The Social Media Bubble
October 27, 2013
In the early 2000's the United States experienced a profound recession due to the burst of the Internet Bubble. This bubble was in part created by the race of firms such as Google, Yahoo, and AOL to become the dominating web-player in the US market. Guess who won, Google, as it is currently trading at $1015 per share. Compared to the measly AOL shares ($36), and its even worse little nagging follower Yahoo ($32), Google is the outstanding champion.
After all the major commotion made about the tech market in early 2000 many major businesses slowed their tech purchasing pace. However, this was not before they scurried to stock up on as many computers as possible, as well as enough bandwidth fit for a small village. This decrease in their purchasing was reportedly what began the downward fall in the US economy.
There is however another similar storm brewing in the United States at this very moment. This bubble is a descendant of the notorious tech bubble, but has some notable variations in its form. However, this bubble still has the potential to cause sizeable recessionary effects on the US Economy, and most notably the technology and Internet sectors.
When investors as well as entrepreneurs think of Internet success, what is the first major company, (besides Google) that comes to mind? Facebook! That's right, we all have one, and all probably check it at least once a day. It has become our nothing-better-to-do fallback, and for some even addiction. However sweet the story is about this small 2004, startup there is no denying the scale and brute force Facebook has come to be known for. Facebook is the ogre that does not have to play by the rules, because it set up the rules in the first place.
Now a bit of push-and-shove makes for a healthy market, but in the case of Facebook, there is a different story. There is no push, no shove, just an immovable mass that throws the money where it deems necessary; or profitable for that matter. We have all heard of the famous acquisition of Instagram made by Facebook for 1 billion, and the recent offer of the same amount to acquire the similar photo-sharing app, Snapchat. The fact that Facebook keeps packing on the pounds is not a bad thing, but what is, is that all the others competing, or trying to, are famished little orphans who can't seem to catch a break.
Facebook is most definitely the social media network with the most value, as well as largest user base, reaching out to over 1 billion people. It's gotten comfortable with its pace and safely far enough ahead of the pack to take an forever lasting lunch break. And its hungry, Facebook is always hungry. So in this case, Facebook begins to feed on new fads, whatever new cool app that may be, and throws the big cash lure out for the companies to bite on.
There is also the possibility that Facebook, with their cash-wad throwing tactics, will begin to become a type of standard that new media startups will pass though. They will not compete with Facebook per say, only use Facebook as a route to a capital acquisition, or developmental stepping stone. This is how the video sharing app Vine, gained much of its user base and credibility. It has become the all to frequent fad on Facebook walls, thus helping the development and financial growth of the small New York company.
The danger in Facebook's notorious influence in the social media scene expands past just running the game of media accusations and enabling business development. Due Facebook large-scale influence, it holds the potential not only to cripple competing business, but to cause a profound crash in the social Internet market.
There are two possibilities in which this crash can occur. First, as Facebook continues to grow as a company, a promotion service as well as a stock, they will experience strong upward momentum. When it takes its lead ahead the others, this creates good profits for Facebook, but for the rest of the social market this becomes a giant headache. If all is well for Facebook, than that's fine and dandy, but this leaves Twitter, Myspace, Tumblr, and Vine in the dust. Faced with an inability to compete with this giant, these companies will cope in the only ways that they can; branch out into different sectors of the social media market. Now as this may lead to innovation and new forms of media, it surely won't lead to a alternative for Facebook clientele. Thus, when users of Facebook become exhausted with the timeless wall posts, and over stimulating add space, they will not have a similar platform to move to. The user therefore, is faced with one of two options, either stop using Facebook, or use Facebook less. Both of which will have negative influence on the major player in the social network, thus driving the market downward.
The second scenario, in which a crash can be caused, is in the situation where Facebook itself experiences a sharp decline. In this case, Facebook stumbles and takes a loss for not only its investors, but the entire social Internet market as well. In the mind of an investor, what is the best way to not lose money? Stay away from failing markets. However, because Facebook is such a profound player (right now the only player) in the social market, this affect will be much greater. In addition, these investors will have extremely limited alternatives. Until November 2013, Facebook was the only major social media network to be listed on Wall Street. To be put simply, if Facebook stumbles, all the others will follow, and there are not many. This will cause a tremendous fall in the social media markets state, and possibly change the perceptions that investors have about investments in social Internet media.
Institutional investors, as well as individuals have significantly undermined the role of Facebook in not only the Internet market, but in Wall Street as a whole. It can be safely stated that investing in Facebook was for all investors a speculative gamble. Never before has there even been an option to buy shares that were of the same breed as Facebook, and no one has had the time to learn from mistakes. We are all going to find these mistakes out together, or those of us with a sizeable position at least. This is definitely an exciting, but revolutionary time for Wall Street, as the social media market has emerged from almost thin air. Its creation can either be a potential for great riches, or for our investments to vanish before we knew what a "poke" really is.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.