If the Storm of 2008 will do anything in the media world, it is kill print. Let’s face it, had the economy not tanked, then I think print-centric traditional media companies would have slowly but surely built up online units that could have mustered enough revenue to maintain some kind of traction in their markets… but now, I think the contraction will be so quick and so severe that they’ll have cut costs drastically, reduce any efforts to expand online, lose and demoralize staff and have little to show for it down the road. Judge by the headlines yourself:
- As though following the advice
of Netscape founder Marc Andressen, The Christian Science Monitor announces it will cease print publication next April, choosing to focus on its Web site.
- Time Inc. announces a major restructuring, including 600 layoffs.
- Gannett plans to cut 10% of its newspaper workforce, but none at USA Today.
- Doubleday Publishing lays off 16, or 10% of its staff.
- Martha Stewart Living Omnimedia cuts its 2008 revenue forecast, and reports a 25% decline in its publishing division’s revenue.
- McGraw-Hill trims 270 jobs company-wide.
- The Los Angeles Times arranges to cut 10% of its editorial staff, or 75 jobs.
- Standard & Poor’s and Moody’s downgrade The Washington Post Co.’s outlook from “stable” to “negative.”
- The Star-Ledger of Newark, NJ, says it will cut its newsroom staff by 40% by the end of the year.
- In one bright spot, New York Times executive editor Bill Keller says he sees no further staff reductions.
While I’ve hesitated to fall in the “print is dead” camp, I think that this storm will drown their chance of success. A major problem is that many of these print companies have not invested enough in video, which is at the center of growth on the Web in the next few years… and now they will lose any appetite to invest much.
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Since Guitar Hero (Activision) and Rock Band (MTV-Harmonix) were created there has been a literal battle for the bands.
The Beatles, until now, have been acclaimed by neither.
“MTV, wielding the power of its parent Viacom, has claimed the Liverpool legends for itself, meaning that Rock Band will be the exclusive platform for the advent of the first ever digitally-distributed Beatles tracks.”
VCs are like Republicans: all about fear, uncertainty and doubt.
While the economic uncertainty we are going through is going to get worst before it gets any better, I think the current bogey man approach most VCs are adopting has everything to do with the fact that they suddenly realize that most, if not all, of their investments were struck at obscene valuations and they will never be able to get any solid, positive returns on them.
As a result, they are laying the foundation now to:
- instill fear about what is around the corner,
- create uncertainty about the future,
- make entrepreneurs doubt their own gut instincts.
Why do this? Because they will be forced to accept down rounds where the VCs will be able to average cost dollar their investments to something with a semblance of common - and financial - sense.
Mark my words.
Shouldn’t VCs be showing leadership now, rolling up the sleeves or going all out to win? You’d think. But all of a sudden, they are starting to - like the Republicans - scapegoating the economy instead of admitting that their investments were just bad.
It’s amazing how quickly things change. A few months ago, conventional wisdom was spend, spend, spend… at any cost, even if the direction of the company was questionable. Scroll down to the end for my rationale as to why this is happening.
Now, even the most war-tested are showing signs of panic. Via VentureBeat, here are 10 tips from legendary VC John Doerr:
The strategies for muddling through this economy start with these suggestions:
1. Act now. Focus your business, cut what you need, or sell if you must.
2. Protect the vital core of your business. If you have to cut, use a scalpel, not an axe.
3. Get 18 months or more of cash. And do it against a conservative business plan. Plan for the worst.
4. Defer expansion. Delay facilities and capital expenses. Instead of buying PCs or software, use “our technologies,” by which he means, Google Docs (which is free) and similar Web-based back office tools. Reprioritize and rationalize all your R&D.
5. Negotiate. In this climate, everything is negotiable, including your lease.
6. Everybody sell. It’s an honorable profession. Everyone in the company should have a focus on bringing in customers.
7. Offer equity instead of cash. For people who can accept it, offer to swap cash remuneration for shares of the company.
