Are we or aren’t we? When it comes to social media bubbles and whether or not we’re in one, there is no shortage of people willing to argue on each side of the debate.
It doesn’t matter if Facebook finishes Friday, its first day as a publicly-traded company, with a valuation of $105 billion or $75 billion: The debate is sure to get more intense in the coming weeks, months and possibly years. Earlier this month in the buildup to Facebook’s IPO, we took a look at the social media bubble (or lack thereof) in a five-part series that was based on dozens of interviews with experts on both sides of the divide.
We opened with a comparison between the dot-com bubble to the current period, when social media companies that have no revenue model are being sold for a billion dollars or more. Later on, we compared Facebook just ahead of its IPO to America Online in the period leading up to and following its IPO.
While there is no shortage of bright people willing to argue that we are not in a social media bubble, we tended to land on the side of the argument that we were seeing the same kind of “irrational exuberance” that led to a run-up of dot-com stocks in the late 1990s and the early part of the last decade. Working under the assumption that we were indeed in a social media bubble, we speculated on which companies were likely to survive when the bubble bursts.
Finally, we talked to startup experts and found out whether a bubble was irrelevant to those who were thinking of starting a social media business. Suki Shah, cofounder and CEO at GetHired.com, told us, there may never be a better time to start a social network company.
“Small teams of smart, dedicated, entrepreneurial people are creating significant momentum and innovation in niche areas that really appeal to larger companies,” he said. “Regardless of what will happen in the future, serious entrepreneurs need to use this time to set sail.”
Image courtesy of Shutterstock.
A New York Times article in Sunday’s editions highlighted smaller, niche social networks that gave people more control over their privacy when compared to the giants such as Facebook, Google+ and Twitter. The article reviewed Path (for sharing with a small group of people), FamilyLeaf (for sharing with family members only) and Pair (for sharing with one other person).
These networks, and hundreds of others like them, fill an obvious void that the big three social networks are missing. The question is whether that void is big enough to justify revenues that will allow all of these lesser social networks to survive.
Some will undoubtedly fail. Others will follow Instagram and win the merger lottery, getting scooped up by a bigger company. What seems less likely to either of those options, however, is that the smaller niche social networks will continue as independent firms.
“In the early days of the auto industry, there were thousands of car companies. Just a few survived. But those few became business giants,” said Amy Bruckman, professor in the School of Interactive Computing at Georgia Institute of Technology. “The [social media] boom is no different. There will be a few big winners, and lots of losers.”
But Bruckman warns that most small startups will not be as lucky as Instagram: Most will ultimately fail.
“I don’t anticipate as much consolidation as took place in the auto industry – there’s room for more winners than that. But there are going to be a lot of losers,” Bruckman said. “It seems obvious that companies like Google and Amazon know how to turn a profit. It’s also obvious that companies already on their way out like Ning don’t.”
Bruckman doesn’t like the term “social media bubble” for what is happening now, nor does she like dot-com bubble for what happened in the late 1990s.
“I’d call it natural selection,” she said.
The Network Effect
Angelo Sotira, CEO of the online artists’ community deviantART.com says the $1 billion Facebook paid for Instagram is a result of Instagram’s ability to create a so-called “network effect.”
“All of these types of startups sit on a petri dish attempting to achieve this effect,” Sotira said. “Instagram will hit 100 million users by the end of the year. Any company that can do that is worth $1 billion to Facebook, Google or Microsoft from a threat analysis alone.”
Traditional investors, however, may not understand that kind of thinking which, in turn, may give rise to their willingness to throw the “bubble” label on the entire social media sector.
“This is hard to understand for most investors, so there’s going to be some dumb money floating around the photo-sharing space,” Sotira said. “The real value is in any company that can grow rapidly out of that petri dish to achieve network effect. If you can do that, you get a billion bucks.
“Go ahead and try,” he added. “Bottom line: Instagram is a gem worth every penny on that battlefield.”
Facebook Is Big Enough to Make Some Mistakes
Even if Facebook did overpay for Instagram, it’s probably not a big enough deal to do lasting damage to the company. As we interviewed experts about the social media bubble, we kept hearing the word “scalability.”
