The Social Media Bubble Beckons

The next big online media bubble is here, and it is social media -- at least, in my humble op-ed. There are certainly a lot of signs pointing in that direction, reminiscent of recent bubble markets. Here's a short list of the symptoms ...

1. Media frenzy, generally characterized by breathless, only occasionally well-informed reporting about trends real and imagined. General news journalists try to find links between the new phenomenon and random topics -- how is Facebook changing retirement? How is Twitter changing gardening? How is LinkedIn changing pet care? Meanwhile business journalists report each new company launch and round of fund-raising, the media feeding frenzy helps lure more investors into the market, and the cycle repeats itself.

2. Redundancy, with multiple companies doing more or less the same thing. Perhaps the best example right now is location-based social networks, of which there are currently over a trillion. For example, I'm told there are substantial differences between Foursquare, Yelp, MyTown, and Gowalla -- I'm just not sure what they are. Looking at one recent roundup of new location-based networks, I noticed that even a zealous advocate had to admit they all kind of resembled other existing networks: "BrightKite is a location-based social network that acts a lot like Twitter." On MobiLuck: "The European location-based social network is similar to others." "Whrrl is similar to another online community, Yelp."

3. Volatility (part 1) marked by the rapid rise and fall of companies, often in succession. In a market characterized by increasing redundancy, simple novelty becomes the key factor in the success of new companies -- but also means their success is transient and fleeting. I will admit, with great shame, that I can't really see much of a difference between Friendster, MySpace, and Facebook, in terms of their essential functions. But Facebook has somehow assumed the dominant position (at least until it is unseated by some other network or group of networks). While it enjoys apparently unstoppable momentum right now, mere newness is not enough to support an $11 billion valuation. Which brings us to...

4. Volatility (part 2) marked by wild changes in the estimated values of social network, and huge discrepancies between estimates from different analysts at any given time. In September 2006 the Wall Street Journal reported that Yahoo valued Facebook at $1.6 billion in a potential deal. In October 2007, a deal with Microsoft valued Facebook at $15 billion. In February 2009, an internal assessment by Facebook as part of a legal settlement valued the company at $3.7 billion.

In March 2010, SharesPost valued Facebook at $11.4 billion, but the Private Equity Data Center thinks it's more like $35 billion. Meanwhile, in October 2007, Wall Street analysts valued MySpace at $5 billion, but RBC analyst David Bank argued (based on Facebook's value in the Microsoft deal) that it could actually be worth up to $65 billion. But then it dropped to just $1.44 billion in the SharesPost valuation. Or look at Bebo, purchased by AOL for $850 million in 2008: now AOL's new boss, Tim Armstrong, is said to be considering simply shutting it down.

5. Companies getting funding without revenues or business models. Although the dynamic isn't quite as crazy as, say, the first Dot.com boom, venture capital firms are frantically plowing money into companies that -- to all appearances -- currently have no way of making money, or even plausible plans for doing so.

Twitter has received multiple rounds of funding -- $15 million in May 2008, $35 million in February 2009, another $100 million in September 2009 -- but so far its revenues are still negligible. True, every company has a start-up period where growth is more important than profitability, but Twitter (launched in July 2006) is now almost four years old.

Or consider YouTube: Google bought the video-sharing site for $1.65 billion in 2006, motivated more by determination to own the online video market than make money off it. That's a good thing, because four years later, co-founder John Hurley tells USA Today: "I really can't comment on that. You'll have to ask (Google CEO) Eric Schmidt about profitability. I can't answer that... We have always concentrated on the audience first and foremost..."

Which is fine for Google -- they can afford it -- but not very encouraging for venture capitalists, if YouTube's trajectory is representative of the prospects for other social media startups.

Tags: social media
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6 comments about "The Social Media Bubble Beckons".
  1. Steve Sarner from Tagged , May 25, 2010 at 9:23 p.m.

    So much of this frenzy is indeed true.

    Here’s one test that can determine the real players. Take the comScore top 25 social networks by Unique Monthly Visits and find out which ones are consistently profitable.

    The list gets real short - real fast but some – like Tagged.com – are consistently profitable with multiple revenue streams and a large loyal audience with a different use case from the others.

    Of course, that won’t work with many of the ‘common” names as they are so small that they don’t even register on ComScore or exist only as a Phone or Facebook App . But then again – none of them are profitable anyway so they would not make the cut.

    Companies with a loyal audience and diverse revenue channels beyond just advertising will prove not be victims of the “social media” bubble.

  2. Michael Rubin from Fifth Third Bank , May 26, 2010 at 10:56 a.m.

    Erik,

    You really ought to differentiate between social media as an industry and social media as a strategic communications tool. I don't disagree entirely with the gist of what you're trying to say about the industry, but social media as a strategic communications tool is nowhere near bursting.

    In fact, social media is thriving and becoming more of a factor in our daily lives. More and more companies are figuring out ways they can use social media to help make their customers' live better. That deserves support, not derision.

    -- Michael E. Ruibin | http://flavors.me/merubin75

    Disclosure: I am an employee of Fifth Third Bank and this is my personal opinion.

  3. Jon-Mikel Bailey from Wood Street, Inc. , May 26, 2010 at 4:15 p.m.

    As a web design and development company that started in 2002 (after leaving a failing web design firm founded in 98) we know about bubbles bursting. The social media frenzy definitely is reminiscent of the dot-com bubble. That said, just because the dot-com bubble burst didn't mean that the web went away. If anything it got much stronger. It just took a little longer and a steadier approach. I believe the same will hold true for social media. I agree with the previous comment that it is thriving. Those trying to get rich quick may or may not achieve their desired outcome. For the rest of us it is business as usual of smart, strategic and effective marketing.

  4. Rick Lavoie from RUCKUS , May 26, 2010 at 4:33 p.m.

    A lot of what you outline really comes down to the elimination process whereby certain players float to the top rather than a bubble bursting. I agree with Michael, it is becoming part of culture and a way of doing daily functions. It feeds our needs for connection, control, and conversing or desire to share every little details about our lives or thoughts. It's a matter of increased integration and emersion that building into a burst.

  5. Katy Planamenta from Superfly Digital , May 26, 2010 at 10:28 p.m.

    Erik -

    I agree with you that there is much resemblance in the social media "application developments" and specific "networking sites" as there were in the establishment of online portals in the Dot.com era. To extend on Michael's comments, Social Media represents a fundamental shift in how our society communicates with each other. At it's core, Social Media, is a communication tool rather than another media channel or batch of websites. Many networks will come and go as we, social community members, establish their credibility and usefulness, but we would be foolish to throw a blanket on top of "Social Media" as a generic term and presume it's demise when it has fundamentally shifted how our world communicates and connects with each other.

    Just my 3 cents.

  6. Howie Goldfarb from Blue Star Strategic Marketing , June 16, 2010 at 4:14 p.m.

    Only missing the rapid IPOs, inflated values, and then all the initial investors and equity owners cashing out leaving the average investor holding the bag.

    Great write up Erik