New lending companies such as On Deck and LendingClub, new media companies such as BuzzFeed and Mashable and new transportation companies such as Uber and Lyft all have something in common: In many ways, they are essentially traditional businesses wrapped in fashionable narratives to seem like visionary tech firms.
On Deck raises money from banks and retail investors and lends to businesses: That's what a traditional bank does. Buzzfeed publishes entertaining stories with a lot of pictures (and some serious reporting). Tabloid newspapers have been doing that for generations. Uber runs a taxi service in multiple cities.
Selling these businesses to investors as innovative tech companies was great marketing. Even after a sharp drop in the share price caused by dismal financial results, On Deck has a price-to-book value ratio of 1.03 (Citigroup trades at 63 percent of book value). A deal with NBC Universal last year valued BuzzFeed at $1.5 billion, comparable with The New York Times Company's $1.99 billion market capitalization, even though BuzzFeed reported revenue of $170 million last year and the Times made $1.6 billion. Uber is valued at more than $60 billion, even though it hasn't posted a profit: No other transportation company could have achieved that.
The actual tech innovations that these companies claim aren't so disruptive or impossible to imitate that their "legacy" competitors couldn't use them. In fact, they do.
Banks employed sophisticated scoring models before "big data" was a buzzword, and the new lenders' delinquency problems mean their models, which pull in more diverse data, such as applicants' social media accounts, aren't better than those developed by traditional lenders -- they're just new, untested and sometimes problematic. "While data-driven algorithms may expedite credit assessments and reduce costs, they also carry the risk of disparate impact in credit outcomes and the potential for fair lending violations," the U.S. Treasury Department said in a May 10 white paper on online marketplace lenders. "Importantly, applicants do not have the opportunity to check and correct data potentially being used in underwriting decisions."
As for peer-to-peer lending, that's just another way of using depositor funds to issue loans, and it doesn't quite work as advertised, as the downfall of LendingClub's chief executive, Renaud Laplanche, proves. One of his transgressions was a failure to disclose an interest in a financial company that buys up LendingClub loans.
The best traditional media organizations have mastered the social networks and are getting good at what provides most of BuzzFeed's revenue -- so-called native advertising, which used to be called advertorials in prehistoric times (as long ago as the 2000s). There's nothing about what the new media companies do that traditional ones can't do as well, and do right now. As Joshua Topolsky, a co-founder of The Verge, former Engadget editor and Bloomberg web guru wrote in a blog post last month,
"Video will not save your media business. Nor will bots, newsletters, a 'morning briefing' app, a 'lean back' iPad experience, Slack integration, a Snapchat channel, or a great partnership with Twitter. All of these things together might help, but even then, you will not be saved by the magical New Thing that everyone else in the media community is convinced will be the answer to The Problem."
Topolsky has lots of new media experience, but his solution to the industry's problem -- the implosion of traditional advertising and distribution models -- is decidedly old-school: Better quality. Lydia Polgreen, editorial director at NYT Global, echoed that sentiment this week in a post entitled "Why People Pay to Read The New York Times." A good media company will use the latest gimmicks, but it's the quality of the stories and the relationship with readers that decides its fate. There are doubts about the direction and the ultimate destiny of BuzzFeed, which has been missing revenue targets, or Mashable, which is getting out of the news business and concentrating on entertainment. There is little doubt, however, that The New York Times, which makes more money from subscriptions than from advertising, will stick around and keep producing good journalism.