Bubbles and Pork

Update: a week later The Economist has a similar take, and explains why Metcalfe’s Law doesn’t apply to social networks, which will almost inevitably be balkanized in some fashion.

A little after Y2K, when I was still adjusting to life in a mobile operator (or, to be more precise, on the ISP arm of a mobile operator), the dotcom bubble was bursting all over the place.

Most people seem to have forgotten the details by now (just as they conveniently forget that Web 2.0 was the name of a conference), but some believe one of the bubble’s main causes was, by and large, lack diversity (i.e., too much venture capital eggs in too few baskets).

Others (rather conveniently broke) blamed lack of critical mass to sustain enough online ventures, and history buffs will readily list innumerable examples of how emerging industries always have a fairly low survival rate (cases in point are, of course, the automobile industry in the US around Tin Lizzie time, and the UK’s textile industry around the time of the Industrial Revolution).

I, of course, have my own pet theory. But unlike other people’s pet theories (which tend to be inflated pontifications on paradigm shifts and technology frontiers), I blame it squarely on hype.

And the surest sign of hype is when you come across fluff pieces like this Wikipedia article on Web 3.0 even before Web 2.0 is shown to have sustainable business models.

Take social networks, for instance.

Business-wise, in and by themselves, online social networks represent nothing except target-able, monetizable eyeballs – after all, given that there are no membership fees and very little you can actually do with personal information that doesn’t violate the most basic notions of privacy, the holy grail of having a pre-processed, thinly sliced (and hopefully compliant) audience you can sell anything from breath mints to deluxe sedans is all that is left.

And companies running those networks are valued according to the number of eyeballs they can bring to bear upon themselves and their sites, which they of course try to make as “sticky” as possible, whether they focus on college relationships1 or knitting styles.

But the economics of it are eerie. No matter how much I dig into them, it all feels uncannily like Terry Pratchett’s take on pork futures, i.e., value is materializing out of thin air, based on the assumption that things will eventually exist.

In this case, value is being created based on the assumption those eyeballs can be monetized – and, according to the usual advertising tenets, which ad mogul wannabes everywhere have memorized using the AIDA mnemonic, that needs to be done by fostering four things:

  • Attention
  • Interest
  • Desire
  • Action

Thing is, people are notoriously fickle. And attention to some shiny bauble dangled inside, say, Facebook (of which I am a member, although I am about as active there as a pet rock) does not, by itself, guarantee that any ads (however subtle, and however targeted) will ride in on that level of attention.

Which is why creators try to drop in more and more shiny things into social networks – not just to boost attention, but also to foster more interest (or cater to more variation in interests). Hence the latest push for turning social networks into mashups of all sorts, tossing in file sharing, videos, and web applications of all sorts (like games, which are sticky but generally ephemeral).

Those two aspects (Attention and Interest) are, of course, leads or, better still, “on ramps” that social networks exploit perfectly – or rather, that’s the Kool-Aid they’d like you to sip.

But, again, people are fickle. And social networks are, as a result, not unlike the time-honored activity of herding cats.

And trying to keep them all inside your neat bag for advertisers to toss in catnip isn’t exactly my idea of a sure thing2.

Still, there is something there. My personal guess is that harnessing the continuous ebb and flow of people as they shuttle from one social network to another (or watch the evolution of social connections as new memes ricochet through existing networks) might yet yield something of value.

After all, I can’t be the only person who remembers the way Yahoo, for instance, threw together web games, online chat and discussion groups even before the term “mashups” got its current meaning. And we all know how much that helped.

My point, however, is that I’m broadly skeptical about the value in social networks being truly what the companies behind them are currently valued for – after all, for each moderately active (insert your favorite social network name here) account, there are probably twenty people that never stuck around, another twenty who prefer something else, etc.

Plus of those who stick around, it is unlikely that the vast majority will ever have accurate enough profiles for any sort of targeted advertising whatsoever. So not only will their membership figures always be flawed in some way, but whatever passes as their members’ suitability towards any sort of advertising message will probably be about as accurate as an orangutan’s Nielsen box3.

So yes, in a nutshell, I’m betting that the way these companies are valued will eventually lead to their downfall. Either there’s some serious meat in their annual reports, or we might as well invest on a sturdy umbrella for when the bubble bursts.

But the real trouble, of course (and the lesson the market seems to have forgotten from the previous bubble) is that the current hype around social-driven sites means we risk putting our eggs in too small a basket again – and it may well be obscuring something more substantial (and valuable) lurking in the wings.

Whatever that turns out to be, one thing’s for sure: some idiot will call it “Web 4.0” and we’ll have another round of sniping and punditry among A-list bloggers.

I will, of course, be sitting quietly in my corner watching the bits fly.

1 And aren’t college yearbooks one of the most popular and longer-lasting forms of Americana for every person listed in one?

2 And you’ll have noticed that I haven’t gone into fostering desire for the stuff you’re advertising or prompting action to go out and get some – try dangling some tuna in front of a bagful of catnip-crazed cats and see where that gets you.

3 Yes, even orangutans get cable these days – I suppose it’s a misguided attempt at improving their standard of living, instead of preserving a few acres of forest for them to do their own thing and eventually evolve to replace us. They sure seem a whole lot more intelligent (on average) than your average venture capitalist.