“If Facebook has one advantage that could possibly make its own ‘go-fever’ a little less destructive, it is unique in its ability to bring unparalleled scalability to the table of its acquisitions,” said Mike Seiman, CEO of CPX Interactive, a digital advertising company. “No one doubts that it likely overpaid for Instagram in what seems to be an impulsive move, but if anyone can use scale to elevate a potential contender into the next Facebook… perhaps it is Facebook.”
Coming Tomorrow: Fear and Speculation Drove Facebook’s Instagram Buy
Image courtesy of Shutterstock.
When you spend a week interviewing people about a social media bubble and whether it exists, one of the things you notice is that people who insist there is no bubble make little mention of revenue and business models. They talk about the depth of which social media has permeated the culture and niche markets, but rarely mention the fact that the most frequently used social networks ultimately rely on the fickle relationship between users and advertisers.
Indeed, the deal that got the whole social media bubble discussion rolling was Facebook’s $1 billion purchase of Instagram, a company that has no revenue. If you think this is starting to sound a lot like the dot-com boom in 1999, you’re not alone. And several experts say you should be worried.
This week, ReadWriteWeb will look at the current social media landscape and try to answer the question of whether or not we’re in a social media bubble that, like the dot-com bubble did in the 1990s, could wreak havoc on the tech sector and the broader financial markets.
We’ll check in with people raising red flags following last month’s $1 billion purchase of Instagram by Facebook. We’ll look at Facebook’s motivation for that deal, which firms are likely to emerge from the current growth period intact, and we’ll ask if now is the best time to launch a new social network. Finally, we’ll talk with people who are optimistic that social media is poised for more growth and believe the bubble fears are, well, inflated.
Bubble concerns have been whispered for months, but when Facebook acquired Instagram, people started expressing those fears out in the open.
“If you cannot deliver sufficient profits over time to justify a given valuation, it doesn’t matter how many users you have,” said Richard L. Harris, CEO of Intent Media. “The end result must be market disillusionment, followed by valuations falling to the levels justified by the underlying profits of the business.”
Is Facebook the Next AOL?
Harris draws some parallels to the current bubble and the dot-com bubble of the late 1990s, while conceding that the Internet is much bigger than it was when most of us still relied on dial-up connections. He also expects the current obsession with social media companies to produce some long-term winners – just as the last bubble gave us Amazon and Google.
“The current number of Facebook users probably exceed ALL Internet users back when AOL bought Time Warner. So yes, it’s different in that regard,” Harris said. “But it’s also worth remembering that a fixation on growing user numbers and a lack of focus on profits is actually eerily similar to the last bubble.”
Bob Knorpp, host of The BeanCast and The 2 Minute Rundown with Peter Shankman, said Facebook’s acquisition of Instagram was shrewd sleight of hand aimed squarely at bolsterings its initial public offering, reportedly set for next month.
“Facebook needs to show value to potential shareholders, but is lacking a mobile strategy and has only the core brand as an asset,” Knorpp said. “So right before the IPO, they buy a hot mobile-only company, they value it at a billion dollars, then turn around and presumably say to shareholders that they now own a billion dollar asset. They have, in essence, created a billion dollars of value out of thin air.”
The problem? It’s not really a billion dollars to anyone who bothers to look up Facebook’s sleeve. And the move is classic bubble blowing.
“Instagram, while being a very innovative mobile-based company, has no discernible monetization strategy, so Facebook is not generating real value for potential investors, but rather more speculation of future value,” Knorpp said. “Bubbles don’t happen just because of exuberance, but also through the calculated moves of companies who know how to game the system.”
Potential Reach vs. Real Reach
Perhaps the biggest similarity between recent valuations and the valuations of dot-com companies more than a decade ago is that they are based on “potential reach.” That, more than anything, suggests a bubble to Mike Seiman, CEO of CPX Interactive, a digital advertising company
Valuations are being based on the idea of ‘potential reach’ – which is virtually unlimited,” he said. “But when the reality of a crowded space makes this kind of scalability impossible, models are quickly discarded for the next big thing.”
