Let’s do a thought exercise.

How much is Google worth? Today, its market cap — the total value of the company — was just over $690 billion. It is the largest media corporation in the world, earning $79 billion on media revenue out of a total of $90 billion in overall revenue. Eight seven percent of Google’s revenue comes from advertising. All the cool stuff you hear about — the self driving cars, Google Fiber, Nest, Verily, Calico Labs, Google Ventures, Google X — made less than $809 million — far less than one percent of total revenues.

And what about Facebook? Their market cap is just over $500 billion. They earned about $17 billion through advertising in 2015. They made a total of $18 billion in revenue that year, putting the percentage of their revenue from advertising at 95 percent.

Now what about traditional media companies? Let’s look at Disney, the largest “traditional” media company in the world. Disney made $55 billion in revenue last year. Of that revenue, just $8.5 billion of it came from advertising, or just 15 percent. This includes all the revenue from ABC, the various Disney channels, ESPN, and A&E. To be fair, Disney owns significant minority stakes in Hulu and Vice, and these revenues do not appear to be included in their annual report’s ad revenue accounting. We’ll put that aside, it only aids the argument I’m making here. Disney’s market cap is about $150 billion.

Disney, owing to its theme parks and significant merch business, is an extreme case, but the story is essentially the same for the other large traditional media companies. They all generally own film studios, cable companies and magazines that generate non-advertising revenue. A full 17 percent of Time Warner’s revenues come from HBO alone, making its ad-to-non-ad ratio better than either Facebook or Google. In total, just 43 percent of Time Warner’s revenue comes from advertising. For Viacom, it’s 38 percent.

Last year the entire world spent about $580 billion on advertising. That number isn’t growing much, but we’ll get to that in a minute.

Multiples

So, looking at these numbers one thing is evident: every company is worth more than it makes in one year. In venture investing, we called this a “multiple” on revenue. In the stock market, they boil the same idea down to a P/E ratio (stock price-to-earnings ratio). The logic here is that a buyer would be willing to pay more for a company than it made in a year, because it will probably make that much money again the next year. And it might make even more next year.

Typically, these multiples apply to a whole industry. Some industries get a higher multiple than others. In basic economic theory — the stuff you are taught in college — the logic comes from what might be called Factories vs Lawyers — capital-intensive businesses versus people-intensive businesses. The thinking went if you bought a factory, and all the people walked out the door and quit, you’d still have the factory, the inventory, the machines. But if you bought a law firm, and everyone walked out, you’d just have a bunch of lease obligations. Thus in the old days, product companies enjoyed a higher multiple than a service company. If you were considering purchasing a factory that made widgets and had revenue of $100 million a year, and also considering a law firm that had revenue of $100 million a year, you might need to pay $500 million to buy the factory, whereas you could buy the law firm for $200 million. These would be called a 5x versus a 2x multiple.

I don’t choose those numbers arbitrarily. Among investors, a 2x multiple for a service company is the default starting point.

Multiples are extraordinarily important to a company. The higher their P/E ratio, the more a company’s stock is worth. That stock is money — money they can use to buy other companies. A high P/E ratio makes a company more expensive, insulating it against hostile acquirers. And at present there are very few companies that could even contemplate buying Google or Facebook. In fact, there is only one — Apple, and I’m sure the anti-trust sirens would go off on that one.

So, then, looking at the PE ratios for these companies, as of today, we see:

Google: 36.49

Facebook: 37.74

Disney: 17.24

Viacom: 7.18

Time Warner: 18.65

Viacom is a bit of an odd one out: it is much smaller, and it has some succession issues, to put it mildly.

Multiples for “tech” companies

You see a pattern here: tech companies get a much higher multiple than traditional ones. Google and Facebook’s ratios are even higher than other tech companies. Apple’s is 17.86, Microsoft’s is 28.61. Some are higher — much higher. Amazon’s is a staggering 253.06. With tech companies, it seems, PE ratios are lower if you do something so old-fashioned as make stuff in a factory. Recall that in the old days, a factory deserved a higher multiple than a people company. This no longer seems to be the case in tech. Actually, with the rise of just-in-time logistics and Foxconn and the like, it’s less true everywhere. But it does seem strange that these tech companies with actual non-advertising revenue — with potential to grow — are valued less than those relying solely on advertising.

