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Business Unusual

Would you invest in a blank cheque company?

27 January 2021 7:15 PM

Two stories that could point to trouble online and on Wall Street

This is a story about special purpose acquisition companies (Spacs) and online advertising in an age when everyone is a publisher.

Let’s start with the SPACs

Usually when a private company would like to raise more capital to help it grow, it can take a loan or invite private investors to buy a stake in the company and it could also list the company on a stock exchange and raise the needed capital from the public who buy shares.

Listing a company involves a lengthy and rigorous process to show what the company is worth and how it will be managed to assure investors that their money will be well used.

Initial Public Offering’s (IPO) are the usual way those shares are first made available and have proved to be great for startups looking to scale and for investors that get in early on a company that is on the rise.

The pandemic has pushed interest rates to much lower levels and traditional sectors of the economy have performed poorly. This has created a situation where investors have funds but are looking for more novel ways to try to find a good return.

Start-ups that are keen to list might be put off by the cost and requirements to list.

A SPAC offers investors the chance to invest money in a shelf company which will acquire a suitable private company that would benefit from listing. Because the SPAC, also called a blank cheque company, has no product or business allows the process to allow it to list much easier. Investors typically buy shares at a set rate with an option to buy more once an acquisition target has been found provided the deal is concluded in about two years. If nothing happens investors get their money back but if they find a unicorn the share price might jump giving the investor a good return, the operator an even better return (often as much as 20% of the equity) and the acquired company gets the money from the SPAC and gets to be be publicly traded.

What could go wrong?

In simple terms the economy is a set of incentives and sentiments. Things that are incentivised and are viewed favourably will get attention and investment.

Just because something gets attention and has an incentive to offer a quick buck does not mean we should pursue it.

In handing funds to a company to find a good investment you could strike gold or come up empty handed or rather some in the deal will always make money, but they will make from those that stand to lose the most and can least afford to lose anything.

Online advertising

When the web was founded there was some debate about how it should be funded. As it was principally an academic community that created it, the feeling was to make it open and free. During the first spike in use at the turn of the century the investments saw the share price as the reason to invest and that the path to profitability could be worked out later.

Media were early adopters and opted to move their ad supported models online. Initially it looked like a good system. Popular sites could use display banners to showcase advertisers products and clicks would generate revenue for the publishers.

But as the web grew and non-traditional media sites began to grow and rival the traditional media the competition from a low cost publisher was to accept lower ad rates which set off a steady drop in banner costs while at the same time, the rise of low quality ads made users far less likely to click them.

When Google began indexing the web it saw the option to offer clients the option to appear at the top of the search results. Users still don’t look beyond the first page of results and rely so much on search that if you wanted to be found you simply had to advertise but as these ads were also sold on auction the prices favoured the search engine which has gone on to control a majority stake in online revenue. The other platform that has been incredibly successful is Facebook, in having you not only list most of your personal details and all of your friends you then proceed to post and comment about everything that matters to you. Facebook uses that to allow advertisers to target ads at the groups they hope to reach.

It was not only large advertisers that could afford to use such a sophisticated system, the prices were so reasonable anyone could use them and judging by the revenues everyone was.

This created two issues, traditional media could not earn the revenue to allow it to maintain the quality of content from the broadcast or print versions. Not only did the revenue drop the costs to host the content rose leaving the media in a tough position to find revenue somewhere.

A content recommendation engine sounds like a wonderful option to ensure a visitor to your website finds more content they would enjoy which for a media company means more opportunity to show ads.

Taboola has become one of the best known such services and will effectively be able to list via a deal with the Ion SPAC which will pay almost $300 million and allow the company to list and be valued at over $2 billion.

A move to counter the monopoly by Google and Facebook is a good thing, but like the search ads could lead some users to clicks ads assuming them to be the best link or for Facebook ads to manipulate those it targets, Taboola types services can also be subverted to work against the interests of those it tries to serve.

You are unlikely to see many ads for major brands on content recommendation sites as big brands tend to use Google search and banner ads and social media posts. But there is a large group of small advertisers that either sell online services or host clickbait sites for the sole purpose of gathering page views to generate more low quality ad revenue.

Advertisers that use the native ads slots use classic clickbait type headlines to induce clicks to sites that are typically stuffed with ads and that have either very little info or info that does not meet basic journalistic principles. It also includes offers to products and services that range from highly speculative to outright scams.

It is not the intention of companies like Taboola to host these types of ads, but as their margins are very thin, most of the process has been automated requiring oversight to be left to reports after the fact.

It is also not the intention of publishers including some very popular and trusted brands to rely on such services, but as they need the revenue they have limited alternatives but to accept the ads.

Combined it creates an ecosystem that I can’t see being sustainable and that issues with misinformation and manipulation and outright scams only likely to rise.

Younger generations rely heavily on the web but often are unable or unwilling to pay for the services. They are surrendering their personal information for a quality of service that is declining and likely to subject them to greater amounts of manipulative messages.

So while I wish no ill for companies like Taboola or say that instruments like SPACs are an inherently bad option. The combination of the two does not bode well for a more balanced and sustainable future.

It would be heretical for me to say advertising is dead, but it is facing a challenge if it continues on a path with publishers receiving less and less even as brands would need to spend more and more while getting less return from an audience that is already sceptical about ads.

27 January 2021 7:15 PM

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