Those who cannot remember the past are condemned to repeat it. With the recent media frenzy over Facebook raising $500M in private capital, and companies such as LinkedIn, Groupon, and Zynga set to enter the public markets, it’s not hard to draw parallels to the dot com bubble that took place a little more than a decade ago.
Investors who get the chance to flock to this latest fad will hope to cash in on the social media boom. But is social media just a giant bust waiting to happen?
Much like in the late 1990’s, once the big players start the trend of going public, everyone will want a piece of the social media action.
We may start to see ridiculously high valuations on companies you’ve never heard of because they will supposedly become the next Facebook or Twitter. Even the valuation given to Facebook at $50 billion seems crazy when they had approximately $1 billion in revenue in 2010.
Social Media: The Problem is that it’s Free
Facebook, Twitter, and LinkedIn are all great websites in their own way, each building and sustaining huge online communities. There is little doubt that social media has changed the way we communicate and do business in the 21st century.
However, the problem with social media as a business model is that the membership and user generated content is absolutely free. The only way to make money is to sell advertising and try to seamlessly integrate it into these online communities without turning off its users.
You can argue that Google is the ultimate free internet tool, and they managed to generate a market value of over $160 billion. But Google acts as a portal to the rest of the web, users go there first to get answers on where to go next. You can build a business off of that kind of demand.
Facebook is meant to keep users on its own site, engaging with friends and family or just mindlessly wasting time. People spend more time on Facebook than on any other website. Facebook is well aware of this and is still trying to work with advertisers to find the best way to leverage this into a sustainable revenue model without ruining the user experience.
So How Will They Make Money?
To quote my favorite Dragon’s Den investor Kevin O’Leary, “So how do I make MONEY?”.
How many businesses do you know that have a Facebook fan page? Or a Twitter account that hasn’t been updated in months? Advertisers continue to struggle with social media because the communities and individual users were not built to be sold to.
Perhaps the more sustainable revenue model would have been to charge businesses to set up Facebook fan pages or Twitter business accounts. Or perhaps they could also get a percentage of revenue from any links to or sales made from that account.
I believe that Groupon has the most potential as a public company, with a proven revenue model that has estimated sales at $800 million in only 2 short years. The users obviously expect to be sold to since they are looking for a deal when shopping online.
So Groupon has the benefit of building a loyal group of subscribers which will attract more merchants who want to sell their products through Groupon. And by pocketing a percentage of each deal, Groupon can be the middle man without having to make a difficult choice on how to connect advertisers to subscribers.
Social Media Bubble?
Either way you look at it, these social media companies are going to attract a lot of money and a lot of attention over the next year or two. But for those investors who were burned during the dot com bubble, this situation must look eerily familiar.
Time will tell if the social media phenomenon will become the next big boom or the next big bust. All I know is, some people will get rich off of these companies in the short term, but not me, I won’t be playing.