Of course, one could rationally argue that having a bunch of lawyers walk out the door would be a lot easier to deal with than having all your computer engineers walk out the door, but despite this Google and Facebook — indeed, the entire “tech” industry — enjoy huge multiples.

Tech company’s higher multiples have been justified, historically, for two reasons:

First, tech companies have a high growth potential, and indeed, this makes sense: you’d be willing to pay more for a company that was more likely to have a growing business vs a flat or shrinking one. And secondly, tech companies earned a higher multiple because they could theoretically execute their business more cheaply and/or efficiently than their traditional competitors.

These theories around multiples proved wildly true in Google’s early days. It rapidly captured print ad dollars — especially the classified market — away from newspapers, and did so with far fewer employees. It grew, and it grew efficiently. And the market seemed bottomless.

But the times, they have changed.

So, here we are in 2017, and let’s look at every. single. reason. why a company has a higher multiple and look at how this applies to Google and Facebook:

Potential for growth: This is what we’ve been talking about the entire time in this series. Facebook and Google have won the war on direct advertising, but are losing the war on the much larger, more profitable, and TV-intensive brand advertising. Their growth potential is severely limited. Despite the fact that Mary Meeker, and other analysts have been extolling the inexorable migration of ad dollars from television to the web (and then mobile) for over a decade, that migration has not happened, nor is there any sound economic basis for thinking it will. Google and Facebook are also bumping up against the entire ad industry — as I pointed out above, it is capped annually just under $600 billion total. That number only goes up with GDP growth, and GDP growth is something we may well be seeing less of.

There is, of course, Google’s core non-brand advertising business — search. And it has some potential for continued growth. But there are some concerns here too. It’s constrained by the rate of globalization and the incumbent global competitors that brings (especially in china). Ad levels are remarkably constant against GDP, and we don’t expect super high GDP growth in the future. Brand vs direct allocations are generally fixed by sector as well, so no brand money is going to be moving over to direct. And while Google is capturing a hefty chunk of the remaining direct dollars moving to digital, there are not many left.

Capital assets vs people: This has always been a bit of a red herring in the tech industry: supposedly they deserved all of the upside of higher multiples for being able to do things more efficiently, but none of the downside to multiples for only employing precious irreplaceable engineering geniuses. But I’ll tell you one thing. If I were a billionaire private equity investor named Schmidt Bomney and I wanted to buy a company I knew nothing about, I would feel a damn sight more comfortable buying a factory (or, ahem, Staples) and replacing all the workers if they quit than I would buying Google and having all those baby geniuses quit on me.

Cost advantages: In the old days, Google could employ far fewer people than the nation’s 5,000 newspapers, and deliver the classified ads far more cheaply. Not only did they employ fewer people, they didn’t have to own all those expensive printing presses.

As we have discussed in previous columns, this is not longer true in the battle for the remaining ad dollars. Everyone — and I mean everyone — is fighting for these remaining non-digimafied ad dollars (also known as TV).

And it is expensive. Apple is spending a billion dollars to get into the game with Spielberg (they’re bringing back Amazing Stories and I am psyched). And that’s only part of the $7 billion they plan on spending. Facebook is spending money on content from Buzzfeed, Vox and others. They plan to spend up to $1 billion. Netflix $6 billion. Amazon, $4.5 billion. Hulu $2.5 billion. Google, $4.5 billion. (Oh, and everyone was spending money with the Weinsteins.)

This all sounds like a ton of money. And it is! So say goodbye to any cost advantages that tech companies might have. They gotta spend money on awesome content just like anyone else.