8. Pay attention to where your cash is. Put all your cash into the most secure possible instruments. Money market funds are not guaranteed. Look at treasuries.
9. Make sure you have leading indicators for all your revenues. 90 days is a good benchmark. You want to see the trouble coming before it hits you.
10. Over-communicate. With employees, investors, key customers. Don’t sugarcoat things (and reread tip No. 5).
There you have it, from one of the most legendary VCs out there.
I cannot stress this enough: these apply to “pie in the sky” companies that had dope-induced business plans with way too much money in the bank and no light at the end of the revenue-tunnel. Then the mortgage market blew up and a sudden, flashing light popped up almost killing them outright. That light was an oncoming train. Then the VCs, who supposedly look long, got into a short term mindset and are now panicking and pressuring their companies to act now.
This is getting ridiculous. Weren’t these guys doling out bad advice a few months ago?
So, why are VCs panicking? My bet is many of them will end up having their own investors balk from future commitments (if they have any) while others outright ask for their cash back. This, of course, will lead to lawsuits etc.
The expression “a rising tide lifts all boats” also applies to VCs, who are notoriously bad at identifying good businesses and win when they carpet bomb a bunch of entrepreneurs and startups with money, hoping that one or two becomes hits.
Right now, suddenly the definition of a hit has changed… and VCs know that once they lift their skirts, they have very little to show their own investors, and this is why they are panicking… it’s almost like a domino effect.
Me to a Partner of Ours: Really? That’s your policy? Ok, no worries. I will look for a solution. Hmm… that is interesting. Do you mind if I blog about this? Not to complain or anything, but to see what others might think as a work-around.
Partner: Well… we’re not here to say what you can and cannot write…
Me: True… but it’s common courtesy to ask.
Partner: We are under NDA.
Me: Right. Let’s try to go 2 years without a massive lawsuit from a big company.
I am all for product placement, at WatchMojo.com, we’re looking to do more product placement, integration and what not… however, product placement will always get a lot of resistance from content producers, not for the obvious seedy aspects of it, but because of greed:
Everyone wants to be able to seamlessly make advertising changes to videos - all videos - and product placement “hard-coded” the ad message in a way that, while advantageous to advertisers, turns off producers.
It’s just one more manifestation of Google envy: imagine if Ad Words would have hard coded a text ad next to content or organic search ads? What self-respecting ad executive (or investor) would want that? Mind you, uber investor Ron Conway is all for it.
It’s Time’s turn, apparently.
It seems like every other conversation we have, someone asks me how the economic slowdown (or more like a clusterf*** to the poorhouse) is affecting our business. Here is a typical exchange:
Someone else: How’s the crisis gonna impact your business?
Me: We’ll win some business (because less people have the appetite to produce so they turn to us) and we will lose some (because people are careful with cash). But net-net, since we did not raise mountains of VC cash, it’s consistent and progressive growth.
Someone else: Right, less competition and even less people thinking about starting up. That’s a good thing, but the problem might be the costs of keep developing new and attractive content.
Me: For us in Montreal it’s not an issue, costs are down, but if you are in NY, SF, LA - creating high quality content at a reasonable cost now is impossible.
Someone else: Yeah, you’re right. We’ve cut down some expenses.
There you have it. I’d like to cut some expenses, too… but we never beefed up on expenses, so short of diluting the office coffee, I don’t know where to start.
I think I’m gonna hurl. From MSN Money Central:
Borrowers falling behind on their payments. Defaults rising. Huge swaths of loans souring. Investors getting burned.
But forget the now-familiar tales of mortgages gone bad. The next horror for beaten-down financial companies is the $950 billion worth of outstanding credit card debt — much of it toxic.
Innovest estimates that credit card issuers will take a $41 billion hit from rotten debt this year and a $96 billion blow in 2009.
What’s more, the Treasury Department’s $700 billion mortgage bailout won’t be a lifeline for credit card issuers.
