On its opening day as a publicly traded company, Facebook (FB) had a closing price of $38, with a total market capitalization in excess $100 billion. This equates to an evaluation of more than $100 per Facebook page on the Web. It also makes Facebook one of the top 25 public companies in the U.S. market in terms of capitalization. Not bad for a company that started as a website created by a certain student in a Harvard dorm room 8 years ago with the purpose of making it easy and fun for college students to interact online.
Recently Instagram, an online photo sharing website, was sold to Facebook for nearly $1 billion. And one of the hottest new social networks, Pinterest, which is essentially an online pin board, recently received $100 million in venture capital funding.
Sure, these companies have experienced rapid user growth with millions of users but are they really commercially viable? Are these valuations legitimate or are we entering the second dot-com bubble, which could be the social media bubble?
A Look Back at the First Dot-Com Bubble
When we look back at the dot-com bubble that popped in 2000-2001, the online companies that have survived showed real earnings and had commercial intent from their users. Google rose through the ashes of that bubble into the one of the largest companies in America largely due to the commercial intent of its users and how the company executed.
Millions of people using Google were using it to find products and services and make a purchase. Similarly, Amazon has thrived since the first dot-com bubble generating billions of dollars in annual sales. The long-term financial strength of social network websites will largely similarly depend on their earnings.
Facebook’s Commercial Viability
Facebook’s long-term success will depend on how it evolves as a company and generates income through its users. Having hundreds of millions of users certainly gives a powerful platform from which to reach out to people. In many ways, Facebook is similar to television in that users use it for entertainment purposes. TV has done quite well as an advertising medium. It is primarily used for branding and awareness, similar to an outdoor billboard.
There seems to be a healthy amount of doubt about Facebook’s effectiveness as an advertising platform. Recently it was reported that GM was pulling its $10 million advertising expenditure for Facebook ads due to their ineffectiveness.
With all the data users submit to Facebook such as their age, gender, where they live, their favorite books, movies, and more, Facebook knows a lot about their user and what products and services they most likely would be interested in. This is valuable to advertisers as they can better focus their advertising messages to their targeted types of customers.
Facebook may lack the commercial intent of Google search or Amazon.com. But even, if you are getting only a small percentage of users to take action, you are still talking about millions of eyeballs seeing your Facebooks ads on a daily basis. This has value to advertisers. Also, Facebook currently allows businesses’, even the largest corporations, free use of Facebook pages that they can use to interact with current and potential customers. This free access model for businesses may change down the road.
What About LinkedIn?
LinkedIn, is a social network best known as a place to build your professional connections. Because of all the user data LinkedIn has, its use in the workplace to find jobs and find candidates for jobs, and the fact that the typical user is an above average wage earner, LinkedIn has overall fared well since it became a publicly traded company.
Despite some turbulence, company’s shares rose about 15% in its first year although the company’s stock performance in 2012 may be in large part to the hype surrounding the Facebook IPO. LinkedIn recently purchased SlideShare, an online presentation sharing website, for $118.75 million.
Pinterest has grown its user base dramatically becoming the fastest growing website to have ten million users. The website’s popularity is in large part due to its ease in which users can organize and share pictures they like. Women whom account for more than 80% of all users have very well received Pinterest.
Its highly female demographic may bode well for Pinterest as women hold the power of the purse strings in many households. The site may be able to entice them to buy clothes, travel services, foods, kitchen items, and other products and services, and could have significant commercial appeal.
It will also be interesting to see how Twitter fares in terms of revenue growth in the coming years.
Social Networks and Business
It feels a bit like deja vu all over again. But this time the dot-com boom is mostly concentrated on the rapid growth of social networks. Time will tell which social networks rise and fall in the coming years. Those that last will be the ones that provide the best user experience while delivering strong revenue to its shareholders.
Even if they don’t want to pay for ads on Facebook or other social networks, it is important for businesses to have a strong presence on these popular websites. Otherwise, they could be missing out on large sources of traffic to their website and new customers to their business.
+Jason Nelson authored this post.