Is Social Media the Next Big Bubble?

Shocking valuations bring back memories of the dot-com bust

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Social media websites are great if you want to read real-time updates from Washington political reporters who don't know how to drive in the snow, or would like to buy 50 dollars worth of Chinese food for 20 dollars. But is there really any money to be made in social media? Recent valuations of Twitter ($8 billion to $10 billion), LinkedIn ($3 billion), Foursquare ($250 million) and Groupon ($15 billion) suggest that there is--or at least that people think there is.

Perception, of course, was the reason people thought they'd get rich investing in an online pet shop during the dot-com bubble of the early 2000s. Those dreams didn't pan out, and Nasdaq was effectively crushed in the process. Is this new tech economy made of stronger stuff, or is irrational exuberance from investors paving the way for another Silicon Valley bubble?

The challenge facing social media companies today is the same one that plagued the dot-coms in 2000: where does your revenue come from? The inability to answer that question caused the first bubble to burst, and Business Insider blog Hidden Levers says monolith Facebook is struggling with the same basic problem. Unless the company "decides to start selling profile data like they are big brother," it will remain at the mercy of ad revenue. The San Francisco Chronicle's Ryan Fuhrmann notes that while "most social media firms are still trying to figure out how to capitalize on their vast user bases," the process is only hindered by young management teams "wary of killing its cult status early in its development."

An emboldened Fed might actually be what prevents a social media bubble from emerging, writes Bloomberg's Chris Farrell. Because "inflation was tame and productivity strong during both the dot-com boom and the real estate bubble" the Fed "felt little pressure to make major shifts in monetary policy with inflation quiescent. Yet the toll when the bubbles burst was huge." It's the fear of another crippling economic downturn that will encourage "a far greater emphasis on regulatory initiative" and prompt the SEC to "step up its scrutiny of private investors and company valuations in the growing trading market for private share offerings of such marquee high-tech companies as Facebook, Twitter, and LinkedIn." His conclusion, then, seems to be that social media might not be the way of the future, but at least investors will know it's not a shell game.

This article is from the archive of our partner The Wire.