Wednesday, October 17, 2007

Evaluating Bubble Talk: What's Real and What Isn't?

The New York Times covers some of the recent surges in Silicon Valley startups getting massive amounts of funding and, in some instances, handsome rewards for private investors backing online content plays. RightMedia's acquisition by Yahoo for a cool USD 850 million and microscopic startup Ning's USD 214 million valuation on USD 44 million of private equity investment are just some of the highlights in today's parade of bets by investors who seem to have the pocketbooks of major media companies at their disposal on a regular basis.

It's easy to see why many are saying that the bubble fever of the dot-com era is beginning to surge again, and in some ways the bubble doubters have a lot of credible evidence that points to many more losers than winners in the push to come up with valuable contexts for content. First and foremost is the inventory problem: with social media helping to multiply the outlets available for advertising at a nearly Malthusian rate there is way too much available inventory for advertisers trying to tap into online audiences. Just as advertising was supposed to float every business plan in 2000 regardless of the available demand there's sure to be a shakeout as reality begins to catch up with the inventory issue. Also having a familiar feel is the availability of interesting but all-too-similar technology plays that have little chance at building audiences at a rate that could justify reasonable returns. How many it's-like-Facebook-with-Skype-and-who-knows-what-else ideas can the marketplace absorb? The pocketbooks of major media companies, the presumed exit points for most of these plays, are not going to support these types of tools endlessly.

But there are some major differences this time around that might help to make more of today's bubbles a little longer lasting:
  • Contextual advertising. While there's an abundance of inventory generated in part by social media there is not an abundance of specific audiences for specific goods and services. The dot-com bubble burst largely before contextual advertising had begun to take off to enable a different kind of economics for the long tail of content that can benefit from high-margin goods and services that match up with niche interests. While contextual ads still place a lot of pressure on online publishers to come up with the goods that attract the best ads, their ability to service lucrative niche markets very cost-effectively will make the landing for many online publishers a little softer as the economy cools off.
  • Finite mainstream media. Even as social media has expanded rapidly the ability of mainstream media companies to create inventory has not changed significantly over the past seven years. While content management, mining and other production tools have enabled publishers to develop more engaging content, with the exception of video there's not a lot more out there. In fact, with cutbacks, consolidations and increased competition from social media outlets one could say that there's less mainstream text inventory online than ever to absorb the advertising budgets of major corporations that crave their content. What has increased, though, are the syndication efforts of publishers to get their content out into new contexts via embedded content services such as Voxant, user feeds and via new mobile platform partners. The need for more usable inventory will keep demand for new content sources high - and multiples relatively lofty - until overall advertising demand softens.
  • The creativity factor. While media companies on both the consumer and enterprise side of the content business are great at managing tightly defined content products they have proven time and again that the corporate cultures that thrive off of control-oriented values are very poor at coming up with new ideas for online content products that thrive on today's softer concepts of value created through collaboration and contextualization. Many so-so ideas will still come and go in Silicon Valley but as a whole the price that media companies are paying for failing to re-invent their own cultures to encourage more risk-taking with new ventures will be regular trips down Highway 101 to fill their needs for innovation with maturing venture-backed companies. You'd think that after seven years it would be different, but we're probably at least five years away from media companies having made enough of a transition into more innovative internal cultures to make those trips less frequent for those who survive the shift.
  • The impending return of premium content. While advertising gains the spotlight in most business plans the push of services such as Near-Time to build profits from private communities of social media and the repositioning of print magazines as community-building tools are increasing the promise of online publishers to build new streams of revenue from relatively small amounts of content. People are also willing to paystill for events - and more content is likely to be positioned as premium event content online in ways that will complement ad-supported channels rather than conflict with them. Look for a broadening array of business models that include new premium elements that could soften the downturn of ad cycles.
Mind you there are just about as many technologists as there ever were with the ability to code and not a clue as to how to be real publishers who will keep the winds of blarney blowing up from the Bay as fresh as ever. Fools will come and fools will go, but as a whole the frontiers of online publishing are still raw enough to warrant independent investments along the scale of today's efforts for several years to come. Probably the biggest factor for determining how healthy that growth curve stays is the ability to get more people more access to electronic content. We're at the beginning of a growth gap in which mobile access to Web content is hobbled by poor network access and costly access plans while land-based access is stalling in U.S. markets.

At the same time high-speed access in overseas markets is exploding, creating more opportunities for new non-U.S. players to carve their own segments out of the global content pie very rapidly. The sooner that publishers can recognize that there's more to be gained globally by pushing more open online publishing models the more opportunities they will have to get their fair share of global online markets. With contextual content and advertising breaking down traditional boundaries for monetization publishers need to think more aggressively as to how to profit from content that knows no borders.

With so much of today's content under development being funded privately it's hard for any exit to the doorways to get a stampede effect going in the same way that IPO-oriented investments in the dot-com era got out of hand. But until mainstream investments begin to offer more attractive returns there is likely to be a steady stream of private investors willing to dabble a bit of their fortunes in potentially high-yield content plays that will put them in an even richer gravy train. As many of these people have already made at least one round of successful investments there's always the chance that smart money can follow smart money indefinitely. Then again, most of us are only as smart as our last good decision. Perhaps Mr. Darwin will be taking on Lord Malthus' math sooner than we think.
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