Sure, the credit card market is just a fraction of the $11.9 trillion mortgage market. But sometimes the losses can be more painful. That’s because most credit card debt is unsecured, meaning consumers don’t have to make down payments when opening their accounts. If they stop making monthly payments and the account goes bad, there are no underlying assets for credit card companies to recoup.
With mortgages, in contrast, some banks are protected both by down payments and by the ability to recover at least some of the money by selling the property.
Risky borrowers with low credit scores account for roughly 30% of outstanding credit card debt, compared with 11% of mortgage debt. More than 45% of Washington Mutual’s credit card portfolio is subprime, according to Innovest.
That could become a headache for JPMorgan, which agreed on Sept. 25 to buy the troubled thrift’s credit card business and other assets for $1.9 billion. Says a JPMorgan spokeswoman: “We are aware of the credit quality of (WaMu’s) portfolios and will manage risk appropriately.”
Credit card losses are already taking a bite out of lenders’ balance sheets. Bank of America, the nation’s second-largest issuer behind JPMorgan, revealed on Oct. 6 that roughly $3 billion of its $184 billion credit card portfolio had soured, a 50% increase from a year ago. At the same time, the bank, which is also dealing with the broader financial tumult, said it would have to cut its dividend by 50% and raise $10 billion in fresh capital. The stock stumbled more than 25% the next day when investors largely scoffed at the new shares B of A was offering.
American Express, which caters to wealthier borrowers, upped its provisions for credit card losses from $810 million to $1.5 billion in the latest quarter, a sign that even upscale consumers are having trouble.
The industry’s practices during the lending boom are coming back to haunt many credit card lenders. Cate Colombo, a former call center staffer at MBNA, a big issuer bought by Bank of America in 2005, says her job was to develop a rapport with credit card customers and advise them to use more of their available credit. Colleagues would often gather around her chair when she was on the phone with a consumer and chant: “Sell, sell.”
“It was like ‘Boiler Room,’” says Colombo, referring to a 2000 movie about unscrupulous stockbrokers. “I knew that they would probably be in debt for the rest of their lives.”
Unless, of course, they default. Responds Bank of America spokeswoman Betty Riess: “The allegations do not reflect our practices. The bank has nothing to gain by extending credit to people who do not have the ability to pay us back.”
Even consumers like Michael Polemeni, who miss only a single payment, can find themselves in the crosshairs of credit card companies. The independent computer specialist relied heavily on his credit cards for child-support payments and business expenses. Polemeni generally made more than the minimum payment each month, carrying a balance of about $2,000. But in July he missed a payment, and Providian, owned by Washington Mutual, jacked up his rate from 9% to 30%. “I was shocked because I am a very good customer,” say Polemeni, who paid off the full balance immediately. WaMu didn’t return calls for comment.
Not everyone will be able to pay down their debts like Polemeni. And that could make for a vicious cycle: As credit-card companies raise rates, more consumers fall behind on their payments, which then hurts the issuers. Says Innovest’s Larkin, “We are going to see the banks massively hit.”
Are you ready?
The layoff trends continue… today it’s Avalanche’s turn. The company is laying off 77 people (basically 50%) because they lost two major deals. Sometimes, as in this case, the layoffs come because a company loses deals; but a lot of the layoffs we’ve seen thus far (check out Tech Crunch’s Layoff Tracker here) seem to come from companies who have yet to even develop a business model. You have to wonder: how much are these layoffs a result of a company’s prospects and how much is it about the economy.
Valleywag has an interesting take on the layoff binge. The conclusion is:
Big companies lay people off because of economic conditions; startups lay people off because their managers have fundamentally misjudged some aspect of their business. Any startup CEO who lays people off, from here on out, should be held accountable for his own mistakes. Blaming the economy for your cuts? So mid-October 2008.
