An Open Letter To Michael Wolff On Yahoo! (And The Digital Economy)

Dear Michael,Thank you for your recent article “Only the Media (and Marissa Mayer) Still Believe It Has Value.” Hollywood Reporter 19 April 2016; (http://www.hollywoodreporter.com/news/michael-wolff-yahoo-media-marissa-885509).I agree with many of your conclusions about Yahoo!. However, I believe that Yahoo!’s leadership is not alone, and in fact many of new [digital] media’s leaders (and investors and board members) would stand to gain from taking a refresher course on Adam Smith’s invisible-hand theory (the crazy idea of supply and demand and that scarcity drives value).As you explored in your book last year, (Television is the New Television. 2015) the hype of new media creates a period of artificial inflation of value for companies. In other words, there is a finite window for them to exit to deliver the ‘unicorn-like’ returns that fuel the romance and attraction of the digital economy for investors and founders alike. Although we are throwing Yahoo! under the bus now for the current management’s state of denial of its own demise, (and Swisher is then backing the bus up and doing burnouts on the CEO’s back) it would be remiss to not acknowledge the two periods of extreme multiples it provided shareholders. The first being when it went public in 1994 and raised $33.8B at a price of $13 per share, and then when it peaked in 2000 at a high of $118.75 per share. As we know the story goes, the bubble eventually burst and Yahoo! is now a textbook story of mismanagement, waste and hubris. It was all a bit predictable, was it not? Shame on the greedy investor for not getting out while the gettin’ was good.The subject on which I would value your perspective is if the business of digital media [audience] has a long tail at all IF the long tail is becoming a publicly traded company? Can a digital media company fare in public markets or does shareholder return ultimately rely on the practice of a small and exclusive group of investors who often co-invest and syndicate deals, artificially inflating valuations and selling to the same 10 companies?Rinse. Repeat.I have been racking my brain to find a pure digital publisher or portal that has gone public and built a sustainable revenue model, purely in the business of audience, or that has been able to deliver enough profit to survive in a way other than as a complement or enabler to traditional media, software or a technology/infrastructure business. I came up with goose eggs.My gut tells me time and time again that the business of digital media as we know it is flawed, and that its basic economics do not allow for long-term, sustainable profitability. The success stories of companies once in the audience business that have survived and thrived (Google, Microsoft, Facebook, etc.) all have tangible assets, either in software or IP that provides renewable revenue. Michael, as you have clearly explained, an audience is not a renewable revenue stream. It requires continual reinvestment to retain and demand is finite. The business challenge is not in attracting and retaining audience; it is in finding a way to monetize it that costs less than the cost to capture it. And this is where the wheels fall off the bus for new media.See, old media, although many seem to perversely want to see it fail rather than thrive, is sitting at a table at which digital media does not have a seat. This big boy table consists of players whose free cash flow and market cap make silicon valley look like a game of monopoly. The ‘big boys’ have REAL money, sitting in a bank, and REAL, tradable, liquid assets. Comcast’s free cash flow in 2015 was $2.3B. (Um, mic drop?) Digital is key to their continued revenue growth, but as a growth LEVER, not a high growth business.So Michael, so I ask you, should we all just call a spade a spade? Do digital media companies hit a tipping point where they start destroying shareholder value in lieu of creating it, and if so, what are the signs that it is time to sell in lieu of continuing the hubris of trying to convert to an old media business to survive?Thank you again for your contribution to our industry and continuing the conversation.All of my best and with gratitude,Ashley J. Swartz aka Red Fury