About Me 0008: internet marketing

While I have been unable to dig up the original report that I wrote at the time, I remember enough of the details to hopefully make the story worth retelling. Between March and November 1998, Yahoo’s market capitalization soared from $4 billion to almost $19 billion. (According to SecondMarket, Facebook’s valuation has soared from $11 billion in December 2009 to $50 billion today.) As a young(ish) equity analyst at Hambrecht & Quist, I had the audacity in July 1998 to downgrade the stock of Yahoo from a BUY to a HOLD based on valuation concerns even though I was well-known on the Street as a long-time Yahoo bull.

The real crux of the downgrade was that no matter how I tried, I just couldn’t get comfortable with the thought that Yahoo—while growing faster than just about any company before it—was worth more than Viacom, whose revenues and profits were a multiple of Yahoo’s. While I had been covering Yahoo for a number of years since its 1996 IPO, I just couldn’t perceive how the company, even as it was defining the way we used the Internet, was worth more at that point in time than the media colossus Viacom (which I had covered for years before that as a finance reporter at Variety). My downgrade proved prescient for a couple of weeks—Yahoo’s stock price dove more than 30% in late summer along with other Internet stocks over concerns about the Russian economy. This did little to deflect the heated feedback from both my own institutional sales force and buyside accounts (I still remember Alberto Vilar—then riding high atop Amerindo—screaming at me about how little I knew about valuation and how I would never make it on Wall Street). Reporter Saul Hansell noted my call in the pages of the New York Times, labeling me a “virtual Jeremiah” for even daring to question Internet valuations. But in the autumn, Yahoo stock’s resumed its dizzying upward ascent, proving me and anyone else who dared to question Internet valuations at that time very, very wrong.

A decade later, Yahoo’s market capitalization is $21.3 billion, and the company is seriously hampered by the lack of a clearly defined strategic vision. Revenues stand at about $6.5 billion with cash flow (EBITDA) of $1.4 billion.
Viacom’s market cap today stands at $24 billion despite revenues of $12.5 billion and cash flow (EBITDA) of $3.3 billion.

Facebook on the other hand is poised to dominate social media marketing and (perhaps) social commerce. Its user base dominates anything that came before it: more than 500 million active users with 50% of its active users logging on to Facebook in any given day. According to Facebook itself, people spend over 700 billion minutes per month on the site. In terms of revenues, the number being bandied about for 2010 is $2 billion (no publicly available numbers exist as Facebook is still private). If that number proves correct, Facebook will have reached that revenue milestone faster than Google, which did it sometime between years five and six, and Yahoo, which reached that revenue milestone in its ninth year. Like Yahoo—and more recently Google—before it, Facebook is defining the way we use the Internet.

Fortunately for me it is no longer my job to try to divine what publically traded equities are worth. But it might be wise for investors to question for just a moment the current valuation hype surrounding Facebook and other private Internet companies (Zynga, Groupon). These companies may very well someday grow into and even exceed the lofty valuations placed upon them today. But for some of us this storyline seems eerily familiar and the ending may not necessarily be as predictable or uplifting as it currently seems.--PN

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Martin,

While I respect your efforts to warn would-be entrepreneurs about illegal schemes, your observations regarding multilevel marketing (MLM) are ignorant and unjustified. Please understand that I am not using the term "ignorant" derogatorily, but rather to describe your commentary as being ignore-ant of readily available historical, mathematical, and legal information about this industry and profession.

First of all, as a successful distributor, consultant, advocate, and court certified expert in the field of multilevel marketing, I am offended by your reference to my profession as a pyramid scheme only by a "matter of degree". There are well over 1,000 such companies in the U.S. alone, which is one of 80+ countries where it's recognized as a legal and legitimate form of business. You assert that they "all" sound like "get rich quick schemes" to you. How many of these several hundred MLM programs have you researched and evaluated? This business model has existed for 75 years, and includes not only Mary Kay and Lia Sophia, but also Shaklee, Avon, Discovery Toys, Watkins, Tupperware, Pampered Chef (owned by Warren Buffet) and many other good corporate citizens (over 20 of which are publicly traded). Your characterization of this profession does a grave disservice to the 30 million world-wide distributors, 20,000+ employees, hundreds of vendors, and thousands of investors associated with this industry.

