Bubbles are a way of life in Silicon Valley and if you’re lucky you can ride one. I was lucky enough to ride the great dot-com bubble at Yahoo! Like a wave it washed me from LA to the Valley and once here I hoped for more bubbles. We all dream of working on that next revolutionary product but we’re also gamblers. If we’re lucky our startup hits the jackpot and IPOs ala Netscape, but we also know that in bubbles even bad companies can profit. Just look at theGlobe.com.
Being a gambler I think I’ve gotten pretty good at spotting bubbles, similarities I saw in the dot-com bubble and the one of today with LinkedIn, Pandora, and Groupon.
They haven’t even begun to turn on monetization
This quote came from an article about how P&G opened a store on Facebook.
Facebook will figure out a way to get people to sell on Facebook or through Facebook, and then figure out a way to take a cut from that. It’s a multibillion dollar opportunity.
Really? It’s that easy? So easy that they’re just waiting to turn it on when they need it?
They said the same thing about GeoCities in 1999. It powered some percentage of the whole Internet in those days and everyone thought it was only a matter of time before they figured out monetization. Yahoo! bought the service on those same expectations in 1999 only to close it down in 2009. Same words were mentioned about YouTube, it’s doing pretty well for Google but it’s more of a leverage play than a pure revenue source.
That isn’t to say that some companies haven’t figured out monetization, Google did. But more or less stumbled into it. There is a big difference between turning on monetization and trying everything under the sun until you hit strike gold. This talk of Facebook knowing exactly how to monetize but waiting to do so is crazy and such talk seems to become deafening during bubbles.
These are real businesses
A lot of people hold out that this bubble is different because these businesses have real revenues. True many in the Dot-com bubble didn’t but some did. I worked at Yahoo! and it had more than real revenue, it had growing profit. Even when things began to turn sour Yahoo! was still profitable and would tell the press that it was a very different company than those flaming dot-coms, it had real revenue. But soon it became apparent that a lot of those revenues were from those same dot-coms now on fire. When they burned out so went their ad budgets.
I’m betting the largest ad buyer on Facebook is Groupon and LivingSocial, then maybe Zynga. What if Groupon flames out? They’re already spending a massive amount on advertising, similar to dot-coms looking for portal deals in 1999. What if Zynga does? Facebook’s revenues might not look so hot.
What you should do is watch for slowing growth
A lot of these high flying tech companies get there by capitalizing on powerful trends and brand positioning. It was called first-mover advantage in the days of the dot-com bubble. In 1999 everyone thought they needed a place on the Internet and were planting their flag using GeoCities homepages. It was an unstoppable juggernaut but in time even that trend faded out. The party atmosphere ended and the really difficult work began. Most companies never make the transition and muddle on for years like GeoCities did under Yahoo!
When things are going up everyone takes credit for the success. “We added a million new users because of my feature”, because of this or that. But many times that growth is almost inevitable due to the trend and brand. Riding trends is a lot more about not fucking it up.
So when the trend peters out you should take heed. If Facebook’s numbers are slowing I would begin to question all this talk of taking on Apple or expanding into mobile. It changes managements focus. You go from one day thinking you’re unstoppable and will rule the world, to suddenly pulling people off projects to kick start growth again. Soon you question everything. It’s like trying to hold water in your hand.
That said, Sterling still thinks the site may be vulnerable. “[Facebook CEO] Mark Zuckerberg has characterized Facebook as a utility — a communications utility — but I’d argue that it hasn’t yet made itself into one the way that Google has,” Sterling told PEHub. “In the same same way that we joined Facebook because our friends did, we’re likely to leave if those same friends become less engaged,” he says.
Then again there’s evidence that Facebook isn’t slowing at all. Hopefully the trend is still going for Facebook, and even if it isn’t they can ride the bubble and parlay it into something.


