OPINION

If You Want to Make a Fortune in Social Media, You’d Better Move Fast

LinkedIn has been a public company for roughly two weeks, but its brief history on Wall Street should give the people running other social media companies a lot to think about.

The biggest question to ponder is whether they should go public now — or as soon as they can convince an investment bank to shepherd them through the process — or wait until the business is a bit more mature and possibly able to command a higher price.

My advice to anyone running a social network that’s not named “Facebook” or “Twitter” would be to go public as quickly as you can — and cash out as much of your newly minted stock as you can — before this social media bubble pops.

Groupon has already jumped in, and the water seems fine — but for how long?

This is Not a Dot-Com Redo

Some very smart people are contending that the rise of social media companies doesn’t constitute a bubble. Things are different, the argument goes, because social media companies — unlike their dot-com predecessors — have real business models and already are generating actual revenues.

LinkedIn, for example, generated roughly US$250 million in 2010 from three revenue sources: subscriptions to premium user accounts; employer job postings; and ads targeting its user base. After closing the books on 2010, LinkedIn reported $3.6 million in actual earnings.

That’s not bad for a startup, but shouldn’t a company that’s supposed to be worth $8 billion — which is where LinkedIn stands based on this week’s stock price — be earning a bit more than that?

There are indications that some social networks are doing better. Some analysts believe Facebook and Groupon are bringing in more than $2 billion a year each. There’s no way of verifying those numbers, however, or determining how much profit either company is realizing.

The biggest names in social media — Facebook, Groupon, Twitter, and even LinkedIn — probably are earning a profit. They also have business models that could position them to do so for the foreseeable future.

You Can’t Buck the Laws of Economics

That does differentiate them from most of the seemingly high-flying companies in the dot-com era, but it doesn’t necessarily mean buying stock in a social media company will prove to be a better long-term investment.

That’s because putting the words “social network” in a business plan won’t alter the basic laws of macroeconomics. And one of those laws is this: No matter how hot an industry may be at a given moment, only a handful of players from that industry will survive over the long term.

We now know that the dot-com era was an historical anomaly in many ways, but it did adhere to this economic law. If we look at the pure dot-coms from that era, few are left standing, with Amazon perhaps the most notable survivor.

There were other groups of companies racking up record sales during that boom, and their ranks thinned as well, even as the Internet itself has expanded over the years.

The providers of networking gear fit that category. Cisco was the top name in networking during the dot-com heyday, and it’s one of the few with a commanding market presence today.

Driving a New Economy

During the height of the dot-com boom, I was a working journalist covering the enterprise software space — companies that developed and sold applications to help other companies run backend business functions such as moving inventory and managing production.

Customer relationship management applications were particularly hot, but what was really exciting was the prospect of moving enterprise applications to the Internet, with the expectation that every company would be operating like a dot-com.

I still recall an executive with a supply chain management vendor confidently predicting that his company’s software would be the engine driving a new economy. He even drew a diagram to show how his software would take an order from a customer at a car dealership and push that information back through the supply chain to trigger the building of the exact car the customer wanted.

Betting on Facebook and Twitter

At that time, this company had roughly the same stock market valuation that LinkedIn boasts now — but when the dot-com bubble burst, that company’s fortunes started sinking as well. A couple of years ago, it was purchased by another supply chain management vendor for a small fraction of what is was worth in the dot-com era.

As for the rest of the enterprise software market, it’s now dominated by a relatively small number of companies, such as Oracle and SAP.

If the laws of macroeconomics hold, which they usually do, we’ll see the same thing happen in the social media realm.

If I had to place a bet on which social media companies will survive for the long haul, my money would be on Facebook and Twitter, and that’s about it.

I pick these two because they appeal to extremely broad audiences, and most of their users visit them daily. In fact, many log in several times during the course of a day.

A Shakeout Is Inevitable

LinkedIn, which happens to be my personal favorite social network, has a rather sizeable user base of its own, with 90 million registered users and 45 million unique visitors each month. It also caters strictly to business professionals, an audience that many advertisers covet. I wonder, though, if that narrow focus could ultimately be a detriment to LinkedIn as the competition for social networking advertising heats up over time.

Facebook and Twitter clearly are catering to the masses, but they also have the capability to offer services that would appeal to the average LinkedIn member. Conversely, I think LinkedIn would have a hard time pulling in the hardcore Facebook and Twitter crowd.

Then there are the daily deal companies like Groupon and Living Social, which have so many competitors entering their space that a shakeout is inevitable.

Obviously, there’s no way to predict which of these companies will survive and which will fail. But I’m fairly confident in saying that five years from now, there will be a lot fewer social media companies than there are today. There also will be a fair number of people who got rich investing in these companies — and a good number who lost a bundle doing the same.

Anyone hoping to be in that first group should move now, before this non-bubble bursts.

E-Commerce Times columnist Sidney Hill has been writing about business and technology trends for more than two decades. In addition to his work as a freelance journalist, he operates an independent marketing communications consulting firm. You can connect with Hill through his website.

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