Is Facebook Staring Down Its “AOL Moment?”

It wasn’t all that long ago one of the most powerful digital ads-for-eyeballs platform ever created appeared as if it was the unstoppable juggernaut all the talking heads and analysts reigning on Wall Street declared it to be. Two of the most powerful reasons for why this mega-capped behemoth was not only here to stay, but was now the only company poised to outperform and capitalize on digital advertising in ways others could not was…

  • The new digital age of advertising allowed for precision ad placement, in front of the most qualified prospects for the advertisers product via data collection of attributes and viewing habits like never before.
  • They were so dominant a player, owning (and constantly buying) the very revolutionary assets that would propel it for years to come, that advertising anywhere else would be considered misplaced at best, and “not just getting it”, (“it” being advertising in this new age of digital) at worst. For this was the day and age of targeted data for ads.

Sound familiar?

If it does you wouldn’t be wrong if you cited hearing the above via the current business media as they rambled on trying to spin their take about what the latest Facebook™ earnings report portended for the future. The issue is the above is precisely what was similarly being bandied about with glee, and trumpeted, after each and every AOL™ report of that day.

Then – the music stopped and the horns went silent. And they never returned.

The sole reason why AOL faulted, floundered, then fell apart was for one reason, and one reason only: It was all based on the “ads for eyeballs” model. i.e., The more eyeballs it collected – the more ads it could sell. The issue was when advertisers realized not every “eyeball” had the same value as another? Ad revenue fell – and so too did AOL.

I am (and have been consistently) of the opinion that Facebook (FB) is, and has been, nothing more than the AOL of yesterday, both in hype, product, advertising results, etc., etc. I also hold the opinion (and have expressed it too many times to list) that it may indeed meet the same fate.

That opinion is now seeming to be not as “crazy” as it once appeared when I first argued it, because as to paraphrase an old line that’s been said more time than there’s digital ink, “History may not repeat, but it sure does rhyme.” And to my ear: Facebook’s rhyming with AOL as if through an auto-tuner. Here’s why…

Another of those “rhymes” currently taking place throughout “The Valley” is the ever-increasing, foreboding presence that “it’s different this time” is morphing into – it sure is. And not in a good way.

Since the ending of quantitative easing (QE) startups, unicorns, and more have been left to either wither on the IPO vine, or been sent mercilessly to the glue-factory just after reaching the green pastures of IPO nirvana. Funding for startups has all been but shunned entirely when compared to just two years ago when VC “lottery ticket investing” was the game of the day.

Today? That game has all but vanished. But they are far from the only ones not feeling “the love.”

Now not only do unicorns seem IPO shy, but rather – IPO phobic. Why? As I’ve opined relentlessly, “Better to stay private and declare you’re worth $Billions and have people believe it – rather than IPO and show investors their “investment” might not be worth the certificate its printed on.”

This is all reminiscent of the same that transpired at the end of the dot-com era. The only thing left to complete it is for that other “rhyming” similarity to take place. i.e., The leaders aka the FAANG group of stocks begin to have their valuations hobbled much like what happened to the concentration of leading stocks that kept the entire “it’s different this time” meme alive back then, aka “The Four Horseman.”

And Facebook (again, my opinion) is the current front-runner to kick this entire rhyming race off in earnest.

Facebook is, for all intents and purposes, an advertising tool for advertisers only. It derives nearly all its revenue from advertisers. i.e., If there’s no advertisers buying on Facebook – there’s no Facebook. Regardless of how many free “users” sign up.

Pretty simple construct, but imperative to truly contemplate because it’s not that FB provides anything that people truly need. It’s just an outlet connecting eyeballs. And it is those “eyeballs” which are the product. And as soon as advertisers begin regarding 2 Billion eyeballs as being not worth more than two-red-cents, because nobody is buying? That’s when $Billion dollar valuations begin to plummet.

Well guess what? Hint: “It’s different this time” seems to not be all that different after all.

Here’s something I stated back just one year ago. To wit:

“Here’s a report done by CNNMoney™ on AOL way back in August of 1998 (you know, just previous to it all coming apart) titled “AOL – We’ve Got Profits!” As one reads it, it’s striking just how much it rhymes with FB today. Especially when you read things like this:

“Entering our new fiscal year, we’re not only the biggest in the industry, but the most profitable. Fiscal 1998 was more than a great operational year for us, but it will serve as a strong foundation for years of profitable growth,”

Sound familiar? How about another? From the same article:

“If we continue to grow membership, advertising and commerce, we believe we will continue to show very strong growth in profits.
“The overall driver will be turning this into a mass medium. The question is who’s going to get those customers.
“We’re not going to get complacent, but we’ve created a service that’s fun and easy to use. Those factors and the general shift in spending to new media positions AOL as the best brand in the industry.”

Uncanny, no?”

Since that point the valuation for FB has gone ever higher – as did AOL’s. But then something began to enter the fray which should have caused concern for anyone paying attention. Again, from that same article, to wit:

“So why do I say Facebook (FB) and AOL of the past are rhyming and so in-tune today? Well, let’s just look at the most recent scandal revelation coming out of FB today. e.g., Overestimated a key video metric for two years.

Now some are stating this latest oopsy is immaterial since FB is said to charge after 10 seconds. So, as the thinking goes, no one paid for something they shouldn’t. Well, that’s how it’s being argued by both FB and those marketers that rely on getting companies to part with their ad dollars via their services and FB’s. But to an advertiser? I’m sorry, but that revelation is far from no big deal.”

