It's over. The social networking phenomena is coming apart at the seams. At least that's what Eric Savitz says. He covers the intersection of tech and investing for Forbes.
While Savitz certainly makes a compelling argument citing how Facebook, Groupon, Kayak, Angie’s List and Yelp’s stock prices are at, or hovering near, their all-time lows, he doesn’t mention LinkedIn, whose valuation might be better compared to Salesforce.com’s rather than to Facebook’s; or Jive, whose shares are mostly rated a “buy” (based on “reasonable expectations”); or Salesforce.com’s recent acquisitions of Rypple, Buddy Media, Stypi and Goinstant among others; and, of course, there’s also Microsoft’s purchase of Yammer to be considered.
The aforementioned companies seem to be doing just fine. As are new(er) comers to the market like Pinterest, Eventbrite, Path, Branch and FourSquare who use their Social graphs in a whole different way.
It may not be time to scream THE SKY IS FALLING just yet, if at all.
Right Sector, Wrong Model
The reality is that Social Media/Networking isn’t dead. (Even on the stock market.) It’s just that some companies, even perceived industry leaders, simply have their business models all wrong.
Consider that “winning” in Social has, up until recently, has been largely determined by parameters like traffic (site visits and page views) and stickiness. The idea being that if mass numbers come to a site and stay for a while they will click on ads. That assumption may be false (a la Facebook).
What that model fails to consider are answers to questions like “Why are our visitors here?" “What would compel them to notice, let alone click on an ad?” “Are ad clicks our only way to make money?” (The volume of visitor valuations, by the way, makes sense for web 1.0 companies like Google, where people go to find links when they look for things. Or Amazon where they go to shop and a “People like you also bought” algorithm is well suited.)
Some social sites need to consider factors like “Will visitors notice, let alone pay attention to ads on our site?" "How will their visiting/hanging-out on our site generate revenue for our clients?” When these questions are asked, the answers need to be tested. If Social Media/Networking companies don’t do this and make changes when necessary, clients (a la GM) and stockholders will run and analysts and journalists will rake them over the coals.
Establish Why They Visit First
Facebook is a perfect example. The company turns membership into money through ads. Unfortunately for them, according to this most Facebook users have never clicked on an ad; in fact many of them say they don’t even notice the ads.
Data scientists can work day and night to get the right ads on the right page for each Facebook user, and the company can be brilliant in the way it crunches Big Data. It may not matter. People don’t go to college reunions to shop: they go to look at each other, compare lives, rekindle old memories and so on. Very few ads are as compelling as that.
So the bottom line is that Facebook is a place that people go to do things other than to shop and it appears that advertisers are beginning to figure this out. Mr. Zuckerberg either needs to change his revenue model (membership fees?) or find a way to get people to shop (or at least click on ads) or both. Would a Facebook mobile app sell for US$ .99? I bet it would (if it wasn’t already given away for free).
Groupon, and sites like it, have their problems too. Some critics say that they aren’t tech companies (and therefore shouldn’t be valued the same way) but more like the Penny Savers we get through the mail.
John Shinhal of Marketwatch puts it this way:
Groupon, on the other hand, is still being valued as if it’s about to start posting double-digit profit margins. In truth, the only way it can post a quarter in the black is by dialing back its own marketing spending so much that it reduces growth.
What Groupon’s results have shown repeatedly over many quarters is that investors can have sustainable growth or profits, but not both.
What Groupon founder and CEO Andrew Mason came up with in 2007 was an idea that was really neat, and one that consumers love, yet not one good enough to build a sustainable business on."
LinkedIn, on the other hand, is all about resumes, recruiters and professional networks. Companies will spend money to search for, attract and identify talent. Jobseekers will give their right arm for exposure, they want to be seen. And advertisers want to market to a professional audience. LinkedIn not only has that, but its data scientists have a pretty good read on their members. Not only do they have social graphs to work with, but they have well-defined interest graphs as well.
When I interviewed LinkedIn’s co-founder Reid Hoffman in 2006 (LinkedIn had 7 million users at the time, it has 175 million today) and asked him how the company was going to make money, his answer was NOT the typical “We’re not worried about that now; at the moment we’re just interested in collecting users, content and data.”
Way back then Hoffman knew that revenue would come not only from ad clicks on the site, but also from companies who needed to hire (and would therefore be willing to pay for job listings and database searches), from jobseekers, consultants and entrepreneurs who wanted greater exposure and/or access to LinkedIn’s database and so on. Interestingly one revenue stream didn’t seem to be more important to him than another.
It's Just the Beginning
And when it comes to Social in the enterprise, companies will keep trying and keep buying until they get it right; in a globally dispersed, diverse workplace employee engagement is key not only for competitive advantage but for simple survival. Ditto for collaboration and brand management on the Internet of things. Social networking has barely dipped its toe in the water in this space. It won’t take off until enough early adopters figure out how to swim.
So, is the Social Networking phenomena coming apart at the seams? I think not. There are certainly companies that have their revenue models wrong. But there are also others like Twitter, Foursquare, Eventbrite and Tumblr who have resisted being acquired or going public until they become all that they can be. There are new Social companies like Pinterest Path, Branch, Bright and Medium which will undoubtedly learn from their predecessors’ mistakes. And, of course, there is mobile where the opportunity for growth is huge.
The Social Web isn’t dead, it has yet to come into its own.
Editor's Note: Virginia always has an interesting spin on the tech world. To read more by her: