In The Coming Social Media Crash: Similarities With the dotcom bust #1 I suggested that there are amazing parallels between the rise and subsequent bursting of the dot.com bubble in 1999-2000 and the current situation with social media. Almost every week I see both additional parallels with that time in history, and more convinced than every that absent some startling changes, there will be a bust of the social media bubble by sometime in 2012.
Business Model Shifts – A Crash Portent
In the latter stages of the the dot.com boom companies faces some sobering facts. Based on expectations of huge revenues from advertising sales, which they did receive, at least for a short while, they assumed that everything would continue along the same path. That as visitors to their sites rose, so would income. That did not happen. Advertisers finally discovered that people visiting websites simply were not interested in buying things, so spending $50 per 1,000 impressions for display ads, was insane, and deadly. As advertisers pulled back, and also as click through rates dropped, revenues tumbled, leaving many newly minted companies with a serious problem. How to show venture capitalists and other investors there was still potential, so they would continue to shore up the company even though there was never a profit?
What companies did was start fiddling with their business models, in the hope that they would find something that would work, since ad sales were not longer sustainable. They shifted their business models, in some desparate experimentation. Some tweaked. Other changed a lot. It didn’t work every well, and consequently most of those companies are gone. That’s not surprising, since a company that has never turned a profit, and has revenues crashing is hardly likely to pull a business rabbit out of its hat. Not at that point in the business cycle.
Of course, what happened, then was that money from investors disappeared, and it became impossible to get to the holy grail of the dot.com rush–an Initiial Public Offering, or IPO which, if successful, guaranteed huge profits for anyone holding even a piece of the company. Then, Bankruptcy. Being acquired for pennies. Or closure.
Today – Social Media
We are at the beginning of this phase in the rapid expansion, rapid collapse cycle, with social media. Most social media platforms do not make money, although they may generate revenue. Twitter is not a profitable company, by all accounts, while Facebook is with perhaps LinkedIn less so. They exist because of the hope of rich returns for investors.
However, investors will wait only so long, and companies realize that they need to start generating revenue AND profit, NOW. The clock is ticking, and companies know it. So, what we are beginning to see is shifts in business models, either via tweaking, or more drastic.
For example, Ning, described by Wikipedia as an online platform for people to create their own social networks, launched in October 2005, recently eliminated its free offerings completely, while laying off a number of employees. It notified users that it would now charge for the services it previously provided for free.
Why? As a privately held company it isn’t obligated to tell us but the amount of money investors provided it – reportedly around 104 million dollars – relative to its estimated revenue (note that’s not profits) of 10 million dollars for 2009, is a decidly bad omen. When you have a five year old company generating virtually nothin in its fourth year, and having taken over 100 million dollars from investors, there’s clearly going to be pressure to not only increase revenue, but to start showing profit, or at least some business health.
At least it’s still around. However, the odds of it being around in two years are not good, but we’ll have to see what numbers emerge to determine whether the business shift to user fees will work. It’s simply not likely.
You could argue that this is just one company, but of course there’s no skill (or use) in making predictions about things that have already happened. However, there is no question that Ning is not the last company to hit the brick wall, and try to survive via changes in the business model.
The next major company, already involved in tweaking around the edges, but headed for forced changes in its business model is Twitter. I’ve repeatedly said that among the big players, Twitter is the weakest (although the current MySpace user collapse probably puts Twitter as second most vulnerable). It is slowly introducing ads to try to generate revenue and profit, and one has to compliment it on trying to do so without becoming intrusive to its loyal users. However, it’s not going to work. (see Twitter In A Corner – Facing Huge Challenges)
You cannot monetize certain kinds of sites long term via paid advertising. You may get away with it for a year, but beyond that, even the major players with money to experiment with are going to notice that there is no return on investment. Such is the case for YouTube, and Twitter is in a worse situation, since it lacks Google’s advertising infrastructure and web real estate on which to display ads.
Twitter is going to have to accelerate its revenue development strategies beyond their current scope, which probably was a planned part of their overall strategy, but drastic changes will be necessary to preserve the value of the money already invested. Those changes will need to occur fast.
Conclusion
None of this is new. Those of us who were around in the 1999-2000 dot.com bust and who haven’t been taken in by the loud hype and hope about social media have seen all of this before. We are only at the initial stages of the upcoming contraction in social media, and the model tweaking is just a symptom of underlying problems.
In future articles in this series we’ll look at several other indicators/factors, including 1) user and loyalty volatility and instability, and 2) the growth syndrome, both of which fueled the dot.com collapse and are currently happening in the early stages of the runup to the social media collapse.
