The Bubble in American Idol

Ever since the Nasdaq market popped in 2000, pundits have been quick to label anything that becomes popular a bubble. Sure, housing is in a slump right now, but how many shorts were busted, and how many trees were killed to print stories proclaiming the housing bubble? Yet, how many people are still kicking themselves for thinking they were so smart in 2002 when they opted for rent in the rent vs. own debate?

Oil and commodity stocks have been quick to get the bubble label slapped on them over the last three plus years as well. When oil was in the 30s, 40 was the top. Then we hit 40, and 50 was the top. Once 50 came, 60 was the top, etc. Who doesn’t remember thinking that the Goldman analyst who called for $100 was nuts. Sure, we are still a long way from there, but now, while triple digit oil is most likely not in the immediate future, it just doesn’t seem too far fetched anymore. In January, when oil fell over 20% in a matter weeks, the oil bubble had finally popped. Now crude is back in the upper sixties and gas is three bucks a gallon in the Northeast and Memorial Day is still over a month away.

While everyone has been busy looking for the next bubble, one that has escaped the spotlight is American Idol. Seriously. In many ways TVs most popular show has several similarities to the technology stock bubble of the late nineties. If we look at both periods side by side we see that they have both evolved in a similar fashion.

In the early to mid nineties, the success of Windows and other Microsoft applications led to exponential gains in MSFT and spawned a generation of Microsoft millionaires. Suddenly, a secretary at Microsoft with only a high school diploma now had stock options worth millions. Or an individual who in 1986 took a flyer on “some sort of software company called Microsoft, or something like that” turned their initial $10,000 investment into over a million dollars by 1997. Reading about these rags to riches stories created mass inflows of people and capital into Silicon Valley as everyone wanted to be or find the next MSFT, INTC, or CSCO.

In 2002, Fox debuted American Idol, and while early on the ratings weren’t huge, the show’s winner in its first year was Kelly Clarkson and the success of her career increased the shows popularity. In subsequent seasons, producers were confronted with tens of thousands of wanna-be superstars who showed up at tryouts to become the next American Idol.  At the same time, the show's ratings took off as viewers wanted to see the next superstar before he or she was discovered.

The tech stock bull market also created a new breed of superstars. While we all grew up wanting to be Pete Rose, Joe Montana or Michael Jordan, in the nineties a new breed of idols emerged- technology sector CEOs. Now, instead of wanting to grow up to be a famous athlete or military figure when they grew up, Bill Gates, Andy Grove, Lou Gerstner, or John Chambers, were now receiving the attention.

In the same way American Idol created a new breed of celebrities. While some people actually do remember Randy Jackson from his days in Journey, or Paula Abdul from when she danced for the Lakers or sang Two Steps Forward, Three Steps Back with a cat in the animated music video, 99% of people today immediately think American Idol when their names are mentioned. And while they may not freely admit it, both celebrities are probably extremely thankful that they were chosen as judges.

Every mania also has its guru who becomes the poster child for that period. In the nineties that guru was George Gilder. Gilder’s Technology Report became the go-to newsletter for investors who wanted to get rich. Every month, stocks mentioned in his newsletter immediately took off. Mere mention by Mr. Gilder of stocks like Lanoptics, Nortel, Global Crossing, Avanex, and Teryon, in several cases resulted in triple digit returns over a period of hours as investors who knew nothing about the companies bid up the shares.

Votefortheworst.com and Howard Stern share the guru role for the American Idol bubble. Every week this season, contestants backed by Stern and the website have avoided elimination from the show even though, as the website flat out tells us, that contestant is the worst. Just as some of the best performing stocks of the Internet era were companies with no real business model or any chance of long-term survival, the contestant that is the most popular this season by most accounts has at best, limited talent. 

Additionally, Gilder, Stern, and Votefortheworst.com, all have cult like followings who follow the advice of their gurus even though these followers have no active interest in the show.  While most of Gilder's followers had no idea how his companies operated or planned to make money, most of Stern's viewers have probably never even seen American Idol.  They just vote for whoever he tells them to vote for.

While questionable characters characterize the late stages of each bubble, early on, these manias are for the most part rational. During the tech craze, even though stocks were expensive, the market remained rational. Companies with questionable business models were usually avoided, and while an occasional bad egg would slip through the cracks, the process generally worked so that money only went to companies that had viable business model. On American Idol, the process, until this year, generally worked as well. Most viewers of the show would agree that the best usually made it through to the next week, while the William Hung’s of the world were quickly eliminated.

Inevitably though, bubbles pop leaving participants wondering, “What was I thinking?” Anyone holding Xcelera.com, Nortel Networks, or Global Crossing in their portfolios post 2000, probably suffered a bad case of buyer’s remorse. Likewise, if the most popular contestant on this season’s American Idol goes on to win, viewers of that show will also likewise be reaching for the aspirin in the morning.

 

Note: This is a post-April Fool's Day post.

Comments

[Michael]

I stop reading blogs forever if I come across two huge errors in a single post. It is just so annoying to present yourself like an authority when you can't get the facts right.

1. American Idol ratings were huge in the first season.

2. The Paula Abdul song wasn't called "Two Steps Forward, Three Steps Back." The title is "Opposites Attract."

[Adrian keys]

Maybe the author should respond but I am not sure it's a question of facts.

The ratings issue could be a simple matter of interpretation and the truth is "Two Steps Forward, Three Steps Back" brings me to the exact song the Author had in mind. Not sure how many people could tell you it was "Opposites Attract".

It could really just be a matter of interpretation and style...but then again that would not be obvious from reading the Post.

Regardless, your point is very well taken.