The Dotcom Crash and the Social Media Bubble
(I came to work in Silicon Valley in 1993. I worked at dotcoms throughout the bubble (1995-2000). We saw much of this. — andreas)
The social media bubble is going to pop. It’ll happen because the social bubble is basically the same as the dotcom boom, and as we all know now, that was built on fraud.
The dotcom bubble didn’t fail for lack of ecommerce revenues. Revenues wasn’t the driver of that bubble. The promise of the dotcom bubble was the wild revenues that could come from banner ads and CPMs. At the beginning of the bubble, CPMs were $20-30. With a million monthly users, you could earn $20K/month. You could start a company on that. (I know this: I ran the website at Dialpad.com; we grew to 16m monthly users.)
So everyone got into the game: build a site, get attention, get traffic, and sell investors on the promise of future revenue. What if it grew to 100m monthly users? What if it grew to 500m users? What if a web site grew to a billion monthly users? Are you going to be left out of investing in that? OMG! People sold their houses and invested in dotcoms. (Really. I know people who sold their houses to invest.)
Mary Meeker at Morgan Stanley, George Gilder, Henry Blodget, Chris Anderson, Louis Rossetto, John Battelle, and other made outrageous predictions, supported by rows of data and glossy charts. Some of these people are banned for life from finance. The rest of them continue with the wild promises.
Someone once said to me “With that kind of blood in the water, it’ll attract sharks.” And that’s what happened. Dotcom valuation zoomed to an astonishing $5 trillion dollars. That’s 5,000 billion dollars. Swindlers came running. Yes, Wall Street. They carried out massive fraud with fake traffic, fake data, fake graphs. Remember those amazing Officially Certified Graphs published by Harvard MBAs from Major Wall Street Investment Banks? Fake. But who cared? Everyone was making boatloads of money: Wall Street bankers, VCs, the marketing industry, magazine publishers, ad agencies, WSJ, crooked investors, etc.
That was of course unsustainable. Why? Quite simple. There’s a limit to attention. But dotcoms were offering too much advertising. So CPMs fell from $20 to $10 to $0.10 and to $0.02. By then, companies had grown to 500 staff employees, offices in Palo Alto, onsite dog massage, and so on. Revenues based on CPMs could not support that. The bubble popped.
The same has been happening in the social media bubble. It’s fraud all over again. Promise the investors there will be mountains of gold in ad revenue. Use all kinds of digital fraud to inflate the numbers (inflate the number of members, fake monthly traffic, fake likes, follows, comments, etc.) Early investors put up $1m. Use the money for massive PR (business magazines will publish any nonsense as long as you pay them). The second round of investors buy stock from the first round. 1st round triples their money and runs away. 2nd round repeats the process and sells the crap, er, highly-anticipated stock to a 3rd round. FB snookered $70b from investors. For example, a key investor put $5m into FB and made $65m in the IPO. FB has no, not one, scrap of evidence to show its advertising works. Twitter plans to IPO for $11b. Zynga is a morass of fraud. These companies will crash. I expect Microsoft or Google will buy Twitter for $3m. FB will be sold for $25m. Can that really happen? Sure. MySpace was valued at $12b and sold for $35m.
The bubble is still growing (Feb. 2013). Just read Techcrunch. Implausible (okay, totally silly) business plans get $10m in funding. VCs keep shoveling money into social startups because 1) they don’t want to miss out and 2) if they can spook investors into a stampede, they make money.
Some 5,000 companies were set up in SV in the dotcom bubble. About 2,000 crashed. Okay, many of those were idiotic frauds and deserved to crash. However, in the panic, many good companies also crashed (investors fled, etc.) Over 100,000 workers lost everything: jobs, house, apartment, wife, car, etc. A few major investors were investigated, but bribes, er, political donations adjusted the political trials. Many of those scoundrels are now part of the social bubble.
What can you do? If the company says they’re going to (future tense) earn money on advertising, just laugh. Don’t believe them, no matter how many Harvard MBAs they have. In fact, especially if they have Harvard MBAs. Look for companies with real business models: they sell a product or service in exchange for money.