In the years before the financial crisis, we saw asset values rocketing, a host of new buzzwords appearing and a shared conviction that growth would be eternal. So how is that different from social media right now?
Riding the rocket
A bubble can be defined as ‘trade in high volumes at prices that are considerably at variance with intrinsic asset values’.
Intrinsic value is hard to define, since prices are what people are willing to pay. So bubbles are visible in retrospect: if prices suddenly fall, as house and share prices did in 2007–8, that suggests that a bubble has burst.
We’re certainly seeing rocketing valuations for social media firms, just as shares in building firms and banks soared from 2000 to 2007.
Twitter is valued at $10bn on sales of $100m. Some commentators see Facebook’s astonishing $82.9bn valuation (an eightfold-plus rise from 2009’s $10bn) as a clear sign of a bubble, while Groupon’s rumoured $15–20bn IPO makes Google’s $6bn offer look like peanuts.
Measure for measure
Is social media overvalued by businesses that use it? Measuring ROI has always been tricky. At my level of the market, many firms engage in social tactics without a guiding strategy. Since they haven’t defined success, no-one can tell whether they’re overpaying for their results, although it seems likely.
For firms who do measure, metrics that reflect reach and engagement (shares, likes, views, downloads etc) are often subjective.
Firms must decide for themselves how important those outcomes are, how much to pay for them and how to value the brand equity or goodwill they create. Brand equity is potential, or deferred value. It’s tomorrow’s cash flow.
If firms overestimate that cash flow, they may overvalue social media. And the novelty of social as a discipline, and its volatile, fast-moving nature, mean they’re more likely to do so.
So much for the financial aspect, but what about the psychology and culture of a bubble?
Change in thinking
Leading US economist Robert Shiller is an expert on bubbles who predicted the dotcom crash. He has argued that the cause of the late 1990s tech boom was a ‘change in thinking about ourselves’. Consumers started believing that success did not just mean making money from work, but from investing too.
In the 2000s, this viewpoint returned with a focus on property. At the peak of the UK buy-to-let boom, you almost felt reckless for not investing in property.
We’ve seen a similar ‘change in thinking’ about social media. Many firms now accept, largely without question, the idea that they should initiate ‘conversations’ with their customers and be present in the social space. The idea has gone beyond its tipping point.
Maybe they’re right, but as savvy investors know, the time to sell is when everyone else is buying. Universal, unquestioning endorsement usually means the peak is coming.
As the US housing market exploded, fuelled by cheap credit, financiers developed new products that sliced, diced and repackaged mortgage debt for resale: MBSs, CDOs, CLOs, CDO-squareds and many more.
The complex, abstract language mirrored the mindset of investors, who often didn’t know (or want to know) what they were really buying. It also created distance between financial instruments and the future cash flows on which they were based, which disguised risk.
In the housing bubble, the underlying asset was people’s ability to repay their debts. In social media, it’s their loyalty and willingness to buy. And just as in finance, the words people use distance social-media activities and investments from reality ‘on the ground’.
Terms like ‘engagement’, ‘conversation’, ‘experience’, ‘advocacy’ and so on disconnect marketing from its ultimate goal: persuading people to buy things. And, as in finance, this serves the interests of those who profit when others invest.
Digital agencies and social-media consultants have little incentive to stop using jargon that’s so useful in blurring accountability.
Instead of measured, balanced discussion, what we often see is consultants emphasising the urgent need for companies to get into social media right now, ‘before it’s too late’. This post elegantly embodies the argument, and features a silky-smooth segue into the services the author is promoting.
The shrill advice to ‘get on board’ before something ‘takes off’ is familiar to penny-share traders as a classic pump and dump tactic. Pumpers build a position, generate a buzz and push prices up then dump the shares and move on. And high finance isn’t immune, that’s why investment banks around the world scrambled to invest in subprime.
In reality, it’s not too late, and it never will be. Second-mover or fast-follower advantage can be well worth having.
Firms joining Twitter now may have fewer followers than early-adopting competitors, but they can draw on far more knowledge and learn from others’ mistakes. And, crucially, they can make an informed decision about whether they should be in the channel at all.
Blind faith makes critics more outspoken. This happened with property before the financial crisis, and it’s happening in social: note the similarity in tone between House Price Crash and Ad Contrarian.
Both sides are selective with evidence, which erodes credibility. For example, it has passed into social media folklore that ‘Dell makes millions on Twitter’ because their Twitter activity generated $6.5m in revenue worldwide over two years.
But the context for that figure was total sales of $52.9bn in YE2010. Even if we assigned the whole $6.5m to 2010, it would only account for just over 0.01% of sales, or one ten-thousandth. That’s like a freelancer who earns £30k making an extra £3 via Twitter.
Also, @DellOutlet mainly tweets special offers, which drive sales regardless of channel. Dell gets reputational and customer-care benefits too, but the sales don’t clinch the argument. (Michael Dell didn’t even mention social in his review of 2010).
The sales lift of another cause celèbre, Old Spice, may have been down to offers too. But even if it wasn’t, its runaway viral success had more to do with brilliant creative and stunning execution than social. When we get down to the nitty-gritty of B2B, where creativity is much harder, case studies tend to be heavy on ‘engagement’ and ‘feedback’, light on sales.
On the other side of the argument, we’ve got critical coverage of Pepsi’s ‘failure’ with social media. While the sales hit is incontrovertible, the reasons for it are far from clear. The strategy, the message or the execution may have been off – which is bad news for Pepsi and its agencies, but not proof of social media’s failure.
We need balanced debate, but neither side wants it. Social media insiders, like investment banks back in the day, want the dancing to continue as long as possible. And critics gain credibility and exposure from stirring things up, not calming them down. The effect is to entrench opinion on both sides and perpetuate the status quo.
Pop goes the social
If social media is a bubble, it will be interesting to see what happens when it bursts. For example, we might see:
- A sudden nosedive in confidence about social media, coupled with plummeting valuations for social-media firms.
- A sharp fall in the price of social-media services.
- Business failures among social agencies, and wholesale consolidation (as with estate agents and investment banks in the financial crash). Some failures will be ‘unthinkable’, like that of Lehman Brothers.
- Companies deserting social media in droves, followed by a slow, tentative process of finding a level of commitment that works and/or feels right.
- A resurgence of interest in traditional marketing techniques like direct marketing or TV – rather like investors flock to gold and bonds when shares crash.
- A feeling of embarrassment over past excesses and enthusiasms (yes, I’m looking at you, Second Life) – just as house prices have become a sensitive topic around middle-class dinner tables post-crash.
Of course, there will be those who say it can never happen, particularly with Facebook. But even appealing to entire generations does not guarantee you’ll appeal to those that follow. Before JFK, all men wore hats.
What do you think? Are we really in a bubble? And if we are, what will happen when it goes pop?