Advertising & Media (Desperate Times Call for Desperate Measures)

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It's one thing to see a flying car whisk by a Coca-Cola ($KO) sign in Blade Runner 2049. Or Vin Diesel crush a Corona ($BUD) before crushing a skull in Fast and the Furious 2049 (how many of these are there?). Or Mark Wahlberg mention a motorcycle he likes in Big Daddy. It's pretty obvious that those are placement ads. But its an entirely different story when a large corporate partner like Proctor & Gamble ($PG) purchases a plot line and dialogue. That isn't so obvious. But so it is. This week, Variety reported that P&G has done precisely that in a "unique advertising pact" with American Broadcasting Company ($DIS). The network will create an episode of "black-ish" that will - as a central plot device - discuss a P&G-produced short film and its implications on race merely because that's "an issue that the advertiser is trying to burnish." Well, ok, then.

Cord-cutting is getting aggressive and we get that Disney needs to act in-kind to ensure revenues. ESPN is under siege, Netflix ($NFLX) has a head start on stand-alone streaming, and even Star Wars toys have underperformed. But how this is handled will be a bellweather of things to come.

For instance, Instagram influencers are under strict guidance from the FTC on how to handle sponsored posts. Failure to comply has gotten various influencers - the Kardashian's being one notable example - in hot water. Remember the Fyre Festival? Riiiiiiight. To what degree are P&G and DIS required to alert viewers that the dialogue they are listening to is paid for? To the extent there is an alert, should it be noted at the bottom of the screen at the time of the dialogue (makes sense) or noted in the end credits (doesn't make sense). This may very well be another instance where regulation has to play catch-up to innovation.

Meanwhile, there's been a notable rise in corporate venture capital (CVC) arms over the last several years. What we haven't noticed, however, is the blatant weaponization of the CVC's distribution channels to help scale product. Yet. We wouldn't be surprised to see a rise in (shameless) native plugs of new apps or hardware in future mainstream broadcast content. And that - on the basis of scale opportunity alone - could be a real competitive advantage for corporate-backed startups relative to venture-backed startups. Query, however, what that would do to the viewing experience. Netflix ($NFLX) and HBO ($TWX) don't serve ads for a reason. Yet. We'd be shocked, though, if it doesn't come eventually (our money is on NFLX first). 

P.S. Elsewhere in advertising, Amazon is coming ($AMZN) and coming fast with ad revenue growing faster than Google ($GOOGL) and Facebook ($FB). 

Amazon is Coming for Your Ad Revenue

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Companies are struggling and a debate is raging over whether ad-revenue dependent media companies can grow and thrive in the age of advertising behemoths like Google ($GOOGL) and Facebook ($FB). Amazon ($AMZN), meanwhile, grew its advertising revenue by 60% with analysts pegging its advertising revenue at $4.5b in 2018 - larger than combined revenues of Twitter ($TWTR) and Snapchat's ($SNAP) ad business. David Carey of Hearst Magazines has some thoughts about the future (audio).

Trickle Down from Auto Disruption (Short Insurance)

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We’ve spent a good amount of time in the last year discussing the second order effects of autonomous cars. But, clearly Google is thinking ahead. This week Waymo LLC, the driverless-car unit of Alphabet Inc., partnered with an insurance-tech startup called Trovto nail down the mechanics of “micro-duration” insurance for riders. This would be “usage-based” insurances, covering riders for very discreet periods of time and very particular use cases. Risk could be assessed based on the duration of the ride (and, presumably, the trajectory?). This could be a game changer as far as insurance revenues go. Choice quote: “As much as 80% of the premiums paid to car insurers are at risk of disappearing in coming decades if autonomous vehicles make driving safer and prompt big changes in car ownership.” Yikes.

Disruption (Google, Apple, Facebook, Amazon)

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Though somewhat redundant given prior pieces he's written, Benedict Evans doubles-down on why so much disruption is going to come from the Big Four. In a word: scale. In another: mobile distribution. Still, it seems - maybe in light of the recent Russian ad-buying scandal - that people are more focused than ever on the Big Four (Five, if you want to include Microsoft ($MSFT)). Indeed, here, The New York Times highlights how even massive companies like Snapchat ($SNAP) andUber are struggling to deal with the behemoths. On point, Google, which has previously invested in Uber, announced earlier this week a $1b investment in Lyft. Snapchat, meanwhile, much to the chagrin of pundits, is marketing an $80 dancing hot dog costume for Halloween. On one hand, it's brilliant to create consumer products based on your digital product. On the other hand, however, when your target market is the millennial, an $80 price point for a Halloween costume strikes as a, uh, a bit rich maybe...?

Long Regulatory Disruption of "Gig Economy" Disruption

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P.S. What Happened to Unicorn Homejoy LLC? 

Busted Tech? (Long Regulatory Disruption of Disruption). There are, what, 183929 Uber-for-X style companies today offering everything from weed delivery to in-home massages...? Most of these companies - Uber and Lyft included - are built on the 1099-economy where "gig" workers are framed as contractors rather than employees. Given that these companies are struggling to be profitable to begin with, it's especially helpful for these companies to avoid outlays for overtime pay, health insurance, worker's compensation, and other W-2 employee-related expenses. Except now, for the first time, a challenge to this model is seeing its day in court as a GrubHub Inc. ($GRUB) employee is suing for reimbursement of wages. Uber and Lyft have both settled prior (similar) suits out-of-court. Instacart, Caviar and Postmates have also been sued. A similar lawsuit, in part, forced Homejoy LLC into an assignment for the benefit of creditors in August 2015 and Chapter 11 in late-2015.* Which is to say that many companies - of GrubHub's status and otherwise - will be watching this fight closely as it has potentially existential ramifications for the gig economy going forward. Sometimes moving fast and breaking things runs into a regulatory roadblock.

* We thought it made sense to dive a bit deeper into what ultimately happened to Homejoy LLC, which, for the uninitiated, was at one time a Y-Combinator darling valued over $1b (after approximately $64mm of funding). Why? Because more often than not companies are celebrated on the way up and quickly forgotten after they come crashing down. It should be noted what happened to the company, its employees, and its assets after the crash. Here is what we know from the bankruptcy filing and otherwise:

  • Per Re/Code, Google hired "around 20 members of Homejoy's product and engineering team." Notably, Google Ventures was one of the largest creditors of Homejoy's bankruptcy estate - to the tune of approximately $18mm. 
  • Per the company's court filing, the Google hire occurred in July 2015 and the purchase price had to be several million dollars because it subsumed not just the tech team, but enough "consideration" to payoff the company's secured credit facility from Silicon Valley Bank, fund the wind-down AND leave money in the bankruptcy estate for a liquidating trust. See below. 
Company's Bankruptcy Disclosure Statement, filed 9/15/16. 

Company's Bankruptcy Disclosure Statement, filed 9/15/16. 

  • The company sold its customer list, service provider list, trademarks and domain names to entity called ABAP Holdings Inc. Some may recall that this transfer wasn't without its own controversy. The total purchase price was $100k.
  • The company sold its remaining office equipment for $20k.
  • The company seemingly tried to sell its source code but apparently was unable to find a buyer as the bankruptcy docket reflects no motion filed with the Bankruptcy Court seeking approval of said sale.  
  • The company would have managed the wind-down without a chapter 11 filing were it not for the "gig economy" lawsuits. It is unclear whether payments were ever made to the plaintiffs out of the liquidating trust or, if so, for how much. 

Clearly this wasn't the ending that Google Ventures, First Round Capital, Andreessen Horowitz and others wanted. 

9/17/17 Update. Apparently that gig economy lawsuit with massively disruptive potential didn't get off to a hot start for the plaintiff.

