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.