Not sure I agree with it, but I think it’s important to note that indeed, the economy is currently being blamed for all layoffs even though some of these layoffs are unique realizations that the business model was not, you know, sponge-worthy.
I never raised VC money, for many reasons frankly. Reasons included:
- VC’s aversion to investing in content,
- Not that many VCs invest in Montreal companies,
- I was sued in May 2006, and that was settled in January 2007, killing any financing momentum we had away,
- My aversion to VC’s draconian terms,
- I don’t think any VC actually ever liked me enough to want to back me; nor did I ever suck up enough to a VC for them to think that they should back me,
- My inability to manipulate the forecasts for the much sought-after hockey curve effect, which to this day I think is hogwash in any forecast.
We can discuss the other points some other day, but the last point is worth noting:
In other words, the massive spike in growth - be it in traffic, adoption, reveunes, profits - is possible, but unlikely and nearly impossible to project. Trying to project it is an insult to anyone’s intelligence. The fact that VCs look for it in presentations shows how lousy they are as entrepreneurs and how gullible they are, because such growth rates suggests “abnormal profits” and the mere presence of abnormal profits draw in a massive amount of competitors.
So when you see MySpace, Google, or anyone else show such spikes, it is an anomaly and not something that could be forecasted in a powerpoint slide.
Anyway, the point I am trying to make is, are these layoffs a result of
- over-estimating demand and growth
or
- under-performing of results
or
- both?
In our case, we’re growing moderately well:
- our revenues will be more than 50% higher in 2008 than they were in 2007.
- our streams will be roughly 100% higher in 2008 than they were in 2007.
I would have liked these numbers to be even better, but the fact is, we did not over-hire to meet some unreasonably high targets (the hockey curve growth curve) so we do not need to lay anyone off, either.
Or do we? After all, if everyone jumps off a bridge, you can’t help but get close to the ledge to see what lies beneath. I mean, if you open a door and find yourself in a hallway and see everyone running left to right, do you head left or right?
I don’t know. But the point I am making is that these companies over-hired and now might very well be over-firing.
To quote Seinfeld, you can’t over-die and you can’t over-dry. But in the world of startups, you certainly can over-hire and I think time will tell if you can over-fire, too.
In the stock market, bullish trends tend to overshoot, but so do the bearish ones. Right now, everyone is in a panic, I wonder, how much of this has to do with their company’s prospects and how much of it has to do with the economy’s fundamentals?
WSJ is ringing the death knoll for many ad networks:
- JellyCloud, a Redwood City, Calif.-based targeted ad network, closed its doors this month after raising $11.5 million in venture-capital funding earlier this year.
- Adzilla, a similar network in San Francisco, also ceased operations.
- San Francisco-based AdBrite, which was founded in 2002 by Internet entrepreneurs Philip Kaplan and Gidon Wise and has raised a total of $35 million in funding, recently cut 40% of its work force to make itself profitable.
- Ad networks like Burst Media, the 17th-largest by unique visitors, and Collective Media, the 16th largest, say they are both seeking buyers.
- Other ad networks “are in severe trouble and could be closing their doors in the back half of this year or the beginning of ‘09. People are bracing for the worst,” says Ross Sandler, an Internet analyst at RBC Capital Market
- Mr. Sandler at RBC Capital also recently cut his estimates for ValueClick — operator of the country’s fifth-largest ad network, as measured by unique visitors. The analysts warned investors to brace for declines of nearly 2% for the full year 2008 and as much as 7% in 2009 in the company’s ad-network business. ValueClick is expected to report third-quarter results Wednesday.
Indeed, it is going to get pretty bad for the hundreds of undifferentiated ad networks out there. Come to think of it, the ad networks were for all intents and purposes the social networks of Web 1.0: very little by way of differentiation and no barrier to entry for anyone other than the #1 or #2.
And the same way that you are now seeing a shakeup in the ad network space, you will see the same thing in the social network space, especially when you consider just how worst the monetization is on social nets than it is on ad networks.