You state "…the essence of an entrepreneur is creating something new and innovative, whereas an MLM is a traditional formula on an existing product…". And a typical Starbucks or McDonald's franchise is not? But this argument is academic considering the wide array of innovative products that have come from, or been popularized, by the MLM industry. For example, no one even heard of Mangosteen, Noni, Goji or Acai ten years ago. Today these "super fruits" make up a billion dollar world wide market, both within and outside of the MLM industry. Yes, some marketers of these fruit drinks do over-hype their products, and many untrained, unprofessional distributors do make unsubstantiated claims about them. But let's be clear in that this is an issue with how MLM is often packaged, not with the content.

Yet, you go on to claim that an upfront requirement to purchase marketing and training material (which is typically less than $50) that will better educate the new rep on how to properly promote their business is an "unnecessary and are inappropriate" red flag.

You go on to site online material such as Van Druff's “What's Wrong With Multi-Level Marketing?” as a credible source of information. This is in spite of the fact this article was originally written 21 years ago by an individual who has never participated in the profession he criticizes. This is one of the most ill-conceived and debunked anti-MLM article in existence, as is evident here: http://www.marketwaveinc.com/viewarticle.asp?id=7

Your suggestion to look for a formal home office street address is valid, however the existence of a toll-free number is virtually meaningless considering the ease in which one can now be obtained, and considering Bernard L. Madoff Investment Securities LLC had one. Furthermore, the BBB routinely issues low grades to MLM companies due to the "industry in which this business operates" – that is, until the company pays for BBB membership. Then the BBB will have no concern about the "industry in which this business operates" and will unconditionally award it at least an "A-" grade.

While I agree with your "red flags" #2, #3, and #4, when evaluating whether more income is coming from purchases of downline reps, per #5, you must also consider that, according to several states as well as the Federal Trade Commission, those downline reps can count as bona fide customers. As can be gleaned from this FTC letter to the DSA here, http://www.marketwaveinc.com/FTC_Letter.pdf, the FTC considers only the motive for buying the product, not what percentage is sold to non-distributor customers. And, in fact, many retail customers do choose to become reps, and most MLM reps are passionate, often to a fault, about their products.

You state, "you will need lots of family and friends to make it work" yet just a few sentences later you state "The Internet has made it so easy now. In the old days you had to actually visit people, or at least call them, to pitch your fabulous new opportunity." Your first statement is utterly false, while your latter statement is quite correct. While exposing one's product or opportunity to a friend or family member is still common (with the majority of industry leaders training to lead with the product), the majority of marketing is now done online and directed towards one's "cold market".

You further theorize that "Multi-Level Marketing” and “Network Marketing” were "sanitized terms" invented after Amway and others were charged with “pyramiding” back in the early 1970s. What you failed to mention was that the courts ultimately ruled Amway, and thus the MLM compensation model, was NOT an illegal pyramid. Furthermore, the term “Network Marketing” was coined in the early 1990s.

Finally, you do concede "there must be something to the business model" since "some big business icons like Donald Trump are joining in the MLM parade". Besides Trump you can include the afore-mentioned Warren Buffet, as well as Anthony Robbins, Robert Kiyosaki, Paul Zane Pilzer, Brian Tracy, Mark Victor Hansen, and Bill Clinton (http://www.youtube.com/DirectSelling411) as supporters of this profession.

Martin, pyramid schemes do often try to disguise themselves as legal, legitimate MLM operations – because they want to be perceived as legal and legitimate. And yes, we do suffer a guilt by association with illegal pyramid schemes, but this is due precisely to wholly inaccurate portrayals within the media such as yours.

Thank you for considering, an allowing me to present, an opposing point of view.

Len Clements

Founder & CEO

MarketWave, Inc.
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Monday, January 10, 2011

internet marketing

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