Social Network Bubble?
After LinkedIn filed its initial public offering last week, early private stock transactions quickly placed its market value between $2.5 billion and $3 billion. Although some deemed it rich, that’s still a far cry from where Facebook ($50 billion) and Groupon ($15 billion) were valued in recent private financings.
With the Dow Jones Industrial Average briefly surpassing 12,000 last week and the promise of major IPOs from Demand, Living Social, Zynga, Twitter and others, some are speculating whether a similar dot.com boom and bust may yet play out again around social networking stocks. Some are also lobbing public-companies, Google and Apple, into the herd as the “next generation” of tech stock darlings. Apple recently became the second most valuable company in the world, behind ExxonMobil, with a market cap of $309 billion.
“The technology I.P.O. market is very healthy right now, one because we have large companies that truly have the scale and the proven business models to be attractive to investors, and two, the shoppers have their credit cards out,” Lise Buyer, founder of the I.P.O. advisory firm Class V Group, told the New York Times.
But some see dangers in a potential social-networking bubble. The similarities include the fact that most companies are less than ten years old, many are still figuring out how to capitalize on their extensive user bases, and most of the financials aren’t visible since they’re private. Worriers also cite natural tendencies around speculative investments throughout history.
But writing for Business Insider, John Battelle, a tech guru and co-founder of Wired magazine, noted several differences from the dot.com days. The social media companies seeing the high valuations have revenues “in the hundreds of millions or more, and operating profits in the tens of millions, if not more,” he wrote. Most have years of operating histories and management with years of internet experience.
Consumers are also more comfortable spending money online and the web “is firmly a mobile medium, enabling business models that were mere dreams a decade ago.”
“This is not to say that marginal companies won’t attempt to go public in coming years, or that there won’t be flameouts and losers over time,” concluded Mr. Battelle. “There always are. But compared to the late 1990s, the companies lining up to offer themselves to the public look healthy, well positioned, and very, very real.”
Some say investors are smarter about web companies these days. The fact that MySpace, Friendster, Mercata and others have lost ground or flamed out altogether is a sign to some that the survivors have legs.
Still, Chris Farrell, writing for Bloomberg Businessweek, is hoping to see more oversight this time.
Wrote Mr. Farrell, “Plenty of mobile internet companies, social networking firms, and other information technology companies will get funded over the next few years. Many of them will fail. That’s capitalism. Regulators need to concentrate on preventing major financial institutions from feeding the frenzy and putting the taxpayer at risk.”
- Social Media: Next Dotcom Bubble? – Newsweek
- What the Past Tells Us About the Future of Facebook, Groupon and Twitter – Advertising Age
- No, In Fact, We Haven’t Seen This Movie Before – Business Insider
- Why Today’s Tech Market Is Not Like 1999 – The New York Observer
- LinkedIn Files Papers to Go Public – The New York Times
- LinkedIn IPO May Be First in Wave for Social Media – Bloomberg BusinessWeek
- In Case of Tech Bubble, Do Not Break Glass – Bloomberg BusinessWeek
- Is LinkedIn Worth $3 Billion? – The Wall Street Journal
Discussion Questions
Discussion Questions: What similarities and differences does the current frenzy around potential social media IPOs have to the dot.com era? Do you see potential risks for retailers and brands now investing in integrating their ecommerce efforts with social media?
Although this situation seems familiar, we’ve learned from the past and will avoid a wide-spread bubble-burst. That’s not to say there won’t be losers; not all these companies will thrive. But with social networking it takes more than one privacy snafu, ill-placed ad, or day-long crash to lose the confidence of users. Just look at Facebook, the Teflon-Don of social networking mistakes. That’s because the business is “sticky” and people don’t want to start over entering all their friends, pictures, bookmarks, etc.
The winners will have the most active users and a business plan to keep them engaged. If they can achieve that feat, then there will be lots of ways to monetize.
There are more similarities than differences. A tremendous amount of capital is chasing this space. There are many suspect business models that depend on assumptions that cannot (on average) be true. I think the result will be similar in the social media space itself — most of the many, many players will die and a small handful will rise to greatness.
The biggest difference is that few major corporations are trying to build their own offerings in this space. Remember the B2B marketplace fiascoes of the early 2000s? I don’t see anything like that today. That should limit the fallout to the broader economy when many of the emerging players do fail.
It’s no secret that financial markets are irrational–anyone want to buy a CDO? Market valuations have only a nominal connection to the underlying value of the company. Look at Apple. It is a terrific company with incredibly loyal customers (including me). However, it has the second highest market cap in the world with only 5% market share. That is not rational.
Right now, the social media companies are hot because there’s little else that’s growing. What’s that stat–if Facebook were a country, it would be the third largest in the world. That kind of growth draws attention (and $$$).
Amazon’s history is instructive. It came public with no profits. At the time analysts were trading on multiples of revenue instead of profits. At the peak of the tech bubble, it’s unadjusted stock price was over $650/share. The bubble burst, the stock price plummeted, and the company continued to grow nicely, thank you very much. Look for exactly the same sequence in the SM companies.
I concur that there’s slim likelihood of a 2001-type stock market “bubble” forming around high-flying new personal media companies like Facebook and Groupon. However I still believe their values reflect excess speculation about future success.
My concern is that these companies are claiming value based in large measure upon the size of the “audiences” they are aggregating. If a broadcast mentality prevails, some late investors might be tempted to overvalue these firms due based on out-of-date assumptions.
I suggest that large numbers of individual participants in personal media do not automatically constitute a collective audience that may be compared with the old-fashioned media networks. Old-school advertisers may find the numbers exciting, but the legacy, analog media planning methods do not apply very reliably in a mobile, digital world.
The wiliest early V.C. investors, who have helped brilliantly to pump up the value of Facebook and some of its kin, are no doubt already timing their exits to cash in before reality kicks in. It’s market gamesmanship at its best.
As the song goes, “know when to hold ’em; know when to fold ’em”….
If someone can tell me what the competitive advantage is, let alone what the SUSTAINABLE competitive advantage of Groupon is, then I will agree that there is no bubble. But otherwise this looks like the silliness of the past.
The original dot.com era companies had fundamental business issues that social networks don’t.
Remember pets.com? It had brand recognition but was weak on business fundamentals. First, e-commerce wasn’t a well-established habit among consumers at that time. And second, shipping pet foods is too heavy and expensive to be worthwhile for shoppers to buy this way (vs. say, HSN jewelry).
But ultimately, having a constant and enormous base of potential buyers sets this era’s social networks above previous net-based bubbles. In some sense social networks are now in the position that the original big 3 broadcast stations were in the 1960s. These networks are capturing a huge portion of the population. That’s different.
I trust both the financial markets and individual investors have learned from the dot com bubble days. However, my big take on current events is the optimism and willingness to invest. Overall, it’s good news.
Hopefully, the market will be smarter so that there is no catastrophic bust. Yet, social networks and consumer behavior is still evolving. Big shakeups are inevitable. With the busts will come more innovation and advancement and new dynamics. “Rock and roll is here to stay”. So are social networks and the investment opportunity they represent.
Unlike the .com bust of 1999/2000, these sites have sales and are profitable. In addition, they have their own members, advertising the sites by continually “inviting” others to join. Some will stick and some will not. LinkedIn fits a great niche for professional networking which is different than Facebook for social networking. I think both will stick. In addition, these are sites that our new graduates grew up with. Lastly, they are great source of information and allow for specific target marketing.
Social media is here to stay. The valuations are high, and some will not stay in business, but the ones that do, will be goldmines.