The Tech Bubble Will Burst, and It Is Gonna Hurt

Share!Share on FacebookTweet about this on TwitterShare on RedditShare on Google+Share on TumblrShare on StumbleUponDigg thisPin on PinterestShare on LinkedInEmail this to someone




4fd695be-0d3a-49a7-a160-bd9e46eeba3f-original

It’s coming.

The lessons of the Dot.Com Bubble days have been forgotten by the business elite. We now have all these “unicorn” companies with over a $1B in valuation, even though very few of them have any profits to justify such a valuation. The valuation is based purely on over-hyped metrics like subscriber count and “engagement”, and not on cash-flow. Due to a lack of cash-flow the startups instead sell the dream that these userbases can be successfully monetized — even though startups like MySpace have long demonstrated user adoption doesn’t necessarily translate into dollar signs.  There is no doubt in my mind that the “growth over profits” mentality which led to the early 2000s collapse and resulting recession has returned in full force.

Most people will say to themselves this has nothing to do with them, but it does. Our economy is pretty fragile; the combination of the bubble burst, the 9/11 tower attacks and legislation such as NAFTA and various banking deregulation acts ushered in the early 2000s recession, which our economy has never fully recovered from regardless of what analysts on TV like to claim. The reality is much of the deregulation has not been addressed, and NAFTA is still in full effect. In fact, NAFTA’s replacement the Trans-Pacific Partnership agreement is on its way to deregulate international trade even further in ways that will only serve to completely drive all manufacturing jobs out of the USA, leaving a substantial portion of our population without the ability to find work.

In this time of world-wide strife, what is happening in the market is looking an awful lot like what happened only a decade and a half ago. History is repeating itself.

The worst of it? There’s no way to stop it. The damage has been done already. Seriously, who invested into Snapchat? The platform’s valuation is way overpriced for the same reasons that reddit was– focused purely on growth, it cultivated a userbase that hates advertising (worse, Snapchat’s entire offer to users is to protect their communications from Big Brother by deleting the data, so turning around and selling it to advertisers is the exact opposite of what Snapchat users expect) yet its only source of revenue is advertising. Once the companies purchasing ads on Snapchat realize they will never get a ROI on their marketing spends they will abandon the use of the ad channel, just as they did reddit. That Snapchat’s top executives have started bailing the startup before it even has an IPO is indicative that the people who lived and breathed the company know the writing is on the wall. Twitter is also losing a bunch of execs, too.

We must remember that advertising based revenue streams are based entirely on product’s ability to deliver results for marketers, and as more companies become sophisticated with understanding how to use tracking codes and pinpoint the specific marketing that led to a customer purchase, more companies will realize sending $100K for 1 million impressions of an ad that sits in a speck of space on a 4 inch mobile phone screen is highly inefficient. The money could be better spent.

On top of that, when the bubble bursts the amount of money in a company’s advertising budget will drop substantially, just as it always has. The priority will go into traditional channels which have many decades of validation behind them, and not into something like Promoted Stories on Snapchat or Facebook.

So what can be done if the bubble burst cannot be stopped? Make wiser investments into companies by investing into companies which demonstrate financial growth, not user popularity. Build an advertising product that is truly useful to advertisers and not based entirely on the decades old ad impression model.

Build useful things, for Pete’s sake! 

Stop building apps designed to occupy people’s time when they are bored but otherwise add no value to their lives. 

What do I think is going to happen next as a response to the change in the market? I think we’re going to see a lot more companies emerge that seek to compete with YouTube. Although they are the market leader YouTube has started getting very aggressive with creators as they become threatened by other platforms like Vine and Vessel. Take for example the YouTube RED agreement; if creators do not agree to the changes, YouTube is pulling their monetization features for regular advertising. This isn’t endearing YouTube to the small business owners who supply all its content and creates the dissent necessary for them to be willing to try other platforms.

I also think 2016 is the year we are going to see the business models of television and web video finally merge together. The technology is there, and the migration of viewers to the web has been paid attention to by all of the major publishers. Almost all of them have their most popular television series available on the network website; everyone from small stations like The CW to major ones like ABC. We’re going to see a lot more crossover of new media stars from YouTube and Vine into long-form content, as it becomes obvious to the networks that this new generation of viewers are following the new generation of celebrities closer than the old guard.

There’s been talk about films breaking box office records, but the reality is these “records” don’t adjust for inflation. Theatrical attendance has been dropping every year and this is a pattern that will continue. The decline of the theatrical market is going to result in more films getting exclusive releases on online video platforms like Netflix, YouTube, HBO Go, Hulu and Crackle.

Everyone knows there is a bubble in the tech industry right now. It is possible the fear of it bursting is what is pushing YouTube into the paid subscription market, as once the bubble bursts it will significantly hurt their ad business. Google is almost certainly trying to protect against this by pushing the paid subscriptions for their products (including YouTube RED) but how successful it will be is yet to be determined. This is, after all, the third attempt YouTube has made to convince its audience to pay for content.

My advice for companies seeking to enter the digital video scene is to be aware of the changing landscape and plan accordingly. Even if a repeat of the dot-com collapse occurs (which I believe will happen), there will always be investors for startups that actually generate revenue and turn a profit. Let’s not forget that even in the midst of the market crash, startups like Google, Yahoo, eBay and Amazon saw their largest growth. They survived the collapse because their hype was built on revenue, and not on metrics like subscriber counts and monthly views.  Just because we are dealing with tech doesn’t mean we should throw the principles of business out the window. Using a bootstrap framework for your media business is the safest way to ensure you don’t become another reddit with millions of opinion-ated users to service but generates no profit for all that work.




Share!Share on FacebookTweet about this on TwitterShare on RedditShare on Google+Share on TumblrShare on StumbleUponDigg thisPin on PinterestShare on LinkedInEmail this to someone