Time for social media to get real

There are striking similarities between the dot-com bubble of yesteryear and today's social media boom. Facebook's float may signal a boom peak, but the hard road ahead will be worth it.

After its successful float on Friday, social media giant Facebook’s stock is now 18 per cent down on the IPO price and there are claims some investors were aware of revised analyst expectations shortly before shares went on sale.
Facebook’s share price isn’t being helped by large advertisers, most notably General Motors, publicly expressing their dissatisfaction.

In SmartCompany’s survey on business tech use, one statistic that stood out was that less than 30 per cent of businesses were happy with their returns on social media.

Facebook can’t even win in the courts with a Californian magistrate throwing out the social media platform’s trademark case against a Norwegian pornography site.

It’s been clear for some time that the tech industry has been in an investment bubble and social media services have been at the centre of that hype.

The huge expectations of Facebook’s float value has been one of the drivers of Silicon Valley’s investment boom – a dangerous feedback loop in itself.

So now Facebook’s share price is in decline and angry investors are asking "why” and demanding answers from advisors and banks.

The real question though is does Facebook’s float mark the peak of the current tech boom in the same way AOL’s merger with Time Warner in January 2000 marked the peak of the original dot-com mania?

One of the great similarities with the original dot-com mania is the businesses’ failure to make money from their services – today’s Pintrest and Twitter have that much in common with the great dot-com boom debacles of Pets.com and Boo.

The biggest problem with social media services is that most of them are advertising dependent. As we see from General Motors’ dissatisfaction and that of the businesses in the SmartCompany survey, most businesses aren’t happy with the performance of social media platforms.

Getting the advertising, or other revenue streams, right is key to the survival of these services. Google cracked this after the original dot-com boom and are now one of the most successful companies ever.

The companies that figure out the revenue models for social media, or online news, will be the next Googles and Facebook could well be the business that cracks the code for social media.

For the social media industry overall, it appears the sector is now at what Gartner calls the "Peak of Inflated Expectations” on their hype cycle.

The next stage from the peak is the tumble into the "trough of disillusionment” and that appears to be where Facebook is heading.

As Gartner points out, that trough is also where good, stable businesses are built. While the sector or technology is scorned, those who survived the tumble out of fashion are able to consolidate and learn from the harsh lessons they’ve received.

Eventually the market rediscovers the technology or industry and eventually becomes accepted as a mature part of business or as Gartner put it, they enter the "plateau of productivity”.

This is exactly the process Amazon went through during the dark days of 2002 and 2003 after the tech wreck which today finds them as one of the internet’s giants.

Whether Facebook can emulate Amazon or Google is for history to judge, but social media’s falling out of favour is not a bad thing, the wreckage of the current tech mania will see much stronger and viable social media businesses that will deliver real value to industry and society.

In the wreck of the dot-com boom we saw HTML "coders” reduced from driving Porsches to driving buses, the same thing will probably happen to many of today’s social media experts. That in itself is not a bad thing.

Paul Wallbank is a business technology writer, broadcaster and blogger and author of eBusiness: Seven Steps to Online Success.

InvestSMART FORUM: Come and meet the team

We're loading up the van and going on tour from April to June, with events on the NSW central & north coast, the QLD mid-north coast and in Perth, Adelaide, Melbourne, Sydney and Canberra. Come and meet the team and take home simple strategies that you can use to build an investment portfolio to weather any storm. Book your spot here.

Want access to our latest research and new buy ideas?

Start a free 15 day trial and gain access to our research, recommendations and market-beating model portfolios.

Sign up for free

Related Articles