Mary Meeker's Internet Trends. This is Real Disruption, Summarized

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We may have to dedicate more time to this at a later point but for anyone who has some time to kill, we HIGHLY recommend this lauded report by Kleiner Perkins' Mary Meeker. The short version: smartphone growth is flat-lining as is internet growth (in the US, India on the other hand has only 27% internet penetration); 20% of mobile inquiries are via voice now - a mind blowing number (per Google); 25% of Americans own a wearable and 60% of consumers are willing to share their health data (with Google, Microsoft, Samsung and Apple best positioned to take advantage of it); US Net Debt to GDP is 77% as of 2016 and trending towards 105% by 2035 (US record surpassing WWII); household debt is back at peak levels last seen in Q3 2008 with student loans +144% and auto loans +44%.

Interesting Restructuring News

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  • Busted Tech. This is becoming a regular topic. After LivingSocial (remember LivingSocial?) and its $6b valuation sold for bupkis, serious doubts now surround its acquirer, the publicly-traded Groupon. 
  • Lit. Google released the results of a survey showing what is currently considered "lit" (read: "cool") among the teen and millennial demographics. A few observations: 1) Ivanka Trump's brand was conspicuously missing and so clearly there is a high probability of this being "fake news" (yes, we're joking); 2) Netflix and YouTube are the two highest rated brands in both demographics which certainly raises questions about conventional media companies; 3) Tesla is considered the coolest auto company despite not necessarily having the highest brand awareness (nevertheless a positive leading indicator for electric vehicles assuming a) these idiots will drive, b) they'll have money to buy a Tesla, and c) Tesla can manufacture enough cars to meet the supposed demand); 4) Still, car brands across the board are cooler to millennials than teens which raises questions - in the face of autonomous cars - about what car ownership may look like in the next decade; and 5) there is little to no consumer products representation in the "cool" zone outside of footwear and electronics (gaming, Apple, GoPro) which speaks volumes about why we're seeing as much pain in the retail space as we have been. Notably, Uniqlo, Zara and H&M - favorite excuses for why conventional retail is, gulp, out of fashion, are all middling in the 6.5 area. Footnote: Quicksilver looks to have subpar awareness and "lit" ratings which begs the question: how long before Oaktree Capital Management flips it...?
  • Post-Reorg Equity. Apparently filing for bankruptcy hasn't turned out too badly for certain oil and gas executives who find that they're realizing a lot of upside value through the reorganized equity of their companies (WSJ firewall). Elsewhere, upon release back into the market, Peabody Energy's equity initially traded up 3.5% only to flip-flop and go negative by over 12% by market close on Tuesday. #MAGA baby! Coal is, uh...back??
  • Professional Fees. The American Lawyer seems to have it out for bankruptcy professionals these days as it seems freakishly obsessed with professional fees: in this instance, Weil's fees representing Westinghouse. 
  • Restaurants. "There's been an oversupply for 10 years in our industry," says the Darden Restaurants CEO Gene Lene upon announcing the acquisition of Cheddar's Scratch Kitchen. Still, the fast casual space is showing signs of strength: most notably, Panera Bread's stock popped upon acquisition news earlier this week.
  • Retail. We really tried to stay away from retail this week because, like you, we're just tired of the story. But, here (video), Jason Mudrick of Mudrick Capital Management provides some interesting thoughts on how to trade the space. This isn't new ground, necessarily, but for the less-initiated, his comments on the difficulty of shorting retail debt may be educational. Note, however, that his views are disputed by analysts at Citi who claim the CMBX trade is over-crowded and that CDS is, in fact, the way to go. Either way, his overall thesis seems a bit inconsistent to us. On one hand, he indicates that the "Amazon effect" (lazy) is leading to a secular decline in retail, generally, but on the other hand he leaves us with the impression that only the lower tier malls will be affected. If the "Amazon effect" is what it is and our parents will die and our kids only shop online (paraphrasing here), why isn't he mentioning the A tier malls as well? This seems to be a blind spot within the restructuring space generally. As