This guy doesn't even have a grasp of the basic facts of the web app business. The core of his argument is that an ad-supported business is ipso facto a fad. So is Google a fad? Are all the ad-supported businesses of the past 100 years?
Look no further than Friendster for evidence of users' fickleness? Friendster wasn't killed by the market; it committed suicide.
Google isn't an ad-supported business, though. They are an ad business, period. Not many companies have the privilege of being an ad provider, which functions much more like a traditional company.
And there haven't been Internet companies for the last 100 years. 50 years ago switching newspapers would've been a much different thing than switching websites today.
The confusion is that Google has two businesses that are integrated. They have products that are advertising supported and they have an advertising platform available to others.
Google could kill their open AdSense product completely and still make billions dollars selling ads on their products.
"With social networking sites the amount spent is zero"
That statement further supports your claim. The time people spend working on their profile, building friends and relationships ... etc is probably worth much more to them than a $300 iPod.
I don't think I'm saying that ad-based businesses are a fad at all.
What I am saying is that ad-based businesses aren't stable enough to warrant the valuations that we're seeing right now. The core audience - the user - is not loyal enough to justify valuations that would take years of sustained behavior to see any ROI.
The cause of Friendster's demise is irrelevant - it's the speed at which it happened that proves the point. 19 million users lost in under 2 years is fast even for web apps.
Paul, you're completely ignoring my main point by focusing on this idea that I'm suggesting ad-based models don't work. I'm not saying that.
What I'm saying is that because consumers that don't invest out of pocket are fickle and that ad-revenue follows consumers, valuations of companies that survive solely on ad revenue should reflect this.
Right now they do not, hence they are overvalued. When a company is overvalued, it's not a good time to invest. The fact that there continues to be a market is based on the fact that Facebook, or a site of equal stature hasn't actually had to justify its value.
Once it does, the house of cards will adjust a little.
I think fickleness is more closely related to switching costs than sunk costs. In other words, I don't pay a dime for Gmail, but it would be quite difficult to move away from. Facebook probably doesn't have quite that much of a lock on your data, but I guess that depends on who you are and how you use it.
Everyone would easily switch to a better mail system that offers some kind of a one-click migration/import from GMail, provided it is really better in some ways. In fact, however harsh it may sound, GMail can be ruined in a matter of months just because the majority of its user base is not loyal. Compare it with Apple in terms of loyalty, if in doubt.
Well if you think Murdoch made a mistake it's not surprising you think Facebook investors would be making the same one.
The people who believed Google would monetize their business in a huge way seemed to do alright. I don't think Murdoch regrets his decision. I do think people should be cautious but you're going way beyond saying just that.
Well, although I think the mySpace deal is crazy, it's at least somewhat attainable. Murdoch has a bit of a history though of making bad moves in tech. He was nailed on Gemstar. Compared to the $11B he lost then, mySpace is peanuts.
The money being talked about though for Facebook and others cannot possibly be recovered though unless a number of stars align, and that's too much for me. ;-)
You don't seem to understand refutation. I'm not claiming your main point was that ad-supported sites are fads. I'm claiming that follows from what you say. And if something false follows from what you say, what you say is also false.
"consumers that don't invest out of pocket are fickle"
If consumers who didn't pay for stuff were not making investments in other ways, I suspect it would be easier to get users to register. Time is an investment, as is trust.
"What I am saying is that ad-based businesses aren't stable enough to warrant the valuations that we're seeing right now."
What valuations? You mean profits? I honestly don't know what companies you're talking about. Google? You're predicting the downfall of Google? Get in line -- there's been one for years, right next to the one that predicts Apple will Die Any Day Now[tm].
He's right. Let's all quit and get jobs crunching numbers in the finance industry. Better yet, lets become farmers. Everyone needs food right? That market isn't going away any time soon.
When did he ever imply that? Just because he is suggesting that the market might see a recession or a bust doesn't mean he is saying all people should get out of the market.
This "analysis" is nothing but opinion. There is nothing data- or fact-driven about the graph (labeled "hypothetical valuation during a general market correction") or assertions (e.g., "Even the most optimistic however, don't suggest that we are heading into anything but a bear market.").
If you are going to form opinions and hypotheses, please back them up with fact-based analytical rigor before writing an article and posting it in public. The world doesn't need more opinion masquerading as analysis.
One important thing to remember is that company valuations in technology are not set by any current metric (discounted cashflow, multiples of revenue), but perceived future value. Facebook may only be taking in 8 figures in revenue each year, but certainly has future potential on the order of billions of dollars.
