The Recession – Are We There Yet?

When major changes happen in the markets, The Wall Street Journal Online will generally send out email alerts. One of those came yesterday shortly after the close of the market. It said, "The Dow Jones Industrial Average dropped 510 points, with the bulk of the losses coming in another dramatic final-hour dive, as investors worried that a deteriorating global economic picture will cut deeply into corporate profits. Selling swept across the board, with financial, industrial, and consumer discretionary stocks all taking a beating." Except for exact numbers, it sounds incredibly similar to many sent before it. The stock market has bounced back a bit from the lows it hit earlier in October, but the question on everyone’s mind is still "How low can it go?" Historically, the answer is a lot lower, if indeed this economic crisis turns out to be as serious and extended as some people might think. We saw a graphic in an article published in the Wall Street Journal that puts into perspective just how long bear markets can last. The one from the Great Depression for example, took 13 years, and the stock market entered one in 1966 that lasted until 1982. We’re in one now, but what about our industry. Has it started to feel the effects?

Despite the fact that online advertising should fair better than many other industries, we’re definitely entering something online, even in the performance marketing space. Here’s why we’ve entered:

• Payment Issues – All it took was one comment from one of the more savvy, connected, and profitable people to put the fear of reality into us when he said, "Hey. Who have you heard that is stiffing their bills? Is it the same that I’m hearing?" In good times and bad, there are always shady companies that skimp on their bills, companies that promise too much with no intention of paying, but when a decently known name starts to run behind and try to not pay, the alarm bells start to go off. Right now, it’s an isolated issue, due less from actual cash reserves and more from Yahoo like pressure to cut costs in order to show a certain return. Regardless, it’s a wake-up call, and those expecting money should be diligent about getting it.
• Layoffs – Yahoo’s cost cutting announcement includes a reduction of their workforce, in the neighborhood of 10% of their staff. Adbrite too recently laid off a portion of their staff and a select number of other, smaller private companies have all done the same. This, though, is really just the beginning. The hardest hit will be the venture-backed startups whose model rests more on acquisition than profit through operations. A presentation given by the famed Sequoia Capital has made the rounds
• CPA Drops – More than a few companies had paid relatively healthy CPA’s. Unfortunately, many of them did so not necessarily unprofitably but with optimistic expectations when determining the lifetime value of their customers. We are starting to see a handful of advertisers cut back on those rates for two main reasons – to conserve cash, and because of decreased customer spending. Since valuations and acquisition activity will be down, companies spending big to look pretty, need to look pretty in other ways.

We might not like hearing it, but things must get worse before they can get better. The economy as a whole has yet to really feel the pain. Just wait until second quarter of next year. So, in the meantime, here’s what you should remember:
So…

• Cash is King – This was also mentioned in the PowerPoint, but now is the time to make sure your company has adequate cash reserves. You might not get paid by someone but your affiliates will still expect you to pay. If you don’t pay them, their loyalty will quickly disappear as most keep even less cash around than your company does. The rule of thumb that gets mentioned – keep one year of operating expenses around. A company we used to work with kept enough cash to pay all affiliates and all employees for a year even if they didn’t make a single dollar. Most people won’t have that issue, but it shows the level of preparedness needed.
• Look for Opportunities – Now is the time to make money if you have it. Here is where those in the performance marketing space excelled during the last major contraction. They had a proven model and worked relentlessly to expand on it. Those best positioned are companies that take advantage of weaknesses in inventory prices. Sites like Time, and The Wall Street Journal are now running campaigns they wouldn’t have given a second thought to just a year ago. No one will will be immune, and you should pound on their shortcomings. As mentioned in the Sequoia

• Spend Wisely – It’s one thing to horde money, but you still need to deploy it. There is an anecdote about McDonalds and Burger King, and that it was McDonalds aggressive use of funds that propelled them to the number one brand at a time when either company could have taken the lead. It could be apocryphal, but the lesson holds true. If you don’t have the money, don’t spend. But, if you have saved well, continue to operate profitably, now is a time when you can pick up quality assets – from companies to people.

For better and worse, the economy now is virgin territory, resembling only in bits the struggle the industry went through eight years ago. Eugene White, an economics professor at Rutgers University who is an expert on the crash of 1929 and its aftermath, is quoted in a piece from the WSJ, saying that "the only real similarity between today’s climate and the Great Depression is that, once again, ‘the market is moving on fear, "not facts.’" Ending with a historical foot note. The big crash in October of 1929 didn’t signal the actual bottom of the market. It even rallied some after. It wasn’t until July 9, 1932 that the Dow Jones Industrial Average hit bottom, closing at 41.63, down 91% from its level exactly three years earlier. And, it took the market until the mid-1950’s to reach the levels seen during its height in 1929. In other words, we should be thankful that at worst, people are predicting just a year or two of a depressed market.