After a long crescendo of whispers about social-media-centered tech bubble, recent developments have made this debate one of the hottest topics around both the internet and wall street.
Headlines from the first 6 months of 2011 included staggering figures:
- Facebook's Valuation Approaches $100 Billion
- LinkedIn's IPO Values Company at $8.9 billion
- Microsoft Buys Skype for $8.5 Billion
At the same time, we witnessed stories including:
- Yahoo Sells Delicious, Never Earns Revenue
- Following MySpace Redesign, News Corp Tries Frantically to Sell for $100 million (bought for $580 million in 2005)
- Friendster Retires Social Networking Features in Favor of Social Gaming
These are just a few of the headlines that have intensified the debate. An explosive 6 months on Wall Street accompanied by extremely high PE ratios and uncertain revenue models has left us with two main questions: Are we approaching another tech bubble? Can these social networks ever earn profits to back up these valuations?
Social networks will continue to come and go, with only a few persevering through each loop of the rollercoaster ride... But the ride will go on. We're not going to see another true tech bubble any time soon, and social networks can earn profits to back up their valuations. The uncertainty comes in the details.
The most difficult thing for people to understand is that today's large-scale social networks are built around completely different financial models than the traditional Wall Street businesses. The investment world is dealing with a new beast in social media. Traditional businesses only get IPOs once they have proven themselves - with steady growth, established tactics, and a well-tested revenue model. In social media, the young companies that businesses and investors are wagering billions of dollars on have already scaled, but they are just beginning to prove their capacity for sustainable growth.
So why don't these high valuations for unproven companies indicate a bubble? Because while many social media powerhouses will fade away, the ones that are able to adapt and sustain revenue models will live up to expectations and new companies will fill the shoes of the other giants as they fall. It is just a different level of risk and reward than the market's ever seen before among companies carrying such high valuations.
Social networks are young and their individual futures difficult to predict, but together they are transforming the web into an interwoven and data-driven network that will reward the most agile companies -- and their investors.