Is the digital bubble about to burst?

31 May 2016

It should, surely, be a time to rejoice. Never before have small companies had the opportunity to become big companies and then corporate giants so fast. Results over the last few months reflect the stunning success of the first decade of the digital age.

Recent Reuters’ headlines:

  • Facebook in class of its own as ad revenue soars
  • Pandora revenue rises on ad sales, shares up 11%
  • Expedia posts surprise profit as acquisitions pay off
  • Amazon profit crushes estimates as cloud-service revenue soars

An increasing number of digital business models are based purely on advertising revenues. Advertising is booming, but some argue that advertising is a fragile platform for a robust business.

Advertising is embedded in apps and games and increasingly encroaches on our digital lives. But the advertising model has deep flaws.

The industry is late to understand how the digital and increasingly mobile experience works, yet is now trying to plunder both. Ad gurus boast of “programmatic advertising” when all that means is that machines bombard you with irrelevant ads rather than humans. Many talk of analytics and data as if these things will save the day - they won’t.

Ad-blocking software has been downloaded hundreds of millions of times. What does that mean? This: for every customer that writes to your company to complain, there are ten, a hundred, a thousand perhaps, equally irked but without time to write. Mass irritation will reach critical mass as the hundreds of millions who haven’t yet downloaded ad blockers soon do so.

And millennials loathe social media feeds that bombard them with ads. WhatsApp reportedly has grand plans to go down that path - can you predict the response?

It gets worse. A student with a rare form of cancer went onto Baidu (China’s giant search engine) and searched for cures. The ad that he clicked persuaded him to buy a certain cure. It killed him.

Baidu’s allegedly rapacious approach to selling advertising in the “healthcare”’ sector is now under minute scrutiny. Chairman and CEO Robin Li now insists that his employees take a longer term view and look for value, not instant revenue. “I believe this is the right way!” said Li in a letter. He also said, “If we lose the support of users, we lose hold of our values, and Baidu will truly go bankrupt in just 30 days!”

IoT convulsions

Meanwhile, the IoT is now at the frenzy stage. Reuters reports “two dozen major mergers in the IoT space in the first four months of this year” and there are more to come. This will increase pressure on IoT companies to perform quickly to justify the transactions.

Respected IoT watcher Machina Research believes that - merely in the 'smart city’ arena - cities could waste $341 billion by adopting a non-standardized approach. This should give the whole ecosystem pause for thought. At worst, it means that the standards-making processes will be wheeled into ponderous action, which will cause lengthy, agonizing, and costly delays.

This and other factors such as safety and simple human nature (i.e. inertia) will put a brake on the wholesale adoption of autonomous vehicles. Massive advances in healthcare will hit the almost solid brick wall of healthcare regulations.

The strain of financial performance pressure across the range of digital services cannot be underestimated. This is mainly because there is a more-than-equal (and not exactly opposite) pressure from our regulators and our human nature.

Many of the ingredients of an overheated and arrogant system are poised to tumble. Facebook, for instance, should stop risky maneuvers like trying to control political content.

All it would take is a single digital giant to “truly go bankrupt in 30 days” and the digital world will be rocked to its shallow foundations. If valuations are based on “feelings” or “market hysteria” rather than concrete revenues then we may see the digital bubble burst with disastrous economic repercussions.

Remember the bust?

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