I think we are seeing another period of web standards being set (Ebay, Amazon, etc were the standards of the previous boom). Wasn't Bezos big in the 'get big fast' strategy? That will work, but only for a very select few.
I agree with some of his premise, in that relying solely on advertising dollars is a huge risk to any potential revenue model, but it does not mean that there won't be winners in that race. After some experience, I'm pretty confidant in saying that advertising-only models are VERY hard work and require a massive amount of network effects.
The lack of defensibility in Web 2.0 is also quite troubling to me, as it seems like if you create something worthwhile, you may be stuck in the no-man's land of free AND not enough page views to support the ads-only model. Perhaps that's when we'll see a permanent change in nomenclature from 'web products' to 'web services'?
Elephant in the room no one's talking about: almost everyone reading news.YC wants the market to remain as healthy (and bubbly, if you call it that) for as long as possible.
In 1998, the voices of the naysayers were drowned out by the shouts of irrational exuberance. Still don't agree with the article's assessment -- but who wouldn't love to pull a Mark Cuban this go 'round?
The argument this time seems to be that the entire industry will crash once it becomes clear that a large site like Facebook can't hold on to its ad revenue for more than a few years, because the fickle users can (and supposedly will) migrate to other sites.
I don't understand. If Facebook's users all left the site tomorrow, it would obviously be bad for Facebook, but the rest of the industry would break out the champagne. Users who leave Facebook don't abandon the Web and join the Amish - they go someplace else online, and the ad revenue goes right along with them. Friendster's collapse was a bad omen for Friendster shareholders, but it doesn't seem to have had any terrible effect on the rest of the social networking industry, which grew even faster once it absorbed all of Friendster's former users.
Even if it turns out that individual sites like Facebook are fads, lasting for a few years before burning out, there's no reason the industry can't adapt. Clothing styles turn over just as quickly as Web fads, but fashion designers still manage to stay in business for decades. You just have to operate at a higher level. The Facebook or YouTube of the future could be a company with half a dozen brands, rolling out (or buying out) a new brand every few years to please the latest group of teenagers. Like a TV network, or Procter and Gamble, or the Pepsi Corporation (which owns Pizza Hut and Taco Bell and a substantial piece of your local high school cafeteria.)
The real limit to the growth of ad-based sites is the number of users and their available attention - you can only show so many ads to someone in their lifetime. One could argue that the industry is funding, or is about to fund, many more ad-based companies than the ecosystem can support at the moment. But even that would not constitute a "bubble". It's just the business cycle. These companies aren't fantasies or fakes - they're just competitors, getting ready to fight for a share of some very real ad dollars.
I think it's dangerous to think that advertising dollars operate in a zero sum balloon sheltered from economic realities.
>The real limit to the growth of ad-based sites is the number of users and their available attention
Assuming the perceived value of an ad remains constant. Unfortunately, ad budgets change, and sometimes, ad spending does indeed pick up and go join the Amish.
Of course the advertising world is not a zero-sum game. In fact, the overall size of the ad market has been growing like gangbusters over the last few years.
Has it grown too much? Maybe so. It's still possible to argue - easier than ever, really - that Web ads have become seriously overvalued and that the whole industry will collapse when we figure out that the intrinsic value of the average ad is x and not 10x or 20x. That seems like a sensible theoretical approach, but Google took the fun out of the last round of these arguments by experimentally disproving them to the tune of several billion dollars, so I'm not surprised to find that theory is out of fashion and that the modern entrepreneur prefers to be an experimentalist. Darwinian evolution isn't fun for everyone, but sometimes it is the fastest way to explore.
And, yes, of course there are "economic realities". The number of users and their available attention is an upper limit to the growth of ad-based sites. In a recession we will get to explore the lower limits, and the Darwinian evolution will really kick in. But that's just the business cycle. That's not a "bubble".
A bubble is a nonlinear event in which otherwise rational people - some of the smartest people you know - choose to deliberately forget everything they know about business. They're happy to pay 2x for a company that they know is only worth x because there's a sucker down the street who will pay 5x. A bubble is where you're terribly tempted to join that crowd, because they are getting rich, while you're stuck being a middle-class Cassandra with a boring, profitable job.
What I see today is a crowd of people falling over themselves to proclaim the next bubble. That looks like healthy skepticism to me. Maybe even a bit too much healthy skepticism, like a public service ad that runs ten times every hour.
