Opinion: Why Reddit Deserves A “Platform” Valuation Premium Over BuzzFeed
Too many digital executives are chasing the flavor of the month. The new one is to try and become a “tasty” — a social-only publisher that publishes only across social media without a strong loyal following on its own platform.
Companies that focus on platform-building, like the New York Times and content-sharing platform Reddit, have locked-in user profiles and risk profiles that give me confidence they will have sustainable businesses in five-to-10 years, regardless of what happens with social media.
Reddit is in the process of raising $150 million at a valuation of $1.7 billion, Bloomberg reported recently.
If the platform closes at this valuation, it will be higher than media company BuzzFeed’s reported $1.5 billion valuation in late 2016.
BuzzFeed didn’t have a down round — that’s what happens in private financing when investors buy stock from a company at a lower valuation than the preceding round — but the valuation ended up being flat versus its prior funding round.
Reddit is an independent platform. BuzzFeed is increasingly a social-only publisher that is largely dependent on other platforms such as Facebook to survive.
Reddit has a strong argument with investors for being valued at a premium to BuzzFeed because it can’t be “Zynga’d” or “Panda’d”.
Some social only pubs mistakenly think they can diversify out the risks by publishing on different forms of quicksand vs owning real estate
— Jamarlin Martin (@JamarlinMartin) June 19, 2017
With the industry changing so fast, investors may have short-term memories or may miss how to price platform risk with digital media companies.
In 2012, game maker Zynga experienced growth on steroids as it leveraged Facebook’s platform. Zynga drove 13 percent of Facebook’s revenue for the first nine months of 2012. Everything seemed fine. Investors had bid the company up to a market valuation of over $7 billion and a successful IPO.
Zynga was a slave and Facebook was the platform master. This uneven relationship took a turn for the worse when Facebook decided to change its relationship with Zynga.
Many investors had thought Facebook was a safe place to build a new digital business. They didn’t realize that at Zynga’s level of scale and dependency, Facebook was actually a very high-risk place to lay your foundation. Many investors were likely bullish on the fact that in 2010, Zynga and Facebook signed a five-year exclusive partnership deal.
This deal was torn apart in 2012 and Zynga’s growth and stock collapsed.
Facebook was amoral in the sense that it didn’t care that Zynga had spent and invested millions of investors’ dollars marketing on the platform supporting Facebook engagement. Facebook effectively changed its policies, materially impairing Zynga’s business. Zynga showed how fast things can change, priorities can change, and how seemingly solid relationships can quickly collapse.
Some people thought Los Angeles tech firm Demand Media would revolutionize content production.
Similar to Facebook and Zynga, Demand Media and Google loved each other until they didn’t. You saw digital media investors misprice risks from Demand Media’s inordinate dependency on Google Search.
Google turned bearish on the idea that a company could exploit its search algorithm. It started a series of algorithm updates with Google Panda in 2011. Google Panda changed Google’s search-results ranking algorithm to lower the rank of low-quality sites — or “thin” sites — especially “content farms”, and return higher-quality sites near the top of the search results.
Perceived geniuses figure out algorithms to outsmart platforms and other investors. Within all the hype, it is very hard to appreciate the possibility of change when things are going so well, similar to the hedge fund collapse of Long-Term Capital Management.
Long-Term Capital Management (LTCM) was a large hedge fund led by Nobel Prize-winning economists and renowned Wall Street traders that nearly collapsed the global financial system in 1998 as a result of high-risk arbitrage trading strategies.
Investors should appreciate whether an algorithm or a change in any partnership dynamic could lead to a collapse of the digital media business. If Facebook changes the music again, could the digital media business even keep the doors open without its platform master?
In BuzzFeed’s case, they have a hedge with a potential conflict of interest: BuzzFeed investor Marc Andreessen sits on Facebook’s board. This has allowed BuzzFeed, the mother of clickbait, some protection.
The question is, for how long? The value of a company and how you price the concentration risk should not be dependent on an investor sitting on the platform-master’s board, providing mafia-like protection to hedge an inordinate amount of platform dependency.
Based on my 11 years of experience in digital media, I have seen a lot. I’m seeing too many digital executives chasing the flavor of the month.
You don’t need your own platform, the narrative goes. You can diversify out the platform-dependency risk by publishing on several social platforms.
It’s like building on quicksand as opposed to building your own real estate with locked-in users and data that you own.
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