Six Pixels of Separation - The Blog
August 16, 2012 2:00 PM

Pop Goes The Social Media Bubble

Is there a social media bubble? Did it pop just like the dot-com bubble back in 2000?

In a word: no. CNN would have you believe otherwise. Just take a look at the news item published today, Pop went the social media bubble. Now what? The CNN Money theory goes like this: "How quickly things have changed. It was just a year ago that Silicon Valley was gripped by an are-we-or-are-we-not in a bubble debate. Many of the Valley's brightest lights took the latter position, rejecting out of hand the notion that a bubble was at hand. These were all real companies, they insisted, with soaring revenue and healthy profits. There were no Pets.coms or Webvans this time around. Perhaps. But now, with Groupon (GRPN), Facebook (FB) and Zynga (ZNGA) alone accounting for tens of billions in losses to investors, it's a different story.... Of course, even bloodied, none of these companies is going out of business. Social media is hardly dead. What's dead is the world's wild infatuation with all things social. That change alone could have profound implications."

Is it a bubble? Did it pop?

When people ask me if this is a bubble, I am quick to answer "no," based solely on this quote by Simon Khalaf of Flurry from March 2012: "In 1999, there were 38 million broadband Internet users worldwide. Today, there are 1.2 billion people getting broadband Internet access on their phones." What this quote demonstrates is that back in 2000 there was no market big enough to support the valuations that were taking place. The difference between then and now is that we have a valuable and viable marketplace for those who get it right (just ask LinkedIn if the social media bubble has popped... or Salesforce, for that matter). Social media is a phrase that seems like a catch-all. Last time I checked, Groupon was a daily-deal retail business, Facebook was an online social network and Zynga was a gaming company. Saying that they are all "social media" and, because their stocks are not performing, that it is endemic of a social media collapse is silly, if not laughable.

Everything is social.

Look at some of the most traditional businesses that have made social media, social business and social interactions core to their marketing and development. Are they all tanking? Almost every single company (B2B and B2C) is looking for more and more ways to become more social (and we're not just talking about chasing likes on Facebook or followers on Twitter). They're doing their best to connect - in a more personal and direct way - with their consumers and their peers. If we lump this all into one big bubble, we're not only completely missing the point, but we're dismissing the greedy investors who are doing everything they can to gamble and prospect on businesses that they simply don't understand.

What is happening?

When investors speculate, they're not always right. Don't believe me? Take a look at how your investment portfolio has been doing. Take a look at the housing crisis. These people are supposed to be the best of the best and, at the end of the year, we're all happy if we got a two percent return on our money. Think about that. It's two percent more than doing nothing and your money is in the hands of those who are supposed to be the experts. Facebook has been grappling with a clear definition of monetization forever. Groupon may have lost favor with their consumers and there could be some fatigue due to the daily deluge of anybody and everybody jumping on the "deal of the day" craze (Groupon didn't have much in the way of unique intellectual property or capital). As for Zynga, you're only as good as your last game.

Don't blame social media. Blame your business model.

When you're connected to one of your close friends on Facebook, how open are you to targeted advertising? How inclined will you be to read a sponsored story from a brand? What will all of this look like as more and more people connect on Facebook through their smartphones? Will it be the same kind of advertising? Facebook needs to find what Google uncovered in their AdWords model. I think they will, but being a public company leaves little room for experimentation. New business models take time. Just because a company starts, attracts tens of millions of users who are fervent about it and everybody is excited, it doesn't mean that these same users will be open to advertising, paying for this service or anything else. It simply means that they like a service.

What comes next?

Companies need time. Lots of time. They need to understand what this sudden rush of millions of connected people want to do. From that, they need to better understand how the money flows. For my dollar, I'd like to see companies like Facebook, Zynga and Groupon take the time they need to get beyond the hype of how many people are connected and talking about them, and into the stuff that matters: how do you create something that people will, happily, pay for? Within that framework, they should be able to better uncover what happens when there is fatigue, stagnation and even a need to rethink the product. The problem is that when you're a public company, you're doing this all in public - for all to see.

Sometimes it ain't that pretty, but you can't blame it on social media.