However insane their valuations may appear to us, we're still at the point where investors are debating the actual value of sites like Facebook and YouTube. It's a large, young, and unpredictable market, and even in non-bubble times there are plenty of irrational investors, so it's not a very sober debate. But rationality is still in the picture. Those who believe that YouTube has a fighting chance to become the next News Corp (another worldwide media company; $24 billion annual revenue) might well argue that buying the company for $1b is a good deal. I think that's a nutty argument, because my techie instincts tell me that there are several dozen Startup News readers who could clone YouTube in less than a month, or even a week. But, you know, I could be wrong. I was wrong about Google.
This guy must have hit a nerve to generate so much vitriol. I think many of the comments here hit on some good points. I think the blog post we are discussing hits on some good points. It is possible that we are all right.
We need to be honest here and admit, however, that the vast majority of the free to use consumer startups that we are seeing will be challenged generate US$1 Billion in revenue a year. Or for that matter, even US$100 Million. That is why there is little talk about taking the majority of them public, because other than as a delivery vector for advertisements, there is scarce value in this crop of startups. To be perfectly frank, these are less than ideal platforms for ad delivery as well.
What can be done? We can try other models, and I'm sure many will. There are a boatload of virtual worlds, virtual world platforms, and MMOs coming on line this fall. ALL of them plan on using ads, microtransactions, and subscriptions. They are in the good position of being able to use all three of these at the same time, and all of them will. I predict though that by December all of these companies will have their models DESTROYED by two guys on their couch in boxer shorts developing a FREE virtual world on their laptops while watching SportsCenter and eating ramen. There will be 1000 college students "building portfolios" around the country that will make gigabytes of content for the new LINUX of virtual worlds. It will all be P2P or hosted on Amazon, and it will piss many a VC off. So the only thing these businesses will have left will be advertising.
This is the situation web 2.0 is in. People keep investing in the hope that some little twist will be the magic one that brings in the most ad bucks. Charging for these things is not an option, there will be free alternatives if you wait 6 weeks. Even virtual worlds can be duplicated in 6 weeks these days! What can we do?
It's easy to point out the holes in what is currently being done, it is much more difficult to offer a WORKABLE solution.
By hitting a nerve you presumably mean touching on some fundamental point that makes people uncomfortable. But not everyone who generates a lot of responses hits a nerve in that sense. Trolls pride themselves on causing huge fights from remarks with little more content than a bot might generate.
I'm not saying this was a deliberate troll. I'm sure it wasn't. But it had that in common with trolls.
When people are connected to an idea, they tend to believe it to be true, even as evidence starts to mount otherwise.
When a definitive answer to this question comes, minds may change, but like most disputable theories (global warming, economic cycles, religion) without proof, people tend to react on their base instincts.
To those that have a lot to lose in me being right, it's a tough pill to swallow. I haven't given any real proof, rather a selection of observances that could point to a conclusion.
To those without any real vested interest, or (like me) looking from the standpoint of a potential future interest, the situation seems more tenuous.
"This guy must have hit a nerve to generate so much vitriol."
He hit a nerve, but not any kind of "nerve of truth". We're simply tired of the same old bullshit repeated by thinking-impaired writers.
You can't have a "crash" if the stock marketed is not tied into the business. PlentyOfFish.com, my favorite example at the moment, does not need to worry -- directly -- about a stock market crash. Nor does he (it's one guy) need to worry about VC pulling out: he has no VC.
A stock market crash could hurt everyone, but that won't be caused by some "overvaluation" of Web 2.0 companies.
Folks, the worst thing that can happen here is that some people may have to get corporate jobs while they plan their next ventures.
Those who predict a Web 2.0 crash don't understand what happened the first time.
A good question to pose would be: assuming a significant economic downturn is likely, how would this affect typical 'web 2.0' businesses?
The answer may well be 'badly'. A great deal of these sites presume a healthy, wealthy economy: they hope to generate income from ads, or subscriptions, or hope for investment and/or buyout. All of these routes will be significantly impacted by a liquidity crunch.
Many sites with small margins, or hoping for investment, or looking for a big sale, or counting on getting big fast may then have real problems.
I am not denying that there are many opportunities on the web, or saying that it is necessarily a bad time to be in the internet business. I am suggesting that anything less than a solid business may prove extremely vulnerable to a small-medium recession.
Well... I'd be very skeptical to listen to a guy with such a cheesy blog title. He is "Building leadership...". Often most of these folks usually don't bother with even a basic logic in their "predictions" and "explanations".
Quote: Facebook and mySpace are only as valuable as the next big thing. In other words: they are fads. Now, fads can be successful if they are managed right, but they all share one thing in common - they will not be be around tomorrow. If you need proof, look no further than Frendster.
Wow. This is an excellent, realistic article. Some of the great nuggets:
"Consumer loyalty is directly linked to the amount the consumer invests out of pocket. Apple has a fiercely loyal base partly because they feel really stupid spending an extra $300 on a product that isn't something special. With social networking sites the amount spent is zero - and the loyalty corresponds.