we've noted, General Growth Properties and Simon Properties are appearing in the vast majority of these retail cases - even the little ones that nobody appears to have heard of prior to the last few months. Now, granted, there's something to be said for the "replacement value" argument: but are these mall operators really filling vacancies fast enough to maintain revenue and, if so, who is filling the void? Warby Parker currently has 47 "retail locations" (a term we use loosely because this includes small kiosks like the one in the Los Angeles Standard Hotel - basically a cart). Bonobos has 31 locations. Cuyana has three locations (one a pop-up). Birchbox has one location. And most of these are in major cities so not even necessarily in malls. And, directing you back to "Lit" above: we don't see much mall-based retail on that survey - "A" mall-based retail included. So then what? Chiropractors, dentists and clinics? Seems thin. All of this said, the WSJ reported that "the national retail-property market is holding steady," using flat vacancy rates as its measure across shopping centers, regional malls and neighborhood and open-air shopping centers. And mall operators, naturally, are talking a big game. Curious. (*Note: if anyone is interested, we do have a 50+ page hedge fund presentation outlining the CMBX thesis. Let us know).
  • Retail II. DAMN IT, retail, we just can't quit you. More from this past week: 1) Citi cut both L Brands and Urban Outfitters from buy to neutral, 2) Ralph Lauren announced the closure of its Fifth Avenue flagship store (with additional closures to come), 3) Bebe Stores announced the closure of its 34th Street store (great quotes within) and 4) the discount space saw some consolidation as Dollar General scooped up Charlotte-based Dollar Express, a Sycamore Partners company. We can therefore add this to our #MAGA! sub-category given the 2700 jobs slated to be cut. SO. MANY. JOBS. LIKE. REMARKABLE.
  • Second Order Effects....of advancing car tech. We previously covered Benedict Evans' presentation on the rise of mobile and made some abstract statements relating to second order effects of mobile phones and electric/autonomous cars then. Here, Evans goes a bit further in what makes for a long but interesting read about industries that ought to brace for change (thanks to our friends at Hilco for forwarding to us). TL;DR: car suppliers, machine tooling, car repair, gas stations, convenience store retailers (and, by extension, snack & tobacco providers), building power generation providers, safety equipment manufacturers (i.e., airbags - this is thin, we think, and airbags will probably still be in cars for the foreseeable future), parking operators, truck stops, etc. Of course, this all presumes mass adoption in the time frame the herd generally suggests: 5-10 years. There are notable naysayers.
  • Sungevity, a Piece of the Solar Story & Real World Ramifications. Yikes. This is a STINGING synopsis of the downfall of Sungevity, a solar company that recently filed for bankruptcy (our summary and case roster is here). To be fair, the writer seems to have some sort of ax to grind with the company but the comments taken from Glassdoor are, in many respects, heart-breaking and serve as a real-world reminder that while they may line your pockets and juice your bonuses, these cases hurt people. Remember that. 
  • Venezuela. With a state oil company debt payment of $2b looming on the horizon, investors are speculating about the likelihood of default.
  • Fast Forward: Someone just please put Seadrill Ltd. out of its misery. Per Bloomberg, rue21 is due any day now. Sequa Corp....finally. And metals/mining looks like its back on the map with the announcement thatA&M Castle & Co. will be filing a prepackaged bankruptcy shortly.
  • Rewind I: We've been spending a good amount of time highlighting busted tech lately and so we'll add another (per Fortune): Yik Yak. For the uninitiated, Yik Yak was a high-flying anonymous social media app that garnered $73.5mm of VC from Sequoia Capital at a valuation over $400mm. Now it is effectively selling for parts (to Square?) in a manner that likely won't even cover the VC. Ouch. I suppose we can call this the "Snapchat Effect."
  • Rewind II: Ashley Stewart, a plus-size retailer that was in bankruptcy in 2014 opened its first new store last weekend, a counter-narrative to the doom-and-gloom otherwise hanging over retail.
  • Rewind III: We've covered Spotify at length and this week's news of a potential direct listing rather than an IPO is interesting. And goes to show what we've been saying: that convertible venture debt it took on is getting expensive.