Philosopher Santayana said: “Those who cannot remember the past are condemned to repeat it” but surely he was referring to history from the long past and not happenings from little more than ten years ago. These days things happen fast, so we are told, so it’s no surprise that social media growth exhibits amazing similarities with the run up to the great dot.com bubble burst around the year 2000.
By and large these similarities, which virtually assure there will be a major contraction/bust in the social media sector, are almost completely ignored by those trumpeting the value of social media, particularly to business. In the rush of enthusiasm, the hype and hope have won so far. The signs indicate the end is approaching. The good news is that the social media environment will improve after the crash. The bad news is that many businesses that rely on the boom period of social media to make a living will go bankrupt, as was the case in 2000, and a number of venture capitalists will be left holding sacks of melting snow.
One doesn’t need a crystal ball to predict a crash that will result in dozens of smaller social media platforms closing, going bankrupt, or being bought out for a small fraction of their previously estimated values. All we need to do is look, honesty and openly. Let’s look at some of the similarities between then and now.
No Profits, No Strong Business Models
Prior to the 2000 bust, many companies existed for a number of years on EXPECTATIONS of large profits, despite the fact that most were not generating significant revenue, let alone profits. They survived living off the money provided by venture capitalists hoping to fund the next “big thing”. Business models were all over the place in terms of sanity, but many of the models assumed that businesses would continue to make huge advertising spends to take advantage of a market that didn’t exist to any demonstrable degree — E-Commerce. While online purchasing/E-commerce DID arrive it was way too late for those caught in revenue crunches, and also way to little.
During this period of time companies spent investor money as IF they were creating large revenues, when in fact they earned nothing. Rather than spend money on developing infrastructure, better software and hardware, and improving value, companies spent way too much money on promotion of what they had, even if what they had was very limited. In those times, it was simply easier to spend money to create buzz than to spend money to add features.
In the present day climate, this is repeated almost exactly. By all accounts, Facebook is quite profitable, but it stands out as the exception and even it must take care that it’s business model will survive changes in user patterns. Hugely hyped Twitter which has received market value evaluations as high as 3 billion dollars, but by all accounts it lacks both significant revenue and a proven business model. YouTube, of course, owned by Google bleeds money in large quantites every day.
Both in the present and in 2000 we have a situation where investment is based on hope, or in actuality, speculation. Worse, though is that the fundamentals that underlie a good investment are lacking, just as they were in the runup to the dot.com bust.
Poor Fundamentals
In this situation fundamentals doesn’t refer to financials, but to the degree to which an enterprise actually adds value and is perceived as adding value to end users and to those that fund the enterprise through advertising or other expenditures. Part of an analysis of social media fundamentals has to do with user behavior and their attitudes.
For example:
Facebook, along with other social media web sites like MySpace, YouTube and Wikipedia, was recently added to ACSI’s customer satisfaction research. According to the recent report, Facebook scored 64 on the ACSI’s 100-point scale, in the bottom 5% of all companies–with perennial bottom dwellers like the airlines and cable companies.
This finding is not surprising if you understand what drives the boom-bust cycle in this domain. People tend to use online services that are popular because there are more people there and there is a buzz associated with using the services. It’s a happy circle since the more a service grows, along with the novelty “experience” , the more it continues to grow.
Then it changes. It can no longer grow through the “buzz” and the only way it can maintain a current level of usership is if users find that it provides significant value to them personally or for their businesses. The problem here is that many services, despite being entertaining for a while, and providing some value to some people, generally aren’t that functional. Certainly what they provide is not radically different than what already exists. Most functions provided can be done in other ways, and often in more effective ways.
In other words the substance is lacking, so when the novelty and buzz wear off, not only do people start to dislike the platform, but they actively dislike it. The fall from a height of high expectations to the low of disappointment is significant. The fall is hastened because as more people move enmasse to a platform, the platform adopts a lowest common denominator, as spam and junk drives out the better, more demanding users.
Did this happen as part of the earlier boom-bust cycle? Yes. For example, Usenet/newsgroups were very popular, particularly because they were not “owned” by anyone, and had an “anything goes” philosophy, until it hit a point where they it became large garbage dumps used mostly by software pirates and pornography distributors. Popularity and usage dropped almost to zero for legitimate use and few Internet users even know it still exists. That’s because it ended up having no value added functions for legitimate use that could not be duplicated elsewhere and in better ways.
Therein lies another fundamental indicative of collapse. The movement towards lowest common denominator as get rich quick and spam artists move into the neighbourhood. It happened then. It happens now. One only has to sample Twitter or the groups on LinkedIn to view the decay.
There are many fundamentals to note but here’s another, specifically about Twitter. If you look at behavior on Twitter you find that the majority of the “tweets” are generated by a small majority of accounts. Exact number vary from estimate to estimate but one set of numbers suggested that 80% are generated by about 7% of accounts. If you look further, you will see estimates of an 80% dead account rate on Twitter. If you look even closer you will find very high attrition rates for businesses who try Twitter and give up, though these numbers are not public, per se. You have to look.
It’s a sick patient and for good reason. Twitter, at least at present, offers almost zero functionality that is not available somewhere else. It exists because people go there. It does NOT exist on account of brilliant features.
The same could be said for what many companies offered in the runup to the 2000 bust. Once the buzz wore off, people stopped using the services, and the only reason to go, the other people there, disappeared in the same way a trendy nightclub would die once a trend started that caused some people to stop going.
Conclusion:
This is just scratching the surface about the similiarities between then and now. In a future article we will look at one more critical similarity; the inflation of ad rates beyond a level which most businesses could sustain. After that we’ll look at how companies start(ed) to take shortcuts in terms of what they offered to their customers, and in customer service to extend the life of their venture capital investments. Then, we’ll look at some deadly assumptions that virtualy guarantee business extinction for many companies — believing that one’s business environment and assumptions underlying one’s business model will stay the same.