Facebook and mySpace are only as valuable as the next big thing. In other words: they are fads. Now, fads can be successful if they're managed right, but they all share one thing in common - they won't be around tomorrow. If you need proof, look no further than Frendster. In 2003 they had 20 million users. Today, they have less than 1 million die hards. Those are fickle crowds.
So, why is this a problem? Because eventually investors - be they VC's or acquiring organizations - want to see some growth in their investment. With a fad-based industry, all value becomes speculative and opinion based. In order to make money, investors need to assume that tomorrow, the perceived worth of the product will be higher. Let's pick on Facebook a little. Facebook now needs the next investor to believe it's worth $2 billion at least. - invest $1 billion, recoup $1 billion. Sorry if I laugh a little."
And:
"Let's put this into perspective: We have a product that has a monetary value of zero to its users being used to build further products of negligible value - and these products are actually being sold or invested in!"
And this has me asking the question: is it not better to charge for a product and therefore create a loyal and mature customer base on top of actually getting some real revenue? I mean sure, you might not have 30 billion users, you will probably have to make something that is higher quality than something that is free, but the results to me seem to be much more valuable.
That first nugget ignores that some people invest a lot of time and effort into their online identity via a social networking site. They aren't going to switch in a heartbeat.
I don't know how much true is what your saying, a month back I switched to Facebook from Orkut and I find lots of ppl doing the same. Facebook is a clear winner thats why I joined in and if something better comes, I won't mind switching again.
You're making my point. Facebook started to pass Orkut three years ago, and you didn't change until last month. It doesn't happen in a heartbeat. "Zero loyalty" just doesn't fit the facts.
Social App users don't switch by packing up all their belongings and moving them to another site, they just start up a new profile and build there instead.
If you think of it that way, it's not an either-or proposition. I can continue to have my profile on your site, but I won't venture there as much, you lose the ad revenue, and the downward spiral continues.
I actually thought those were some of the worst quotes in the article, not because the conclusion is wrong (IMHO, I don't have enough information to tell), but because the reasoning is wrong. For example:
"With social networking sites the amount spent is zero - and the loyalty corresponds."
Except they put time and emotional investment into the site. That often holds users to a site more than money.
Take a look at the recent fanfiction/LiveJournal kerfuffle. LiveJournal is essentially saying "We don't want you here, and we will suspend and delete your journals until you leave." There has been discontent - both technical and business - with LiveJournal's policies for the past 2 years. There is a widespread belief among many users that LiveJournal has lost out to FaceBook, and FB is now the superior offering. And yet the bulk of my friends are unwilling to leave, because LiveJournal has been a major part of their life for 5 years. It's too much of a logistical hassle to bring all their friends over.
(Strangely, it was not much of an issue 5 years ago when my friends all abandoned DeadJournal for LiveJournal. Perhaps it's because they were mostly 13-15 year olds then, and mostly 20-somethings now. Adults don't deal well with change.)
"Facebook and mySpace are only as valuable as the next big thing. In other words: they are fads. Now, fads can be successful if they're managed right, but they all share one thing in common - they won't be around tomorrow. If you need proof, look no further than Frendster."
That's a non-sequitor. The reasoning is the same as "Google won't be around for long; for proof, look no further than AltaVista" or "Microsoft Word won't be around for long; for proof, look no farther than WordStar and WordPerfect" or "Excel won't be around for long; for proof, look no further than Lotus 1-2-3 or Visicalc".
A product is vulnerable only so long as they have left consumer needs unmet. Early word processors did, but now MS word does a pretty good job for most users. Early search engines did, but now Google does a pretty good job for most users. Whether FaceBook meets everyone's social networking needs is an open question; IMHO they don't, but they're rapidly filling the gaps with the FaceBook platform.
"Let's put this into perspective: We have a product that has a monetary value of zero to its users being used to build further products of negligible value - and these products are actually being sold or invested in!"
Users and customers can often be two disjoint sets. Broadcast TV provides significant value to its viewers, but its viewers aren't the customers; the advertisers are. Bond rating services provide significant value to bond buyers, but bond buyers aren't the customers; bond issuers are. Facebook provides significant value to its users; there's a lot of potential to monetize that through local ads, distribution partnerships, etc.
I also think the reasoning behind this line is quite flimsy:
"I'm sorry to those that are caught up in the madness, but you have to have a few screws lose to think that we're not in the middle of a bubble."