By Mitch Joel


Comments Comments Feed
  • Posted by Laura Lee Catleugh
    Mitch Joel

    There may not be a bubble burst for the big players, but what about the hundreds of app builders and social commerce companies that have built their business model on milking the social media cow? A fundamental shift will take place as the Facebook app-creators try to figure out how to shift that expertise someplace else.

    Reply
  • Hi Mitch great post. I have a finance degree and there was no bubble. If we had a bubble a ton of companies would go public, their stocks would all rise then earnings wouldn't be there and BOOM.

    I do think though like with SMS that many functions of social will eventually become imbedded in hand sets and the 'networks' will fade away. They will be more infrastructure. I mean most of the technology is the same just packaged in different ways right now.

    What I think is going to happen is social technology start ups creation will slow down. During the dot.com businesses like Path, Quora, Foursquare already would be public with the starters and investors making small fortunes before the company fades. That hasn't happened. In fact the lack of IPO activity is very telling.

    Cheers

    Reply
    • ... and, hopefully, the smarter startups will stay private, figure out the monetization model, validate and move forward. I'm hopeful that platforms like Kickstarter demonstrate idea and economics :)

      Reply
    • Posted by Sherisa
      Mitch Joel

      Completely agree - when the web becomes a truly social experience across platforms it won't be the thing that makes anyone special. The internet is still very young.

      Reply
  • Posted by Amod Munga
    Mitch Joel

    Hi Mitch

    Great article as always.You hit the nail on the head with the business model point. The thing I believe that's going to kill these platforms are these outrageous valuations. I'm no economist but personally, I can't see how Facebook for example can be valued the way it is.

    Where is the ROI coming from – and more importantly, how did they value the company in first place?
    As an example: I’ve always understood the valuation of Facebook as based on future profits given the current trend in growth.
    This excerpt from an article in Forbes magazine (5/04/2012) supports that:

    “To justify the big numbers being tossed around – $100bn and up – several things must happen in the next five to seven years. The business needs to become much less capital intensive (inclusive of acquisitions) over time, as Google and Microsoft have done. That is the easy part. But margins must also stay near today’s level of about 50 per cent – which would be uncharted territory. And sales would have to grow at least sixfold in this period.”

    The problem is that the company has been defined as a potential success with no actual date of delivery. Their failure to forecast yearly growth about 3 weeks ago didn’t do much in terms of investor confidence either. Post August 16th 2012, Facebook employees will be allowed to offload their shares too. 40% devaluation at this point looks like the tip of the iceberg…and if the adage of something only being worth what people will pay for it, Facebook might signal the end of positive investor sentiment towards other similar platforms. Other forms of revenue? You can only sell demographic info to so many people for so long. And let’s not even get into the discussion of charging users a fee for something they’ve enjoyed for free for years. I think that may be why Zuckerberg chose to list Facebook's IPO, in order to make up for the lost revenue from all those subscribers.

    That’s why I think initiatives like Kickstarter are starting to gain momentum.
    People don’t want to sink their money into something that may or may not pay off…ever.
    Kickstarter is quick and dirty “VC’ing”.
    Get in, drop your bucks, get your reward (T-shirt, credit, personalised doohickey) and get out.
    No mess. No fuss.
    If a share in profits comes with the investment then fine but it’s not the only thing and it’s not why people are investing.

    This is just my opinion but I can’t see at this point how these social media platforms are going to survive let alone prosper if they don’t move their offerings out of the virtual world or at least change their business model to something other than PPC advertising or demographic info scraping. Again, this is purely a layman's point of view, so I'm open to being corrected out here.

    Reply
    • And we have to remember that Facebook is, at this moment in time, a media company. They provide advertising and (some) marketing solutions that are wrapped over content. So, the valuations have to be more in line with these types of businesses. In a world where advertising is quickly moving away from a scarcity model, it becomes ever-more challenging. Like I said, I'm hopeful (because I do love Facebook) but that valuation seemed a little intense to me and now that we're post August 16th, we see the bailing happening.

      Reply
  • Posted by Judy Gombita
    Mitch Joel

    I think the biggest disconnect is the reason why INDIVIDUALS use the platforms--to BE SOCIAL and to learn things, versus what companies want to do--advertise/market and SELL stuff.

    Perhaps companies should look at things such as their (traditional) corporate social responsibility or sustainability programs and try to replicate that into the social business aspects.

