Will 2008 Be Great?

As we wrote out our predictions for the upcoming year, one question kept creeping into our mind – "Will this year be a good one?" Saying this company might go public or this vertical might not tells the affect but not the factors that led to that outcome. Here, we take a slightly different approach to see what information we can glean about the year we face.

Bullish News

• The Analysts – Flipping through various TV stations as 2007 came to a close, you couldn’t help but feel bullish on tech stocks, and then word comes this week of the tome released by JPMorgan analyst Imran Khan and his team with their expectations for the tech / digital media sector in 2008. Joseph Weisenthal at Paid Content has a nice summary of the 300 page publication, summarizing the four key themes: 1) Higher CPMs, 2) Global Consumer Strength, 3) M&A, and 4) Social Media. Erik Schonfeld of team Tech Crunch covers the report as well, sharing some interesting graphs supporting some of the major themes. The main point – online ad growth and the companies in that sector will far out pace the market as a whole, and there is still sizable (30%+ over last year) growth expected.
• Valuations – If we had some financial stake in Facebook, we would have even greater reason to celebrate their astronomical valuation. At $15 billion, as of last count, they have a valuation half that of Yahoo but with revenues perhaps 1/20 of the portal. Even though astronomical, with companies like Digg, Plaxo, and LinkedIn fetching multi-hundred million dollar estimates, we work in the hot area, perhaps even more so because we help these companies make money.
• Continued Funding and M&A – As we read through our RSS feeds, from Paid Content to PE Hub, we lose track of the number of new investments in Internet companies – $5 million here, $1.5 million there, $20 million for this, and so on. The JPMorgan report mentions how free cash flow will grow significantly, arming companies with an ability to continue buying, but similar to John Battelle in his excellent 2008 Internet predictions, they too suggest it could look slower as some incredibly large players were taken, or as Battelle suggests, integration indigestion.

• Strength of Consumerism – Oil hit $100 per barrel for the first time ever this week, yet reports, like this one, suggest that it might not have the disastrous impact we would naturally expect, the main reason being that we spend less of our money on energy related expenses than we did decades ago. In other words, the psychology impact might be the worst of it as it will not likely cause a shift in behavior from the bulk of consumers. International consumer spending and strength in foreign currency also offsets some of the potential weaknesses domestically, especially for companies like Google, Amazon, and eBay which make almost half their money from overseas operations.

Bearish News

• IPO Struggles – Last year seemed to play out similar to this, "X announces plan to file for IPO." Then, months later, "X pull their IPO filing, sites market conditions." Some make sense, and their not going public seems to provide reassurance that the system works. Others, while they make sense, don’t help the overall atmosphere, for example, Classmates. Those who have worked in the online ad space for any amount of time understands their business. Cut from the same vein as Match.com, True.com, or even Video Professor, the site makes money on subscriptions but takes the risk by promoting a free sign-up. They’ve survived and thrived while many others have failed, becoming one of the most efficient media machines, managing to weather the changing display landscape and outlast the mortgage guys. But, they are not a social network, and so long as non-walled gardens and sites that promote openness in exchange for ad revenue have the wind at their backs, Classmates won’t. Even if theirs and others made sense to pull, it still puts a damper mentally to see that trend with no clear end in sight.
• Valuations – Did we mention Facebook going for $15 billion? It’s a good cup of coffee, but all of the Starbucks in the world don’t produce as much froth as that (still) surrounding some of the social media sites. From Last.fm going for $280mm to LinkedIn saying they wouldn’t sell for a billion, the high valuations have no shortage of people who can justify them, but for a performance guy, they both excite and scare, feeling just as bubbalicious now as in the turn of this century.
• Home Sales – November home sales managed a weak improvement from October, 0.4%, but that didn’t do much to stem the nine-months of consecutive month over month declines. Adding to the, on the whole, falling home prices. As Haseeb Ahmed of JPMorgan says, "The supply-demand balance remains decidedly unfavorable for pricing." In other words, people really don’t like listing property when prices fall. Home prices have a huge influence on consumer spending, which itself comprises 70% of all economic activity, and has been the real driver of the growth we’ve seen the past couple of years. The potential consumer spending crunch has already caused the Fed to lower rates, and they might lower them even more in the upcoming months.
• Worldwide Instability – Pakistan, Sudan, Nigeria, Kenya, North Korea, Iraq, Iran, Russia, China, and the list goes on. It’s hard to remember a year with so many reasons to grab a bible and run into the streets. None of these international crises immediately threatens our lives, not in the way that eating McDonalds daily can, but similar to oil prices, it’s easy to imagine that such instability act like debris slowly clogging the river of optimism and economic activity. It certainly feels that way, and how we feel as a whole dictates so much of our actions.

• Buyer’s Remorse – Last year’s turmoil didn’t help the performance of many companies in the performance marketing space. For those in transaction businesses (leads and clicks, excluding Google), they didn’t see the insane multiples as some of the technology plays like Right Media did. Unfortunately, even at the relatively modest valuations, last year some companies underwhelmed with purchases made earlier, some stretching to 2006.

Recurring Themes

• Repeat Users – Hard to believe that a company with no business model, but users, will have more allure than one with stable growth. For better or worse, and hopefully not worse for those who have gone through this before, but the emphasis seems to be on owning an audience. You can be Classmates and generate real money, month in and month out, but your business runs counter to the current trends. Dictionary.com received 30 times revenue for its acquisition price; the major cpa networks earn more in a month than they do in a year; yet, the constant spend money to make money nature of their business earns them a lower value in the eyes of buyers. Someone in either the performance space will learn to create a user base or one of the user base companies, my favorite being Yelp, will turn into a performance company. Facebook almost did, and when one does, it could get legitimately interesting.
• Know what you want to be – Andrew Chen, speaking of his experience as an Entrepreneur-in-Residence at Mohr Davidow Ventures said, "I saw many companies which I thought would be strong, profitable companies, but didn’t have billion dollar potential. In many of these cases, the companies are likely to do quite well, but things might actually be a less optimal outcome for them if they took venture money." For our space, it’s not so much about taking money as knowing who you want to be. Do you want to be a public company? Do you want to be nimble and always able to adapt? The companies that struggle can’t decide; it’s ok to have no strategy and just make money, but don’t confuse your growth with long term strategic vision. Stay true to who you are. Or, do what others have, pick out what you want and stay the course. You’ll either be right or you try again.

• Diversification – As the JPMorgan Nothing But Net report stated, "Global GDP continues to grow faster than U.S. GDP (3.9 percent versus 2.2 percent in 2007), Internet companies with global reach will benefit. Amazon, eBay, and Google all get about half their revenues from international markets. Yahoo gets only a quarter of its revenues from abroad." IACI on the other hand, earns only 13 percent. While we can’t be Google or eBay, we should at least target Yahoo. It’s paramount to have money coming from more than one source, to have multiple growing revenue lines, especially if one is high risk or maturing. It doesn’t have to be international, but it needs to happen. Diversify or die.