Social Media Bubble Poised to Burst

Bubble, bubble, toil and trouble: with the "R" word looming over the greater U.S. economy, the "B" word is once again being tied to Silicon Valley. Over the past few years, private equity and Silicon Valley VC firms have poured millions into social media startups aiming for a slice of the growing online advertising pie, but some analysts fear that to avoid another bubble burst, that pie has to be big. Their concern: investors over-estimating its size.

Long-time industry analyst Jim Nail, now chief strategy officer of Web analytics firm Cymphony, agrees. Nail worries that advertisers have placed too much faith in the potential of targeted advertising. He warns that social networks like Facebook and MySpace cannot become the ABC, CBS and NBC of the 21st century: "The problem is marketers want to look for the next magic solution and social media is not it."

Social media sites won't be able to generate TV-size ad revenue because Web users simply have too much control over their media viewing to pay attention to ads. They are also constantly multitasking, which means advertisers have to work harder to get their attention. Nail adds that too many startups are chasing a finite amount of ad dollars, and while consolidation is inevitable, the short-term worry is that the growing social media bubble will burst, first.

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