Magical Thinking in Silicon Valley

The Vanity Fair New Establishment Summit

I spent two days with Graydon Carter and the swells of Silicon Valley this week in San Francisco. The conference was well produced and programmed, but I came away wondering if there isn’t a kind of bubble in the Valley that has nothing to do with the inflated valuations of the “Unicorns”(private companies with valuations of $1 billion+) which were so much a focus of the conversation on stage and envy off stage — especially from the older Hollywood moguls who are drawn to Graydon Carter like moths to a flame.

The bubble I’m talking about is a thought bubble in which the magical thinking of the guys who clearly think they are the smartest cats in the room, goes completely unchallenged. Case in point: Elon Musk, who will spend hundreds of millions on his quest to inhabit Mars, suggesting that we cause a nuclear explosion on Mars which would melt all that frozen water, warm the atmosphere and allow us to grow vegetables for our space colonies. He said this with a straight face and neither the interviewer or his other panelists even blinked. Musk went on to put down Larry Page’s expenditure of tens of millions so he could live to 200. Elon said he was happy just living to 100, by which time he might be able to upload his brain to a computer so we could all take advantage of his brilliance ad infinitum.

With all the problems of this world, these guys are spending billions on going to Mars and living to 200. WTF? And then we have Mark Andreessen, who happily pushed his “software eats the world” paradigm on Disney’s Bob Iger. In Andreessen’s magical world, the laws of supply and demand have been revoked, and the proliferation of millions of hours of mediocre video on You Tube has no effect on the economics of the quality content that Disney produces. In 1982 the economist Carl Shapiro noted that we move towards an equilibrium that makes “relatively mediocre products ubiquitous in a free market.” Somehow Andreessen does not understand the basic economics of TV production. The fact that as FX’s John Landgraff has recently noted — “there is too much TV” — we now produce 400 dramatic series per year instead of the 200, from just 5 years ago. Each one of these series has a relatively fixed cost of production (unlike reality TV) and so with such a proliferation, the possibilities of a $400 million syndication windfall on the order of a Seinfeld or Friends is an impossibility.

What Andreessen fails to mention is that the quality of the product is almost irrelevant to what Jimmy Iovine of Apple described as entertainment “utility” platforms like YouTube. The web suffers from an extreme excess of ad inventory.

Without the limitations provided by TV of a limited number of ad spots per hour (unless you are Viacom), supply always overwhelms demand and rates keep falling. So for YouTube, quantity of video content is far more important than quality.To make matters worse, the rise of “Programatic” advertising driven by automated real-time bidding for an individual users attention has led to an epic of fraud. A recent Bloomberg investigative report describes a meeting at the offices of Heinekin Beer.

Late that year he and a half-dozen or so colleagues gathered in a New York conference room for a presentation on the performance of the online ads. They were stunned. Digital’s return on investment was around 2 to 1, a $2 increase in revenue for every $1 of ad spending, compared with at least 6 to 1 for TV. The most startling finding: Only 20 percent of the campaign’s “ad impressions” — ads that appear on a computer or smartphone screen — were even seen by actual people.
“The room basically stopped,” Amram recalls. The team was concerned about their jobs; someone asked, “Can they do that? Is it legal?” But mostly it was disbelief and outrage. “It was like we’d been throwing our money to the mob,” Amram says. “As an advertiser we were paying for eyeballs and thought that we were buying views. But in the digital world, you’re just paying for the ad to be served, and there’s no guarantee who will see it, or whether a human will see it at all.”

At a lunch time panel on the second day of the Vanity Fair event Apple’s Jimmy Iovine took on this dilemma directly. “”Free is a real issue. This whole thing about freemium, maybe at one time we needed it. But now it’s a shell game”, he said. “These companies are building an audience on the back of the artist.” When I asked in the Q & A about YouTube he said, “YouTube represents 40% of the streaming volume of the music business and 4% of the revenue. It’s a ripoff, but Google doesn’t care.” I wonder what Ruth Porat, the new CFO of Google, sitting in the audience thought of that?

I appreciate Graydon Carter trying to get the content and tech industries together. We are trying to do the same thing at the USC Annenberg Innovation Lab. But unless the tech guys start looking at media with a little humility we are going to be in trouble. Iovine said it right.

“Just because you go to Burning Man doesn’t make you Hunter Thompson,” he noted of the tech industry’s profoundly uncultured perspective on art. “The media business needs to have tech people and give them stripes and the tech businesses needs to give media people stripes,” he added. “Or it’s going to keep being the Star Wars bar in Tatooine.”