There is zero reason to think that a tech company can create content better than anyone else — which is the only way anyone knows of to capture any future ad growth. They have zero advantage over Disney. They are coming from a position of weakness — Disney already has significant TV ad revenue, and extensive experience in making content we love. Ad tech isn’t going to help them, as we’ve discussed, and even if it is there are a million innovative ad firms out there that are just as happy to be bought by Disney as they are by Google.

Google and Facebook have zero cost advantages when it comes to capturing the remaining ad dollars. And they don’t even have that much money to play this war of attrition. Google has $92 billion, Facebook $30 ish. Newly minted content producer Apple, by contrast, has $256 billion in the bank.

Disney has $12 billion or so, but this is a different number than for the others, because when you come down to it, the amount of money these tech companies are planning on spending on content is diddly squat compared to Disney. Disney’s cash on hand is a different beast because it already spends astronomically more money on content than any of these tech companies are contemplating.

A quick adding up of the budgets of the 10 films Disney released this year comes out to $1.5 billion. ESPN spends another $2 billion a year just for the NBA and $1.9 billion a year on the NFL. And $700 million on Major League Baseball. And another billion or so on college basketball. Half a billion for college football playoffs. Another half a billion on the Big Ten rights. It’s a little hard to come up with a total, because Disney’s accounting in their annual report amortizes some content across multiple years, but a number in the $10 billion range does not seem unreasonable. And that’s ignoring the theme parks and the substantial savings Disney recoups creating something like Star Wars Rebels, for example — a very inexpensive show for Disney to produce, since they already own Star Wars, the mythology, the production capabilities, and the writers. Nor does this include the billions in physical production assets like sound stages and studios Disney already has.

Google and Facebook have the cash to compete, but it is not going to be cheap, and they have no inherent advantage.

Future payoffs: The reality of this situation goes a long way to explain Google’s “other bets” category and its Berkshire-like reorganization into the holding company Alphabet. Facebook for its part touts drones and VR as future growth opportunities (sometimes with unfortunate results) and — despite its balance sheet to the contrary — vociferously insists it’s not a media company. Methinks they doth protest too much. It is a smart move, strategically, for Google and Facebook to take the massive amount of money it is currently making on direct advertising and spending that towards growing other industries, trying to transition into real bona-fide non-media companies before the jig is up on their inflated stock prices. But they are nowhere near reaching that goal. This also explains Google’s Alphabet reorganization. Alphabet allows them, and investors, to value these other endeavors separately (investors hate conglomerates). EMC has had the same problem with its Pivotal division. Time Warner has it with HBO. Nothing new under the sun here, and Google has no advantages when it comes to this eternal corporate problem of “unlocking shareholder value.”

Which half is wasted, indeed.

In short, I can think of no reason that Google deserves its PE ratio of 36.5. It has zero advantages in the one big growth area it can realistically go after: The brand budgets currently spent on TV. Furthermore, that market is not a growth market. At best, if and when it migrates to digital, it will be the same size, and Google will have no advantages. At worst, the migration to digital (if it happens), along with massive competition decimates ad rates.

A far more reasonable PE ratio would be that of Disney — and this might be generous. Disney already has a substantial and growing digital business, and unlike Google it is not facing serious and growing anti-trust concerns on its cash cows. The revenue and assets Disney does had — theme parks, a massive treasure chest of beloved IP, production studios and distribution channels such as ESPN, ABC, Disney XD, and 33% of Hulu — all work towards winning this last, great ad war. Nothing Google has now will help.

But let’s be generous and give Google the same PE ratio: 17.24, instead of its current 36.49. This would be a 53 percent reduction in PE ratio, resulting in a new market cap of $325 billion, and a stock price of $433.38. That seems far more reasonable. Facebook, similarly, given Disney’s PE ratio should be worth about $217 billion, trading at $74.70.

The only thing that Google — and other tech companies — have going for them in the battle for brand dollars is their massive P/E ratios, valuations and stock prices, with which it is far easier for them to acquire suddenly popular, smaller content developers. But these stocks are based on a reality that no longer exists. The emperor has no clothes.