And now you have none other than another member of that same group (e.g., FAANG) reporting an oopsy moment of their own, confirming the validity of the prior.

The issue here is: advertisers were sold a metric that appears to be not what it was sold to represent. e.g., implies fraud via the scourge known as bots, click-farms, or others. Those are not the eyeballs-for-ads these advertisers signed up to have their advertising budgets siphoned dry for. And that’s a huge issue for the likes of Facebook, as well as the others. For the investors (as well as advertising executives) that pay for all advertising can no longer sweep-under-the-rug the poor showing they’re receiving for their ad dollars. Especially when it’s becoming more apparent, as well as reported on.

And the amounts are far from anything close to resembling trivial.

From the Wall Street Journal™. just last week. To wit:

“The industry’s efforts to rein in fraud appear to have an impact. Some $6.5 billion in ad spending will be wasted this year to fraud, down 10% from 2016, according to a report released in May by the Association of National Advertisers and ad-fraud detection firm WhiteOps.

The methods the fraudsters use are highly sophisticated. Some infect unsuspecting consumers’ computers with malware to form a “botnet” that clicks on ads on bogus sites.

Fraudsters are often adept at covering their tracks, which can make their activity difficult to spot until after the event has occurred.”

It’s the accelerating appearance of the above that puts FB most at risk, for it’s not just something inherent to FB itself where it can claim “it’s fixed it”, but rather, it’s the entire ad model, and narrative in total, that is now at risk. And it will be advertisers themselves which will deem what is “fixed” and what is not. And advertisers have already begun pulling in those ad budgets as to “fix” it pronto. And (in my opinion) has only just begun.

The first shot across the proverbial bow was (rhyming nearly a year to the date) when P&G™ announced it was pulling ad dollars from what was considered FB’s ultimate ad model and raison d’être, i.e., targeted ads. The reason? All that targeting (via all that charged-for data) wasn’t hitting the mark.

What’s followed since has been more of the same. i.e., advertisers are beginning to question if two-red-cents might be – one too many.

In and around this past holiday season I proposed that there would more than likely be a surge in FB ad revenue not out of its supposed efficacy, but for the mere fact that many advertisers would more likely than not contract their ad buys into a more concentrated last-ditch effort, and FB would more than likely be the benefactor of it. Yet, once the results of all that concentrated buying was shown to be for not? Everything changes. And I believe that moment has arrived.

This past week none other that WPP™, which just so happens to be the world’s largest ad company, stock value plummeted after reporting dismal earnings, and “terrible” guidance.”

Why this is such an AOL moment-to-remember for contemplation is for this reason:

When the world largest brands, as well as buyers of advertising, both give their reasoning (and blame) for their own sales slump for those ad dollar placements using terms like “fraud”, “fake”, “measurability issues”, “poor efficacy”, and more? “It’s different this time” begins to morph into anything but.

All that’s now missing is when that auto-tuner starts belting out rhymes that begin with: “Ad revenues didn’t meet expectations as advertisers seemed to pull in their horns towards the beginning of the _____ (fill in the blank) quarter, and are signaling maybe the same for the holiday season in general.”

Look for that coming from future earnings calls in the not so distant earnings reporting seasons ahead.

For those whom are a bit skeptical about how all this history rhymes, here’s something to consider from what I like to call “the ancient scrolls” of the dot-com era…

From the ancient scrolls of Forbes™: 1-24-2001

“AOL is masterful at mesmerizing analysts to create buzz that juices the stock price. Now it is crafting for AOL Time Warner an aura of the old AOL. No matter that 80% of the merged company’s cash flow is from old media. This is an Internet outfit. All the Time Warner stuff is there to serve AOL. An announcement of management changes at the online division, made on the day of the buyback news, said: “AOL Organized to Drive Growth of AOL Time Warner.”

Wall Street is buying into the spin big time. AOL Time Warner lists 41 investment analysts covering the company. Just 14 of them are traditional media analysts, half of whom are paired with an Internet colleague. So far, the cheerleading has been led by the Internet gurus, who tend to view Time Warner as an AOL tool kit of cable systems, content and customer lists.”

And then it was all but one year later, where everything which was praised before – was no more.

From the ancient scrolls on CNN/Money™: 10-23-2002

NEW YORK (CNN/Money) – AOL Time Warner Inc. announced Wednesday that it will restate results for the two years ended in the second quarter as a result of questionable advertising and commerce transactions at its troubled America Online division. At the same time, executives of AOL Time Warner reaffirmed their most recent forecast for revenue and earnings this year.

The restatement will erase $190 million in revenue and $97 million in earnings before taxes and other items from its books, the world’s biggest media company said.

Sound familiar? But here’s the money quote, again from the same scroll…

“Rather than the double-digit growth executives had promised as the merged company’s Internet and media properties cross-marketed one another, America Online’s results have in recent quarters been a drag on the New York City-based company’s financial results.

The ailing Internet unit has been hit hard by a protracted slump in online advertising spending as well as slowing subscriber growth. It also is struggling to hold on to its existing subscribers as they make the switch from dial-up connections to high-speed digital subscriber line (DSL) and cable Internet connections”

The above happened all in the course of about 18 months from AOL sitting on top of the digital ad world in 2000 with its then CEO Steve Case firmly ensconced as the then “wonder executive” of everything digital – to where he was gone and the company itself would be all but a shell of its once $100’s of Billions in ad presence and valuation – to just a presence – to be purchased for pennies on the dollar only a short period later.

But, then again, it’s different this time, right?

© 2017 Mark St.Cyr