The trick for investors in any industry, but perhaps particularly in the social media space, is determining which business models are viable.
“If there is a difference between the 1999 bubble and the 2012 version, it may be that in 1999 investors probably held onto models that had no real business model for too long, while today models that may have a real model are being churned through too quickly if it is perceived that they are not the magic bullet promised by the overzealous business plans,” Seiman said.
Coming Tomorrow: Who Will Survive The Social Media Bubble?
Image courtesy of Shutterstock.
From the Macro to the Micro: The Transformation of the Global Village into Hyper-Personalized Tribes?
Global Village, a phrase we use so frequently these days, was coined by the media expert, Marshall McLuhan. It seemed like the perfect phrase to describe the world created by a growing body of interconnected online users of the time. From “global village” emerged the phrase “global citizens,” used to describe people who think, behave and act in similar ways. Experts like McLuhan and Alvin Toffler ushered in the era with descriptors that seemed to fit perfectly – “Future Shock” and “Future Arriving Yesterday,” among others.
Logically, interconnectedness should only grow with time, creating a form of intense, almost bland, homogeneity. However, recent online trends, including search engines like Google and social networks like Facebook seem to have broken the global village down into sects or tribes of users who rally around common interests, heritage or affinity. Even in a seemingly homogenous world, personalization and heterogeneity thrive. Most services, from search to to newsfeeds, seem to be personalized to suit the individual user’s need. Almost all categories of online usage seem to be moving towards hyper-personalization, all based on the individual’s social trending, search, and unique, personal, browsing data.
Although personalization has had positive effects in the online world, growing hyper-personalization has led to questions of privacy invasion and excessive control and monitoring by online giants. Hyper-personalization has also led to the rise of a term (and phenomenon that is getting increasingly defined) called “filter Bubble,” which was first coined by writer Eli Parser. Growing hyper-personalization is hiding more information than revealing it to users, and is trapping us in a sort of a bubble, that we can’t look beyond.
Keeping users in the filter bubble benefits the companies that do so. Indeed, a study in online buying behavior, by a group of Wharton researchers, proved that customization increases the sales of products online, sometimes as much as 50%. The study showed that popular online selling platforms like iTunes and Netflix benefited from personalizing recommendations.
Research in the area has far reaching consequences, not just for online companies and users, but also for the future of online interactions. Future innovation in the field will be driven by increasing customization and the attempt to get to know every individual user as intimately as possible.
Interesting to note is that the growth of the filter bubble has not yet replaced good-old water cooler debate and word of mouth. As individuals we tend to seek out new experiences and go far as we can to find them. However, there is a small measure of anxiety about growing personalization leading to the end of commonality. So far, individual users are safe from the filter bubble. Users want to relate to each other on the basis of common interests and background and will seek out peers, both online and offline.
Although we are far from becoming isolated individual users, it is perhaps valid to raise concerns about the fact that we may be at the risk of becoming such, however small the risk may be. Authors like Paser have spoken out against the attempts made by online giants like Facebook and Google to shoehorn us into “customized living.” Access to information, filtered by what Google or Facebook thinks we must or must not see, is unacceptable according to thinkers like Paser, who view it as violation of the user’s free will.
Thankfully, hyper-personalization hasn’t taken over our lives yet, and thinkers like Paiser look toward the future with optimism. Online portals and businesses, he hopes, will evolve a body of self-regulatory rules that will be based on creating and maintaining public trust. Writers like Daniel Terdiman, believe that these bodies will realize that they need to be the new custodians of public trust. What is certain so far, is that global village vs. hyper-personalization is at the heart of the debate of future online trends.
Perhaps, the challenge for the future of the online world is finding the balance with the laissez fair spirit of the Web, which let it reach out to billions of users and personalization. Finding the road to profits and growth, while upholding the principles of democratic equality is important – for all of us.
Photo by Georgios Michalogiorgakis
Source: A Tale of Two Countries