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Strategic insights
The Social Media Bubble Doesn't Change a Thing

Written by on March 31, 2011

Everyone seems to be talking about the social media bubble. But is it real? Are we in a social bubble? Is social just a fad? Well, yes and no. There are 4 indications that indicate that we are in a social media bubble:

Too crowded, and too narrow

The market is getting more and more crowded, but that doesn't seem to discourage people. It is like the Klondike gold rush in the Yukon. Yes there is gold in social media. But just creating a social startup isn't going to make you rich.

In order to come up with something new, the focus of social media startups are getting narrower every day. If you compare it to the real world, most social startups are like a fashion company that specializes in just making sleeves.

Sure, the sleeves are really impressive, but who wants to buy a sleeve?

A recent example is the new social network "Color." It is a social network that is just about photos, in just your location. It's a fancy idea, but it is way too narrow a focus.

No real business model

The business models used to be about advertising, or getting people to buy "PRO" accounts. Today it is about data. A lot of these startups apparently think that if they can just get tons of people using it, the user-data is going to make them rich.

I'm sorry, but that is just not going to happen.

Yes, there is value in data. But you have to be a data company to have even a remote chance of making any real money.

One good example is PostRank, with their data and analytic services. Another example is Gnip, which is the only company who have access to the full Twitter fire hose.

VC funding spree

After a slow period, the VC community is once again in a frenzy to invest in pretty much everything. Even in companies with an extremely narrow focus, thinking they can sell data about what their (non-existing) users are doing.

Insane valuations

Finally, the valuations of social media startups are just insane. And the rationale seems to be that the valuations makes it valuable. If you invest $100 million in a company that company has $100 in the bank. Meaning, that it is not also worth $100 million - regardless of whatever product they happen to be making.

The problem is that VCs are not going into this to build startups. They are going into it to sell startups. It doesn't matter what they make, if you can pour money into them, the valuations go up. All the startups need to do then is to create a lot of buzz, making it an interesting target for acquisition.

Who cares if the actual product can ever make any real money.

Just read this argument from Business Insider about Color $41 million dollar funding:

Color now has $41 million in the bank, which means it's already worth at least $41 million to any buyer -- TODAY. This is another huge point that everyone seems to miss. Color now has a huge, liquid asset on its books: $41 million in cash. If the company fired everyone today, never developed anything, and closed its office, it would be worth $41 million to an acquirer. Now, of course, Color is eventually going to spend a lot of that money developing a product, which may or may not turn out to be worth anything. But the cash it has left will still be cash. So say, in a year or two, Color has developed a moderately successful product and team that might be worth $20 million to someone. If Color still has $21 million of the cash left, its investors will break even (because a buyer will buy the team and product for $20 and the cash for $21 million. The only way Color's investors will lose money is if the product and team end up being worth LESS than the cash spent to develop them. This could easily happen--it often does--but that can be said about any startup investment

The bubble is here! So what?

When you combine the four indicators above, there is no doubt that the bubble is real.

It is startups, in a crowded market, who doesn't really have a product, with business models based on fantasies (most believing that things just happen if you make stuff), being founded by hungry VCs, and for reason based on pure economics.

That's a bubble! There is really no questions about it. We are in a social media bubble, and it is only a matter of time before someone is going to get hurt.

But it is not a dot.com bubble. Not even close!

Even if the social bubble did burst it is not going to change anything. It is not like people would suddenly say:

I'm am not going to share my pictures with my friends online. I will just print them all out, put them into this binder and hide it in this drawer.
I'm not going to ask my friends about a product. I will just buy it when I see it.
I'm not going to follow interesting people on Twitter, and see tons of great links every day. I will just go back to reading print magazines ones per a month.
I no longer want to follow a company. I will just manually go to their website, to see if there is something new. And I don't care what other people think about a product.
I'm don't want to collaborate in real-time anymore. I will go back to sending emails and use reply-to-all.

None of these things are going to happen. The social media bubble has nothing to do with how people and brands use social media. Even if the bubble where to burst tomorrow, it is not going to change your social media strategy, or the need for you to invest your time in it.

It is not even going to change the playing field.

The big difference between the dot.com bust and the social media bubble is where people are (and what they are doing).

With the dot.com bust, the companies that fell, was also the companies with most the traffic. So when the bubble burst, the internet was left with a huge empty crater. It was the cost of maintaining that traffic, combined with no real income, that burst the bubble.

With the social media bubble, the popular sites like Facebook, Twitter, LinkedIn, Stumbleupon etc. they are all profitable. They are not going to be affected by it. In fact, they might come out of it stronger.

Note: Facebook might be affected by it, but only if they start to over-invest because of their high valuation. But we see no signs that they are actually doing that.

The companies who are going to get hurt are the ones with no traffic. The startups that most people do not even know exists. And it will reduce the entrepreneurial spirit, but that is a good thing. It forces new startups to align their business model with their product.

It is going hurt the startup community and a lot of VCs. But, it is going to have no measurable impact on the world being social.

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Thomas Baekdal

Thomas Baekdal

Founder of Baekdal, author, writer, strategic consultant, and new media advocate.

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