Pop went the social media bubble. Now what?
By Miguel Helft, senior writer August 16, 2012: 7:09 AM ET
Yes, there was a social media bubble. And, yes, it popped. The question now is, what happens next?
FORTUNE
-- There's no doubt as to when the dot-com bubble popped: it was on
March 10, 2000, the day the Nasdaq peaked at 5,132.52. But when exactly
did the social media bubble pop? Was it Nov. 23, when Groupon shares
fell below their $20 IPO price or this week, when they neared $5? Was it
May 18, the day of Facebook's IPO fiasco? Was it even more recently,
when Facebook shares dipped below $20 for the first time or the day
Zynga's began trading at less than $3 each, a whopping 70% below their
offering price? Hard to say. But pop, it did.
How quickly things have changed. It was just a year ago that Silicon Valley was gripped by an are-we-or-are-we-not in a bubble debate.
Many of the Valley's brightest lights took the latter position,
rejecting out of hand the notion that a bubble was at hand. These were
all real companies, they insisted, with soaring revenue and healthy
profits. There were no Pets.coms or Webvans this time around. Perhaps.
But now, with Groupon (GRPN), Facebook (FB) and Zynga (ZNGA) alone accounting for tens of billions in losses to investors, it's a different story.
Of course, even bloodied, none of these companies is going out of
business. Social media is hardly dead. What's dead is the world's wild
infatuation with all things social. That change alone could have
profound implications.
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Take Mark Zuckerberg, the oracle of the social Web. For years, he has
told us that just about everything we do -- playing games and listening
to music, reading books and browsing the newspaper, shopping and even
working -- is better done with friends. And he has told us that, as a
result, industry after industry would rebuild itself around social -- in
other words, around Facebook.
Plenty of businesses dutifully fell in lock step behind Zuck's
vision. Some, like Zynga or Spotify, because they believed he was right;
others because they feared what would happen if they didn't and Zuck
turned out to be right. Even mighty Google (GOOG) felt it had to jump onto the social bandwagon.
Now, faith in Zuckerberg's vision has been shaken. He may still earn a
spot in the Mount Rushmore of Silicon Valley some day (or its digital
equivalent). He may still build a company for the ages -- one that is as
large as Google or Microsoft (MSFT).
But then again, he may not. Today, he is a young CEO who is being
forced to grow up fast. He's heading a large business whose rate of growth is slowing dramatically.
He's built a hugely popular service, but he is still searching for a
business model to match. In other words, Facebook has yet to find its
AdWords, the search advertising engine that mints billions for Google
every year.
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Facebook's struggles are not good news for other social media
platforms, be it Pinterest, Quora or Path. They may have traction with
users, but they too will grapple with similar business model challenges.
The same is true for Twitter, the No. 2 social media platform. While
the company has given hints that its advertising model is working, even
on mobile devices, there's no doubt that its executives are watching
Zuck's travails and rejoicing that Twitter is still private, so that it
can continue to experiment out of the spotlight and pressure from
investors.
Being private may be an advantage, but the turbulence in social media
will impact private and public companies equally in one crucial realm:
employee morale. If social media is no longer a sure-fire path to rapid
riches -- if there's not going to be another Instagram -- attracting and
retaining top people is going to get tougher. "The best talent is
always looking over the fence," says Paul Saffo, the veteran Silicon
Valley technology forecaster. "Your best employees are always thinking
of leaving," he adds. "That's become more acute for Facebook and it is
especially acute for Zynga, because they are burning their employees
out."
The strains are already apparent. Reports suggest that Valley startups are seeing a flood of resumes from Zynga employees. Groupon's legions of sales people are also reportedly restless.
Facebook lost several senior executives since the IPO. The younger
companies could soon face similar challenges, as their best employees
turn their attention to the latest fad, be it big data or mobile
payments -- or heavens forbid, they decide it's time to head back to the
safety and comfort of Google or Apple (AAPL).
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Despite these enormous challenges, social media platforms remain
effective ways for other businesses to reach audiences and for apps to
gain distribution. On that front, the social revolution is just getting
started. The examples are too many to name. But consider, Wetpaint, an
entertainment Web site that in just a year became one of the most
visited on the Web. How? Figuring out how to leverage social media,
which has accounted for 40% of its traffic. "For us, social media has
been the most important source of audience," says Ben Elowtiz, the CEO
of Wetpaint, which is based in Seattle. Elowitz says most media
companies are just starting to experiment and learn how to take
advantage of social. "A year ago, everyone thought that had to be doing
social, no matter what," he says. "Today, the focus is on what results
social can drive."
And social media is also making major inroads in the enterprise. Salesforce.com (CRM)
just competed its acquisition of Buddy Media, the social media
marketing pioneer, for nearly $700 million. The deal follows Microsoft's
acquisition of Yammer, the business-focuses social network, for nearly
twice that much. More recently, Google bought Wildfire, a Buddy Media
rival. Meanwhile, a study published in July by the McKinsey Global Institute
suggests that social media could deliver gains in the enterprise,
mostly in productivity, that could dwarf the benefits of social in
consumer-facing businesses like entertainment, media and commerce.
Perhaps its no surprise then that the one, untarnished mega-success that everyone likes to point to -- LinkedIn (LNKD)
-- lives at the intersection of the consumer and enterprise worlds. For
years, the boring, buttoned-down, business network grew in Facebook's
shadow. It never experienced the kind of rocket ship ride that lifted
Facebook, Twitter or Pinterest. Unlike Facebook or Zynga or Groupon, it didn't seem to overprice its IPO.
Since going public 15 months ago, it has delivered solid financial
results quarter after quarter. As a result, LinkedIn is now a $10
billion social media juggernaut, whose employees and investors have few
reasons to gripe. It is perhaps the best illustration that the current
social media crisis is largely one of massively overblown expectations.
"Everyone got out over their skis," says Ben Lerer, the CEO of
Thrillist.com, a Web site targeted at men that relies on social media to
build its audience. "But there is still fundamental value here." In
other words, the bubble has popped, but the sky isn't falling.
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