(Bonus) The State of Digital Media With Rafat Ali @rafat

Rafat Ali: [00:00:11] Unfortunately…

Brian McCullough: [00:00:11] Exactly. We’ve talked about that before when you were on the Internet History Podcast. But let’s just start with a little bit of context. The current spate of all of these huge VC-funded online media outlets. Did that really begin with Buzzfeed and Vice? Was that the first wave of this?

Rafat Ali: [00:00:32] Certainly the first wave of this crop of digital media companies, but as you know from being a history buff yourself, history always repeats itself. The whole world is about cycles. And if you go all the way back from Web 1.0 days on, a lot of the companies that were funded that — including digital media, online media companies — names like Salon and Slate and others, many of which still exist, many of them don’t. A lot of them were throwing money at companies like AOL and others I’m sure you remember it was probably this was probably part of a podcast and the book that you wrote.

Brian McCullough: [00:01:12] Right. But you said that this is the new crop. Was it that this new crop grew up in the age of social and so that’s why they thought, well it’s different this time around that these guys have cracked the social nut?

Rafat Ali: [00:01:26] Correct. I think that certainly the valuations definitely went out of control. The whole concept of distributed media companies which in many ways certainly BuzzFeed was at the vanguard of because you know everybody thought they cracked virality, right? That’s what the whole thing was. And virality essentially has happened through social media these days. And whether you know old school YouTube to Facebook and Instagram and all the other stuff that obviously came along after. And so, yeah, I would say that that social media now is — people don’t call it social media now, it’s called platforms — a distributed platform media company is what what BuzzFeed thought it was and you know I guess in many ways it still is. But what that also did is some of the large companies like Hearst and others started calling themselves distributed media media companies which is hilarious to hear that along the way. Everybody wanted to ride that that mojo.

Brian McCullough: [00:02:32] Yeah. And even the VCs. Because I’m curious about this side of the equation — all the money that flowed into, you know, BuzzFeed, Vox, Bustle, Refinery29, …

Rafat Ali: [00:02:41] Business Insider, yeah… Certainly they got very good timing and return on that.

Brian McCullough: [00:02:48] So what I’m curious about: Why did why did the investors…why did the VCs think things changed? Because, okay, so social media is a new way to go viral and that — but the the underlying economics of the ad-supported business didn’t change, the CPMs didn’t change, so why all of a sudden for maybe a period of 4 or 5 years were so many people willing to throw so much money at platforms?

Rafat Ali: [00:03:14] I think that people did think that the audiences were infinite. Because of the numbers that they were seeing on Facebook which, by the way, itself I’ve seen over the last 2 years has has come out at least 3 to 5 times about how wrong their methodology, in terms of how they count views and how they count traffic et cetera were. So they’ve downgraded their estimates on numbers that they were pushing to these sites or video views, et cetera. So I think everybody thought that engagement is infinite and traffic is infinite. And then if you add an ad model that may not add up to tons but is in infinite growth mode, which is the default mode in a bull market. This is not just true in internet, this is true in every sector on the planet because all everybody does is extrapolate from where they are today, versus accounting for a downturn down the line or change of economics down the line. I think that’s what VCs got seduced by. They also got seduced by the potential buyers of these companies … to grow these companies. They’re looking for exits. That’s the end game for them. So exits in terms of IPOs, exits in terms of buyers. A lot of the buyers are out of the market.

Brian McCullough: [00:04:42] Who did they think the buyers would be? The AOLs and Verizons and…

Rafat Ali: [00:04:48] The AOLs and Yahoos and Verizons. I mean all of that is gone. Comcast certainly has done its share but it invested in these companies instead of buying them. Disney, which you know in hindsight BuzzFeed should have taken that billion dollar deal whatever that rumored deal was that that Disney was gonna buy. I think that came very close to buying it. This is not just a rumor, too, this is a fact for I think a billion dollars or something. They thought was too low. And yeah, so I think that that many of the buyers are out of the market in many ways. I think that’s the reality of it. And everybody’s buying — they want to buy big things like AT&T is buying TV and Disney is buying TV. And so they’re not buying digital media.

Brian McCullough: [00:05:40] So now we have the situation, you know, Mic just laid off the majority of its staff, sold Bustle, even Oath! There’s the huge write-down that Oath had to take. So essentially all of these companies took, you know, tens, hundreds of millions of dollars in investment money. There’s not going to be any more of that down the road. We’ve had all the things like, you know, Facebook changing the algorithm so traffic is down. So the situation now — like, this is where I think you were smart —

Rafat Ali: [00:06:09] So the question is what happened.

Brian McCullough: [00:06:10] Yeah. Because you were smart. I saw your tweet where you said that if 2018 is bad for digital media now when the economy is good, what if the economy turns bad? So where do you think we are right now in terms of these companies?

Rafat Ali: [00:06:23] We’re kind of in a situation where media is singularly screwed, for lack of a better word, in a boomtown — or in a very upmarket scenario in 2019, which — and 2020 — every indication says we’re in the last evening of an up-cycle in the economy globally and indications are that it’s going to get worse. All of the indications are — you know, talk to economist, I’m not an expert, but every every indication, every media expert, every economy expert is saying that. So in a downturn scenario even more money’s going to go out of the market and go to more efficient platforms like Facebook and Google, the two main beneficiaries unfortunately so far. All these issues with Facebook — it’s certainly not hurting its revenues even though it’s hurting its user growth, from the public numbers. Instagram is still growing like a weed even though when people talk about Facebook they don’t necessarily talk about Instagram or WhatsApp but you know — [they’re] owned by the same company. So I don’t see… Short of all of these companies recapping and all the investors writing down their investments, which some already have done. Keep in mind, in many cases the founders aren’t hurting because the founders probably took a bunch of money off the table in these these large rounds that they did. So it’s the regular employees for most part and investors that get screwed. It’s not the founders that get screwed. Because if you going to raise, today, if you’re raising, if any company’s raising north of 10 million dollars there’s an 80 percent, 90 percent chance that a couple of the million dollars will go into the founders’ pocket if you are a company that’s in a Series B type scenario, and beyond. So guess what? The founders of BuzzFeed and Mic and others probably got enough money off the table already. This is the thing that nobody talks about but that’s just the fact of the market today.

Brian McCullough: [00:08:39] What do you think of — because I’m thinking of like recapping and recombining — what do you think of Jonah Peretti’s idea to do some sort of merger or pooling of ad inventory or something, what do you think of that?

Rafat Ali: [00:08:49] Well I mean I don’t think it’s…I think he he said something about, hey that would give us bargaining power over Facebook and Google? Which I think was more of a throwaway comment than anything else. And obviously that’s the one that got picked up on pooh-poohed and say, oh look at look at these kids that can’t have any power against Facebook and Google. I do think that — I actually give it more credence than others have as an idea.

Brian McCullough: [00:09:18] As an idea that could work.

Rafat Ali: [00:09:21] As an idea that could work. Does it give returns to the existing investors? Not really, but at the right rational valuation of combination with the right management and — I mean, there are a lot of ifs and buts.

Brian McCullough: [00:09:37] Well certainly there would be a lot of egos all in one room too.

Rafat Ali: [00:09:41] I mean, well, a lot of egos will get washed out. Meaning it won’t be everybody coming along. It cannot be everybody coming along. So they will have to be, I’m just making this up, but but Jonah runs the whole thing, for instance. And then there’s — But many of those will get washed out. It’s not like…you know, tomorrow if there is an exit for the founders of Vox, for instance if Vox gets combined with BuzzFeed, I guarantee you if you give a deal to the Vox founders or executives that you’ll get an exit and you don’t have to worry about this anymore…Will they will they not take it? They’ll take it. I mean, it’s an exit. And it can’t be 5 layers of managers running these companies, it will be one layer of management running these companies. So I do think that many of them will take the deal on the table and and will run. Run as in, like, exit. “Run” is probably too strong a word. That’s my that’s my hypothesis based on nothing. [pause] Hello?