Social commerce and the OWJO revolution
lastminute.com and color.com – separated at birth?
The gold rush mentality is pervasive in every boom. Typically several things occur. It begins with someone finding the metaphorical “gold”. This makes other observers feel that what was before unrealistic is now possible. Lots of “wet behind the ears” pioneers head out into the wilderness with little more than a spoon and cup – namely unprepared.
The wise one’s stay put and sell the spoons and cups. Some “spoon” sellers place huge mark-up’s on their inventory and while this yields impressive short term results; it all ends in tears. Fewer still supply the spoons and cups and all the other tools that are needed, at a reasonable price, and make money slowly but steadily by selling people the tools they need. They make money for themselves and their friends.
A recent issue of Media Life lays out a compelling case making the current enthusiasm for social media sound a lot like the “irrational exuberance” that led to the dot com bubble crash of 2001. Consider this, Facebook is now valued at $65 billion and Twitter who have yet to come up with a stable model for how it will make money is valued at $5 billion.
These companies with their mind boggling amount of daily users suffer from what appears to be a lot of weak, artificial connections. What some observers call “thin relationships”. How many people use Facebook to post photos of their latest exploits and never intend to reach for the credit card? How many don’t own a credit card? How many will even pay a $1 yearly sub to post their photographic testimonials?
These pillars of the social media love story are valuing their businesses on tens of millions of users who are, at best, what could be considered low-quality connections. Consumers and suppliers of content who are unlikely to yield meaningful, lasting relationships and more importantly revenue.
But that doesn’t mean that Facebook and Twitter have not got massive potential for revenue. However, they need to start discounting large numbers of their subscriber base as neutral or negative contributors to their bottom line. Even if Facebook discounted its subscriber base by 90% yielding a valuation of $6.5 billion and likewise Twitter at $500m; it would still yield a return representing many multiples of what was invested.
More importantly it would help avoid the inevitable “rolling of the eyes and turning away” that such inflated valuations caused back in the day when the dot.com bubble burst; thus making it difficult – if not impossible – for other good ideas to get properly funded. The dot.com bubble burst in Europe was precursed by lastminute.com who got away at a valuation of Stg£750m off the back of a turnover of Stg£195k in 1999; a staggering multiple of over 3800 of earnings to value.
One year later, it was trading at a valuation of Stg£80m. But lastminute.com has also been one of the dot.com survivors, indeed successes, and by 2004 had a turnover of almost Stg£440m producing operating profits of Stg£7.5m. In 2005, it was acquired by Sabre Holdings in a Stg£600m deal. There are four good reasons for this success story that are just as relevant to social media start-up’s today – brand, timing, innovation and management.
Sequoia Capital, Bain Capital Ventures and Silicon Valley Bank have just bet $41m on color.com based mainly on these principles. VCs have been building a psychological profile of the company that would “kill”– or at least compete with — Facebook for the past year or two.
So far, this magical company will be mobile first, since Facebook apparently sucks at mobile and have some new spin on how the social network is formed – that’s the innovation bits. Be led by a hungry entrepreneur coming off a big hit – that’s the management. Leverage one or both of the primary drivers of Facebook traffic – photos and social games that are still open to competitors – that’s timing. And of course, the site will have a killer domain name – that’s the brand bit.
(Thanks to the launch blog at http://launch.is/ for these last four insights.)
The fact is that companies and individuals who are attracted to social media by the buzz of shiny success stories will bear the brunt of any correction. Those that spent the time and money in the short-term to invest in a stable, sustainable and value-adding social media presence will reap long-term returns.
Please let me have your comments and whether you agree or disagree with this post.
The following articles were referenced in this post:
Steve Kidd; Penticton Western News; http://www.bclocalnews.com/opinion/119001889.html; bclocalnews.com;
Umair Haque; Harvard Business Today; http://blogs.hbr.org/haque/2010/03/the_social_media_bubble.html;
Josh Gordon; Social Media Today; http://socialmediatoday.com/joshgordon/110694/are-we-social-media-bubble
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