Social media: A second internet bubble that is set to burst?

22nd Jul 2011

With fears of a second internet bubble gathering momentum in recent weeks, Nick Giles considers whether we should be concerned.

Fears of a second internet bubble have gathered momentum in recent weeks.
Fuelled by rumours of Facebook’s impending IPO, Microsoft’s $8bn bet on Skype, the eye-watering spike in the LinkedIn share price and the sense that investors are desperate for a piece of the action, wherever that action may be – many are asking whether we’re hurtling towards another meltdown and blissfully ignoring the lessons of a decade ago.
The main statement in defence of the latest frenzy is that the majority of these businesses have a revenue model unlike many of the dotcom failures of the ‘90s. While their valuations are sky high, they have developed a means to generate cash. The most notable is Groupon which is on track to become the fastest company ever to get to $1bn in annual sales – others are harnessing huge audiences to scale their businesses.  

The other fundamental difference is that broadband penetration and a host of technological advances have radically increased the number of people with access to the internet over the past 10 years.  
The investments in fibre networks and datacentres that bankrupted many of the ‘next-generation’ telecom operators of the early 2000s transformed the potential of internet companies to scale quickly, develop enormous customer bases and drive revenue at much lower cost than their 1990s forebears.  
A third significant difference is the changing way in which we access the internet. The rapid uptake of smartphones and tablets means that hundreds of millions of people all over the world have always-on access to the internet wherever they are.  

A different landscape

For all these reasons, we are in a vastly different landscape than that of 2001. Today’s success stories are smart, connected, collaborative and social – unlike many of the flawed dotcoms and heavily indebted retail sites that collapsed a decade ago.
But what goes up must come down, right?  The 64 million dollar question is when?
Last month six million Americans and 1.5 million Canadians stopped using Facebook, so some might argue that it’s not as far away as you might think.  Many are delighted that the site is apparently flat lining in its early adopter markets and Facebook suicide appears to be the cool thing to do for trendsetters around town.
But the idea that Facebook is a busted flush may be a little premature.  The latest numbers suggest that Facebook has just passed 750 million users worldwide and that registrations are racing ahead in Mexico, Brazil and other large markets.  
Indeed, Facebook is rumoured to be waiting until it passes one billion users before making any more announcements about user numbers.  At the current rate of growth that could be early next year.
It’s been said that a rising tide catches all boats and if you turn to the UK it’s pretty clear that British digital entrepreneurs are getting their own slice of the action.
Tweetdeck, a three-year old business from London, sold out to Twitter last month for $40m, netting its founder Iain Dodsworth a fortune and a senior role at Twitter. Michael Acton Smith’s Moshi Monsters, an animated games site that has developed an international audience, was valued at $200m last month when Spark Ventures sold down part of its stake.
The deal puts Mind Candy, Moshi Monster’s parent company, among the most valuable of the cluster of start-ups around east London’s so-called Silicon Roundabout and adds weight to the idea that this nascent tech-hub is gaining critical mass.

Digital opportunities

In comparison to their US counterparts, these valuations are a drop in the ocean but show the potential for Britain’s digital entrepreneurs to develop significant internet businesses that create real value.  
Just take the world of fashion, a sector where British entrepreneurs have excelled since the last dotcom collapse. Net-a-Porter, ASOS and have built fantastically successful businesses delivering high-end fashion to the doorstep – successfully realising the vision of the UK’s most spectacular dotcom failure,, the poster-child for late 90s dotcom excesses that burnt through £80m in two years.
These businesses have eschewed the hype and excess of their notorious forebear, focused relentlessly on customer service and have generated cash rather than spend it mindlessly – a model that has served their entrepreneur founders very well.
While there may well be a bubble forming stateside, it may be some time before it bursts. The opportunity for digital entrepreneurs in the UK is to build sustainable businesses before the day of reckoning comes.

Nick Giles is co-founder of Seven Hills.   


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