Nine months ago WeWork was pushing for an IPO of $47billion despite munching its way through cash losses of $3bn per year.

WeWork’s value has since fallen by 80% or more, its equity now considered worth $8bn or less. The company is running out of money. A bail out and painful surgery awaits.

The second internet boom is beginning to deflate.

Reality’s bite is drawing blood among a generation of digital businesses which have achieved remarkable valuations built on cool brands, charismatic founders and an unquestioned belief in jet-powered, loss-fuelled growth.

The fall of WeWork and the deflation of Uber, Slack and Peloton have grabbed headlines but there are many digital media businesses out there feeling the canines on their buttocks.

Refinery 29 merges into Vice Media

Vice Media, home of gonzo journalism and millennial cool, is near the top of the media worry list as it burns through over $150m each year in losses. Refinery 29 with its female audience is merging with Vice to cut costs harder and seek the scale to attract a wider range of advertisers. Nine Media and Buzzfeed face similar pressures. There is a long tail of smaller, digital media companies also wondering whether they have a future.

A simple economic truth is creating deep uncertainty amongst this generation of advertising-funded media companies.

Each day, digital advertising becomes a purer version of the winner-takes-all dynamic that defines networked digital markets.

Grow global networked scale, own your segment, build defensive walls, become an oligopolist and enormous riches will be bestowed upon you. Fail in this endeavour and a battle for slim margins and survival is your future.

Google, Facebook and Amazon have the consumer data, the technological power and the oligopolistic scale to enable digital advertising that creates more impact for less money than traditional media. They are the pure winners.

Advertising funded consumer media companies face low barriers to entry, compete with a billion bloggers and must pay the never-ending cost of making lots of expensive content. They are losers.

Facebook has misused consumer data; it has been abused for political ends and enabled genocide; it has faced a storm of criticism; and advertiser boycotts have been threatened. But Facebook’s platforms deliver cost-effective advertising, so their revenues grow regardless.

The latest Q2 figures show Facebook’s advertising revenues rising in a continuous, near straight line. In 2019, Q2 revenues are up $3.6bn compared to 2018; very similar to the $3.8bn rise the previous year or the $3bn the year before that. The rise of Google and Amazon advertising revenue is equally relentless.

This leaves thin gruel for advertising funded unicorns whose business plans and valuations were built upon the assumption that they would take an increasing slice of a fast-expanding digital advertising pie.

These are the good times. Economies are strong. Advertising spend is growing. But we are late in the cycle and ever closer to the dark times of recession when advertising falls significantly. This will bring Darwinian pressure on the weak.

So what is an advertising funded unicorn, losing lots of cash and running out of money to do?

Let’s look at Vice.

From Shane Smith to Nancy Dubuc – a mild change of tone

First, fire the madcap creative founder, Shane Smith, who has led the company through its helter-skelter rise in scale, valuation and losses. Replace him with a seasoned TV executive, Nancy Dubuc, who doesn’t pose with bears or take basketball player Dennis Rodman off to hang out with Korean leader, Kim Jung On.

Dubuc’s early moves have been to pull power back to the US centre, cut content costs hard, merge to create scale and push revenues in sectors that aren't advertising dependent.  

Vice is a gangly mix of web media, TV channels, TV production company and creative agency.

Vice digital was driven by an explosion of brands over recent years with the creation of Munchies (food), Motherboard (Tech), Broadly (gender and identity), Noisey (Music) and others already forgotten. These launches must have been horribly expensive with advertising revenues limited compared to the escalation in content costs. Dubuc has quickly emasculated these launches, dragging them into a single Vice proposition increasingly dominated by US content. Costs are being cut hard and there is surely more to come.  

The merger with Refinery 29 brings a big audience of millennial women to join the male-skewed Vice audience. More costs will be saved. Will the pitch to advertising buying agencies and clients of greater audience breadth and scale significantly increase commercial revenues? I wish them luck.  

Vice Studio, the TV and film production company, probably makes money. It is a simple business winning commissions and making a margin. Virtue, their creative agency which includes the digital agency, Carrot, which was acquired in 2013, may also be profitable and can achieve creative service margins. Neither of these businesses have the scale or the high margins to justify a valuation of a billion dollars, never mind five. Dubuc will need to grow them rapidly and win some big clients and commissions.

Television has been a rocky ride. Vice News, a major commission from HBO, was cancelled this year after 7 seasons. It will reappear on the Showtime next year.  

Finally, there is the hugely ambitious Viceland, the TV channel launched in over 40 countries in 2016 with a remarkably high proportion of expensive, freshly originated programming. You had to admire the chutzpah to try such a launch but I remember discussing it at the time with a seasoned factual TV executive who assumed they must have been smoking something potent when they put that business plan together.

When TPG invested $450m in Vice in 2017, the valuation was reported as $5.8bn. This came off the back of rising revenues that probably broke through the $1bn level. Since then revenues have slipped backwards and are probably closer to $800m today.

At $5.8bn, Vice was valuable as Levi Strauss, the 160-year-old clothing company or Coty with its family of global beauty brands. These companies make operating profits of $400-$550m.

Vice's merger with Refinery 29 was at a reported valuation of $4bn. But since money didn’t change hands, almost any figure could have been used. Nobody knows what these loss-making digital businesses are worth.

Dubuc’s concern will not be valuation but survival. Vice is a privately-owned company with blue chip investors such as Disney, Hearst and WPP as well as the private equity fund TPG. But can she convince these or fresh investors to invest more as the company fights to get anywhere close to break-even? These investors have already written down the value of their investments. Will they be convinced to risk more cash?

What happens next for the advertising driven unicorns?

There will be mergers and alliances. Cost cuts will become more dramatic. Valuations will fall.

They are fighting against the digital economics of winner-takes-all and the obvious implication of a small number of gigantic winners is a large number of sizeable losers. Only a minority will have the scale, the breadth of other revenue streams and the slimness of cost base to survive.

Particularly now they aren't so cool any more.