his Facebook stock in the last two weeks?

If that doesn’t inspire a change in thinking maybe the following will. For if there’s anything to be gained for insight such as the much touted “front page article” to mark a bubble. How about the very week Facebook hit its peak share price the following was reported with great fanfare. To wit: President Obama announces launch of his very own Facebook page.

Remember, government has been shown to be with near Swiss watch precision – the last to arrive to the party.

Oh, and one last point just for a little more context. Remember I said at the beginning of this article to put aside anything IPO for the moment? I was scorned and ridiculed by many (especially those within The Valley itself) when I penned an article titled, “Crying Towels: Silicon Valley’s Next Big Investment Op” Yet, a funny thing has shown itself on its way to “Unicorn paradise.”

The much-anticipated IPO of Square™ was announced. The issue? The price is some $2 BILLION less (i.e., at a 30% discount) to its latest private funding round for valuation. That while simultaneously the other company Mr. Dorsey is heading up as CEO (Twitter) once again falls below its IPO price. So now, with all that said, the only question one needs to ask and answer is this:

It’s different this time? Or: same as it ever was?

We’re going to find out much sooner than later. That I’m sure of.

© 2015 Mark St.Cyr