As readers who’ve been with me for a while are well aware; I’ve made no bones about my feelings of many of today’s Wall Street darlings such as Facebook®, Twitter®, and so forth.
Although I criticize them, it doesn’t mean, nor should it be misconstrued that I’m belittling their original products or services. I believe now as I did when introduced the ability to connect or rapidly deploy information is groundbreaking. How these companies are suddenly worth Billions if not tens of Billions of dollars, while hardly generating any revenue let alone profit – is quite another.
When one tries to argue, or at the very least, question many of the premises as to why these companies are worth X or Y. Near immediately some gaggle of defenders begin defending the long-term business premise – with ephemeral logic.
At some point a company needs to demonstrate: It can acquire a potential customer – then sell a product to that customer – make an actual profit on that sale which allows all overhead of that process to be paid for by said profit – with money left over for either expansion, dividends, and more. Period.
If a company (of any size) can not demonstrate that entire sequence, (with real accounting and deposits made in the bank) then everything is “wishful thinking” until it does.
It can be worth billions, upon billions of dollars renting or owning real buildings, employing real people, and more. But, (and it’s a very big but) it’s still only nothing more than an experiment or idea in action. It must, and I do mean must get through the above cycle or example with the ability to repeat it before it becomes what we like to call – a viable business.
I know I’ll get a lot of grief with this however, someones has to point it out: As of right now, as big and as wonderful as I think or believe the company and management of Amazon® are. They too are an experiment in progress. Reason? They have yet been unable to make profits consistent with their market share that would sustain the overhead and more as I stated above. At some point, even Amazon will need to demonstrate more. (Although I believe out of any dot-coms of the last 20 years; they have the greatest chance to do it – and more.)
As I was thinking about all this over the last few weeks. I was trying to remember a scenario of where a lot of what’s currently transpiring again with Wall Street darlings and their sudden rise in market capitalization where they’re buying this, and buying that. Along with anyone whom questions the logic – is seen as some doubting Thomas. Then I remembered Ted Turners autobiography, Call Me Ted – My Life, My Way with Bill Burke, 2008 Grand Central Publishing/Hachette Book Group.
In that book, Ted outlines what transpired to both himself, as well as the company during the height of the dot-com era. He discusses his total dismay with the mega merger of that time with none other than what I can only describe as the emblematic company of what was transpiring then and now: AOL® And their purchase of Time Warner™.
To summarize, back at the end of the 90’s when dot-coms were “the” phenom. Valuations for dot-coms was just as laughable if not more so than many of today’s heralded “social everything” companies. Then the merger of mergers was announced when the so-called biggest and baddest player AOL announced it would acquire Time Warner. The deal at the time was the largest ever seen.
Back then AOL had the money to buy Time Warner because its market cap (aka stock value) was twice the size of Time Warner’s business. What drove AOL to be so highly valued in the eyes of Wall Street? Ad revenues and their potential growth. (sound familiar?) And just how was this merger being justified to become even bigger, better, and more profitable in the future? Ad revenues. (again…sound familiar?)
As explained by Ted in his book, this deal was put together so quickly it was as if there was no tomorrow for AOL to acquire Time Warner. It is also funny to hear as a side-note in the memoir, that this deal was originally being proposed to Yahoo® at the time, but they turned it down. He states he was basically told on a Friday and needed to approve it that weekend, as to be announced to the world that Monday. (Sounds hauntingly similar as Google® not buying WhatsApp™ before Facebook does it not?)
There’s far more to this than I’ll summarize here. I would recommend you acquire the book yourself for it is a fascinating account of Mr. Turner’s past business and family affairs.
However, what is eerily similar are the narratives, impressions, circumstances, and rationalizations surrounding the Wall Streets darlings of the those times – and their juxtaposition to today’s.
For what happened next to both AOL and Time Warner in such a relatively short period of time should live long in one’s memory when considering whether a model of business is as viable as being proclaimed or, is being sold.
For remember how that all worked out in the end?
© 2014 Mark St.Cyr