    Reply
    • You hit the nail on the head. This speaks to the efficacy of the advertising. The intent is different than another channel (where you may be reading an article or doing a search). The majority of Facebook usage is about sharing with a closer circle of friends (about 120 connections per user).

      Reply
    • Posted by Cathy Dunham
      Mitch Joel

      Personally, I believe that each business needs to consider how they can best utilize social media. What works for one company, might not work for another. Once you figure out how you and your brand fit into the social mix, the rest should just come naturally.

      Totallly agree with Judy Gombita. Most companies and business owners need to follow social media and listen with their "business" hat on and then participate or respond with their "social" hat on.

      I always remember what Jason Falls of Social Media Examiner once said to illuminate social media etiquette: "You don't walk into a room with your megaphone blasting your marketing message and saying 'buy my stuff'." This is not just good etiquette, it's good people skills. It's good networking and smarter marketing.

      Your business/social strategy needs to make sense to those you are connecting with. Think about how these people will perceive you - from a social perspective: Why are you talking to me? Do you really care about what I'm talking about? Have you listened to what I've been saying? Do you have anything interesting to contribute? Do you understand how I want to participate in this particular SM channel?

      Social media is primarily an awesome online tool for networking with many different people. It's not meant to replace sales tactics. Used appropriately, it can supplement your branding, how you develop leads, or rethink your marketing message.

      Reply
  • Posted by Lance Binley
    Mitch Joel

    When businesses are created and evolve without the customers value proposition as the driving force of the company, overtime they will struggle or fail. I think Amazon is the best example of a successful company and social platform. They put the customer first in everything that they do. Their vision is the world's largest selection. They have a very serious business model that is generating great compounded growth in cash flow and it is a great and large social community (e.g. ratings, reviews, pictures, sellers).

    When I first joined Facebook it was clean and a great alternative to My Space. Now after a couple of years of use they have taught me not to trust them with all of the unannounced changes that I have had to manage regarding privacy - not customer centric. Additionally when I go there to read about my community, I have to see a bunch of ads, apps, etc... . I would gladly pay a fee to avoid all of this non-relevant ads, tricks, etc... - similar to Pandora.

    Great customer experience needs to be the guiding forces for companies, not IPO.

    Reply
    • Customer intent is huge here. Figuring out the monetization of people and how they connect socially is not easy. Amazon got it right because everything was based on selling something to someone. I do love the Amazon business model.

      Reply
  • Posted by Barrett Rossie
    Mitch Joel

    It's cheesy for CNN Money to throw the term "bubble" around so casually.

    Reply
  • Posted by Gregory Smith
    Gregory Smith

    Either way, I've really enjoyed this read, Mitch. I personally wouldn't use the term Bubble, but do see social media as a whole "a process".

    Reply
  • Companies will come and go, but social media won't. It's ingrained into several generations now. It would be like saying search engines are a fad, or smartphones.

    It's how you use social media that matters. Like you say, it's probably more down to the business model. Not everyone will get it right, but some will. Social Media as a whole, though, that will become more and more 'norm'

    Matthew (Turndog Millionaire)

    Reply
  • Posted by Bill Laidlaw
    Mitch Joel

    Markets are imperfect now just as they were in 1999. A stock price only represents mass opinion, virtually never a companies true value. Facebook is a real company that makes money and it's stock price will find a level that the current earnings and future potential will support, I am not so sure the same will happen to Groupon.

    Reply
  • Instead of commercial "olive oil" dressings - usually made with a mixture of oils -- make your own easy dressing
    with half olive oil, half balsamic vinegar. Only you know when you ask
    the right questions of your physician, and then get a second opinion from
    someone trained in complementary, alternative, integrative, and preventive medicine.
    "Careful evaluation of recent evidence, however, suggests that allowing a health claim for vegetable oils rich in omega-6 linoleic acid but relatively poor in omega-3.

    Reply
  • Instead of commercial "olive oil" dressings - usually made with a mixture of oils -- make your own easy dressing
    with half olive oil, half balsamic vinegar. Only you know when you ask
    the right questions of your physician, and then get a second opinion from
    someone trained in complementary, alternative, integrative, and preventive medicine.
    "Careful evaluation of recent evidence, however, suggests that allowing a health claim for vegetable oils rich in omega-6 linoleic acid but relatively poor in omega-3.

    Reply
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