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When will the Social Media Bubble burst?

Hundreds of Social Media companies have created huge opportunities for marketers to reach their customers more effectively. The Social Media landscape is growing so rapidly that mergers and acquisitions have started.

Facebook recently bought Instagram for 1 billion dollars. Here are some interesting facts about Instagram:

Number of employees: 7

Number of users: 30 million

Revenue: 0$

Profit: (You’re kidding, right?)

Facebook’s 1 billion dollar acquisition of a company that generates zero revenue sounds really bizarre. Facebook’s deal brings back memories of the Dot Com bubble of the late 90s. Companies with no revenue, weak or non-existent revenue models, and weak strategies tried to cash in on the Dot Com boom, which led to their demise. Social Media companies seem to be heading in the same direction. Whether it is Social Media (or traditional media), Dot Com (or physical companies), past (or the present), the rules of business remain the same. The basic rule of business is: Revenue – Expenses = Profit. And companies must deliver value to the customer to generate revenue.

Let’s see what Social Media companies are doing that may lead to their demise:

Skyrocketing Valuations – Facebook is valued at 104 billion dollars. Such skyrocketing valuations for Social Media companies raise a red flag. For a company whose assets and patents are not as valuable, the valuations seem astronomical. Such valuations were quite common during the Dot Com boom. Dot Com companies’ valuations reached exponential heights – only to come crashing down in the year 2000.

Weak Business Model – Facebook’s business model is based entirely on advertising. Show advertisements to the users – charge money from the companies. This is strikingly similar to the Dot Com business model where companies relied mainly on advertising revenue. Facebook markets itself as the only company that can show ‘targeted advertisements’ since it knows more about the users. But tell me, how many times have you really clicked on a Facebook advertisement? Moreover, if Facebook users install applications like Adblock plus, Facebook’s advertisement is blocked.

No Subscription Revenue – Most Social Media companies don’t deliver enough value for them to charge subscription fees. There must be a compelling reason for users to spend time on the site and they must be willing to pay for it. Some companies like LinkedIn charge subscription for value added services (LinkedIn’s basic account is free). However, most Social Media companies would start losing users if they started charging subscription fees since users don’t see enough value in paying for it.

Number of users is the only strength – Facebook’s only strength is its users. The advertising revenue, valuation, and bargaining power are all based on the fact that Facebook has 850 million users. Another Social Media company entering the market may immediately take away users from Facebook. Losing users would immediately drop Facebook’s valuation. There is also a theory that Facebook purchased Instagram since it was threatened by its 30 million users. What value does Facebook have to show apart from its 850 million user base?

Lack the Core Competence – Unlike companies like Apple that have changed the landscape of the mobile industry by creating awesome products, Social Media companies are just web interfaces with multiple users logged on. They don’t sell products, services, or generate subscription fees. Therefore, they will be unable to sustain exponential valuations, growth in revenue, and constant profits. After all, how much money can you really make on Likes and XOXOXs!

It would be interesting to see if there really is a Social Media Bubble and if the bubble will burst soon. The fundamentals of business remain the same whatever the business is. Therefore, Social Media companies that realize the basics of business will survive. Others will fade away.

If you are thinking about investing in the Facebook IPO on May 17th, just be cautious. Web 2.0 may just be Dot Com 2.0. And Facebook.com may just be the next Boo.com!

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