Does the Media Believe in Social Media Initial Public Offerings (IPOs)

Does the Media Believe in Social Media Initial Public Offerings (IPOs)

The Dot.com bubble burst in early 2000. A decade later analysts are raising the same questions about valuations for internet technology companies. It is possible to identify and study many companies in the Social Media arena to validate the bubble argument. Battles like Blockbuster vs. Netflix vs. Amazon Prime Video may not be pure "social" media, but do have some of the elements of user ratings and rankings. Pandora allows a customer to create their own music channel and share it with friends – which might make it “social” as well. Sirius/XM and HD Radio do not have any similar social features - which beg study into their capability to persevere. 

The Dot.com bust was about product delivery in “bricks and mortar” or a digital channel. Some new companies do not even deliver tangible products. They deliver “eyeballs” and the connectivity, relationships, and networks between people. How will the different stakeholders, the insiders and employees, the investors, the users or consumers, fare with this model?

This post will review current analyst points of view on the ability of Facebook, Twitter and LinkedIn to deliver value to their stakeholders. Links are included in the bibliography (below).

Sharon Machlis of Computer World provides a good introductory SWOT analysis (strengths, weaknesses, opportunities, threats) in her article “Facebook vs. Twitter vs. LinkedIn vs. Google+” (Machlis, 2011). LinkedIn has gone public (NYSE: LNKD). Twitter and Facebook are still pending their initial public offerings (IPO). Google+ is a late entry, and demonstrates the threat to all other social networks. Machlis provides the best one-page comparison, but other analysts fill in some of the missing perspective.

Facebook

Facebook is expected to have the largest IPO of these three companies. While several analysts see great potential, many others line up on the other side of the discussion. The Business Insider identifies advertising as the critical revenue driver for Facebook (Carlson, 2010). Mashable comments that Facebook needs to come to terms with its advertising core, then expand into product referrals and sales, and then into a premium subscription model (Lawrence, 2010). PC World compliments Facebook on its huge database of relations, and encourages more advertising and the delivery of applications (Sullivan, 2010).

Those that argue against the grand success of Facebook point to the exact set of advantages and claim them as weaknesses. PBT Consulting makes three salient points: the number of users is finite, advertising revenues will eventually peak, and social networks are at a critical inflection point where additional users are not adding additional revenue (PBT Consulting, 2011). All Things D claims that Facebook missed a critical opportunity in 2008 when they failed to merge with Twitter (Swisher, 2008). The Big Picture asks if Facebook missed their IPO window as the competition has caught up, with the new Google+ likely to shave billions off the IPO price (Ritholz, 2011).

Twitter

Twitter has analysts split as well. The New York Times applauds the growth in Twitter users and describes advertising and Promoted Tweets as revenue generators (Miller, 2010). TNW Social Media interviews Twitter CEO Dick Costolo to uncover the future revenue from “Promoted Accounts” (Wilhelm, 2010). CNNMoney describes the slow roll-out of Twitter ad revenue programs to avoid the backlash experienced by Facebook (Mangalindan, 2010).

GigaOM points to a clear problem with “stickiness” or the amount of time a user is engaged on a web site, article, message, etc. (Taylor, 2011). The idea that Twitter will employ email messaging seems to contradict a key Twitter benefit. Twitteratti gives a nod to a fast growing user base, but then asks how quickly the Twitter eco-system will need to evolve to collect more advertising revenue (Evans, 2010). Mashable provides an interesting infographic that covers the evolution of Twitter’s advertising (Wasserman, 2011). This evolution is the center of most criticism. Analysts question Twitter’s lack of speed to adoption advertising revenue model.

LinkedIn

LinkedIn is a very different social animal. TechCrunch makes this explicit when it compares LinkedIn to the now reeling – MySpace, “It is becoming increasingly obvious that the social networking game is not just about who has the largest audience, but also about who has the most valuable audience. The dominant social networks like MySpace try to maximize advertising dollars by focusing on the most lucrative geographic markets” (Schonfeld, 2008). The San Francisco Chronicle reports that revenue for LinkedIn is tied to the economy and that revenue recovers as tech hiring recovers (Evangelista, 2011), which would also seem to imply the inverse.

News Factor covers the diverse revenue models including member subscriptions, premium subscriptions, advertising sales and hiring solutions (LeClaire, 2011). This balance of individual and corporate revenues allows LinkedIn to escape the “freemium” model where basic services are free and advanced services or functions have cost. Leslie Walker divines from the LinkedIn prospectus that the narrow focus on career development is a limitation to revenue opportunities (Walker, 2011).

Seeking Alpha, Forbes and The New York Times provide arguments against LinkedIn. Seeking Alpha highlights the lack of stickiness and the lack of user growth (Babayev, 2011) Forbes point to a limit on business user (recruiters) growth, rising competition and corporate governance issues (Savitz, 2011). Corporate governance applies to LinkedIn, post-IPO where Facebook and Twitter can still escape the scrutiny. The New York Times expresses concern about technology bubbles, and compares the price-to-sales ratio for LinkedIn to Monster and Dice and declares LinkedIn shares too expensive (Stewart, 2011). PCMag re-emphasizes the point by describing competition from a new Monster Worldwide collaboration with Facebook (Hachman, 2011).

The Problem of Revenue

These three large social media companies are wrestling with many of the same problems. The most critical problem is generating revenue without upsetting their user community and the second most is the fierce competition from known and unknown adversaries. The analysts provide interesting clues, comparisons and criticisms, all of which seem to become outdated as soon as the digital bits are stored. Facebook adds Chat and build a new relationship with Monster, while oldsters and youngsters bail out. Twitter can reach a global audience as a News resource but wrestles with a falling signal-to-noise ratio as unedited content creation and advertising overwhelms the 140-character message size. When do photo sharing and external linking make Twitter too much like Facebook? Amazon, a survivor from pre-Dotcom bubble, adds video streaming to steal eyeballs – there are only so many hours a day to consume social media. Google + launches and launches big – trying to find the sweet spot between Twitter and Facebook.

All stakeholders, users, employees and investors need to be aware of the collective SWOT analysis. Clearly, stakeholders, users, employees and investors interests do not align. Users need to understand that revenue supports these platforms. The Netflix price change will provide clues and important lessons. Netflix users hate the price change and Netflix investors love the change. Employees need to know that the IPO will change their company from altruistic, bounty hunters into corporate cube dwellers with plenty of government compliance and regulation. Investors need to understand the exiting offerings and the potential for competition from likely and unlikely places. Insiders and investment bankers look to do well as these IPOs launch, but regular investors need to be aware that the sands of social media shift quickly. It is clear that these Social Media platforms can deliver value to their stakeholders, but it is equally clear that success and failure can be both go viral.

CNDannheim, 08/01/2011

Bibliography

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