What's that, argument-by-repeated-assertion? Personally, I think we're in the beginning of a bubble - but I can think of several points that suggest we're not in one at all. I certainly think it's premature to dismiss anyone who doesn't believe so as "a few screws loose".
Remember - Greenspan gave his "irrational exuberance" speech in December 1996. The bubble burst in early 2000. That was 3 years between "We're in a bubble" to "Uh-oh, the bubble's bursting."
Other bubbles have had similar timescales - my friends were saying "We're totally in a housing bubble" as of 2003 (it peaked in 2005 and is bursting now), people were saying "We're in a dot-com bubble" in 1997 (burst 2000), people said "Japan is undergoing an asset bubble" in 1986 (burst 1989), Warren Buffett got out of the stock market in 1969 (burst 1973), and the 1920s stock market boom started in early 1927 (burst 1929).
>That's a non-sequitor. The reasoning is the same as "Google won't be around for long; for proof, look no further than AltaVista
Difference being in everyone of your examples:
1. The product is in a near monopoly position
2. None rely on ads as a sole means of income
3. Microsoft isn't overvalued. Google will probably see a share correction soon, or at least during the next downturn.
>Users and customers can often be two disjoint sets. Broadcast TV provides significant value to its viewers, but its viewers aren't the customers; the advertisers are.
Good initial point there. Interesting though that you picked broadcast TV. It's no secret that traditional TV is losing audiences fast. In fact, you could argue that TV proves that my analogy works across mediums. Again, the big difference is that valuations are reflecting reality here, whereas this isn't the case in web land.
Google does. (Aside from products like the Google Search Appliance, which are basically negligible in revenues.)
> It's no secret that traditional TV is losing audiences fast.
Well, yeah, but it's had them for 50 years. If you wanna argue that FaceBook won't be around in 50 years, you'll get little argument from me. However, there's a good chance I won't be around in 50 years, so I also don't really care.
I thought your point is that there's a good chance FaceBook won't be around in one year. That's certainly possible, but I don't really see a case for it from the evidence you've presented. All your arguments apply to broadcast TV c. 1950, but if you'd bet that CBS would be out of business in 1951, you would've been very, very, wrong.
If you want to make the more general point that advertising-supported businesses are hurt badly in recessions - that's true, and fairly well-known throughout the financial industry. However, lots of businesses are hurt badly in recessions. In 1929, nearly the entire financial industry was wiped out - thousands of banks closed, investment trusts (the 1920s equivalent of hedge funds) disappeared and didn't reappear until the 1950s, mutual funds underwent stiff regulation, stockbrokers quit and (legend has it) committed suicide. That's far worse than what happened to the entertainment and advertising industry. Capital goods also suffer, the auto industry downsizes, construction gets hit hard, farmers foreclose on their mortgages, etc. Basically the only industries that do well are consumer staples, entertainment, and vices (alcohol/tobacco/gambling).
One of my major reasons for making the leap to entrepreneurship is that if the economy soars, I do much better with my own business, yet if the economy tanks, my job at a financial software startup is toast. If I'm screwed anyways, might as well enjoy the upside.
Google is ads, it doesn't rely on them. See AK's response to pg in this thread.
I not saying anything about Facebook's ability to survive, I'm saying it's a bad investment because it is overvalued, hence we're going to see a correction in the tech market. It seems everyone is missing that point, choosing instead to go nuts about how ad-supported models are working.
Sure they're working, they're just very vulnerable. When you've got ad-supported models that are over valued, you're even more vulnerable.
I don't think you can use the depression as any indication of what happens during a recession though. In recessions, it's possible to effectively shield oneself from a good deal of harm, whereas the depression came and found you.
I agree with you on the last para. I think you're much better of controlling your own destiny in pretty much every case, even if you lose your shirt.
I hereby predict that the fledgling blog at davidpiccione.com, created in May 2007 by Canadian David Piccione, will be forced to fold soon due to overvaluation and other market pressures.
We expect that the blog will cease operations before the end of the calendar year.
Dude, you're taking my opinion awfully serious. Chill.
If I'm so wrong, you have nothing to worry about. I'm not getting why simply presenting a viewpoint needs to escalate into a personal attack.
Tell ya what, if it means so much to you, I'll write another post exactly one year from now. If you are correct I'll point out how wrong I was for you.
Actually I'm just teasing. The "your blog will go defunct because of market pressures" part anyway.
The rest: it's just healthy debate. As long as no one resorts to name-calling or breaks Godwin's Law (comparing something to Hitler or the Nazis) then you can assume we're all just stating our opinions. No hard feelings.
Look no further than Friendster for evidence of users' fickleness? Friendster wasn't killed by the market; it committed suicide.