It appears Verizon™ has announced to make a play in the bidding for Yahoo™. There are others in the mix (such as Google™) along with those that have already panned their interest (such as Comcast™ and ATT™.) Although the idea of what many would call “a mature” in not “aged” business model such as Verizon acquiring another “dinosaur” brand of the early tech years such as Yahoo (remember the also purchased AOL™ 10 months ago) just more of the “same old-same old” when growth is only possible (or at least verbally spun) via acquisition. This next round of aged cohabitation may be far more interesting and bring forth what the “new” composition of “the web” may look like in the not too distant future. For this time the Darwinian process may favor Silicon Valley’s oldest behemoths – not its youngest.
There’s a dichotomy of thought when it comes to investing in anything related to tech these days. First is the “user growth and only user growth matters” model (which is basically the “everything social” genre) contrasted against the “slow to near absent growth but; stable paying users” model i.e., subscription based and others.
And it is here in both the revenue side, as well as, the user side I believe things are about to get interesting. Especially in this QE starved “unicorn” environment.
If one looks at the current state of unicorns (as well as previously IPO’d) it’s hard to imagine things getting better in this current environment. As a matter of fact, I believe (and have stated many times previous) the entire “Unicorn” phenom is not only drawing to a close – most will never see the IPO light of day. Will not pass “Go.” And, will proceed directly to the glue factory instead where they’ll be drawn, quartered, and sold for what ever prices available – with the remains turned into digital adhesive.
Harsh? Yes. However, no more harsh than the catcalls and scowls I received from Silicon Valley aficionados when I dared point out other cracks in the Silicon Valley mirror. Yet today, it would seem those cracks are growing ever larger by the day. After all: have you seen a “Unicorn” IPO yet this year? Oh yes, it sure is “different this time.”
So, it’s with this dichotomy, along with where “the money” may flow I’m using as a kind of balance scale as to where I believe things could change in ways far too many may not realize. And, as I stated iterated earlier, “things can get very interesting.” So, using an oversimplified model and thesis here’s my reasoning…
When using the “everything social” model (i.e., the Twitter™, Facebook™, LinkedIn™, et al.) it’s all about user growth.
Valuations are said to be “validated” via how many, as well as, how fast more and more users are engaging with these platforms i.e., “eyeballs for ads.” In other words: BILLION $Dollar valuations are based on the same mythical measurements as actually seeing a real live unicorn – belief. Non-GAAP accounting facilitates the myth, where true GAAP accounting exposes the hoax or fiction. (I’m fully aware that Non-GAAP is also employed at these acquiring type entities also. It’s just for this discussion, the older entities I feel still have some time left in their use, where I believe the other may not. Yet, the end draws nigh for its continuation in both, regardless.)
Some will tout “That’s hogwash! “New tech” is not old tech and these valuations are viable.” Fair enough. However, if that is so; explain why valuations such as those of LinkedIn and Twitter remain in the….? Shouldn’t these be great companies on sale so Buy, Buy, Buy with horns over hooves? If the myth was still in tact (and QE was fueling it) the answer would be able to be spun as; yes.
Yet, all one has to do is look at many of these names and their current stock charts where one is quickly reminded, they seem to have more in common with what’s left behind by a horse – not a unicorn.
The more the “everything social” genre of companies try to fulfill their revenue expectations with changes where some form of user revenue is to be extracted (as promised, and promised, and promised, and…) the more its “user growth” or “engagement” model or myth meets reality. e.g., It plummets.
Nowhere is this more apparent than another once highly touted “This thing is the greatest!” new tech phenom of social everything: Instagram™
Back in September of 2015 Instagram announced ads would be rolled out to everyone. The results? Users hate it and engagement plummeted some 40%.
The real problem here is two-fold. First: That report came out just last month. Second: Facebook™ bought it for a $Billion, and both have relatively the same business model. Can you see the underlying problem here to the “everything social” model? And I wont even go into the justifications for valuation when Mark Zuckerberg paid $19 BILLION for WhatsApp™. How do you think that’s going to pan out if, and when, it tries in earnest to pay back and justify its stunning acquisition cost using its fellow brethren of a “unicorn” as its model? Again, in my opinion, the same model that its parent company is tied to. Talk about hitching your cart to the same unicorn. Like I said – things are getting interesting, no?
So, with all that in mind, here’s where “interesting” can really take both shape and form in ways many of today’s unicorns can’t: The model of Verizon is a paying user base that users of all the current “social everything” can’t exist without. i.e., the web access model. Verizon (I’m using Verizon but this pertains to all internet providers) can exist, grow, change, and add services for free or, charge more if applicable to already paying (and that’s the key) user base.
The “everything social” model, no matter how good, big, dynamic, popular, and everything else you want to say about it can’t do one thing that Verizon can: Exist without an internet provider to access it. Period. Never forgetting another very important point: the moment they try to charge – is the exact moment their user base tends to bolt.
Let me use this argument for you to ponder: I can access a crappy, boring, outdated Yahoo type portal via Verizon that may or may not also include a social media type add-on that is user stable at best, with the hopes or expectations that in the coming future they’ll get better and more responsive. Yet, without an internet provider such as a Verizon – you can’t access the most outstanding, latest and greatest social anything.
And if I’m an “investor?” Well, the room for growth and potential profit is much more clearer when viewed through the prism of current paying subscribers than the kaleidoscope prism of “unicorn” user growth models. Both past and future. Especially this earnings cycle in my opinion.
Consider it this way: Let’s say you’re an “investor” in this current climate i.e., with no more QE. Along with the realization the economy is far worse than the data has shown, and the Fed. is also out of bullets for the foreseeable future. Where are you going to start shifting and potentially parking assets with the two models becoming clearer by the day?
One model resembles the heights right before the crash of the last tech boom circa 2000. The other resembles the model that made it through those times and acquired all the former remnants at unicorn tear pricing when it was all said and over with.
It is here where the most compelling argument that things could be different this earnings season than quite a few previous…
The “social everything” modeled companies need every potential investing dollar available currently just to stay afloat. Let alone – grow and repay for past investments.
Just a small shift in fund allocations can bring the “unicorns” of both past and present tumbling to the ground faster than the bulls that may find themselves cliff diving from these latest market highs.
With earnings season quickly coming upon us, there may be no other time where the dinosaurs of the past may outshine and attract (as well as keep) the increasingly dwindling and existence sustaining investment dollar within its grasp. Whereas it is the new media, social everything, new kids on the block that find themselves having existential moments of crisis one after another with every upcoming earnings call throughout.
Remember, I don’t think its going to be lost on the truly smart money that one model not only exists, but can thrive with a reallocation of investment dollars in its favor. The other can only eat if it can justify its reason for existence via story-lines and fairy-tales of “Any day now, just you wait we’ll make money!” As investors wait, and wait, and wait.
That waiting may in fact come to a screaming halt with ramifications once thought never to be seen again – right around the corner.
Yes, interesting indeed.
© 2016 Mark St.Cyr