Sometime in August, Facebook will top 1 billion users. Every few months, Twitter floats a press release that it has added another 100 million users. In quarterly earnings calls during the past year, Google has had to sheepishly admit that it its Google+ social network isn't growing as fast as hoped. Pinterest is the hottest new social network, in large part because it reached 10 million users faster than any of its predecessors.
Building a social media empire is all about building numbers. Those numbers, however, don't always have dollar signs in front of them.
"I do think there is a ton of speculation," said Dean M. Wright, founder of the social data and research company BrandMixer LLC, noting last year's Groupon initial public offering and this year's likely Facebook IPO. "This speculation is driven largely by investors being enamored by the numerology of social media: Facebook has 850 million users! Over 50% of Tweets come from mobile and 300 million people in the U.S. have a mobile! Every minute there are 2,000 check-ins on Foursquare!"
But in an email, Wright says investors may want to consider one more equation in their calculations: "Fear + Speculation = Bubble."
That fear, Wright said, prompted Facebook to spend $1 billion on Instagram, a company with no revenue and no discernible monetization strategy. What Facebook bought were the other numbers, the numbers that project Instagram hitting 100 million users by the end of the year.
"I think what we are seeing in the social media landscape today is fear more than speculation," Wright said. "Fear of being replaced by the next new thing - not necessarily the next best thing."
The "fear" half of the equation is tucked away on the left coast in Silicon Valley. But the "speculation" end of the equation will be largely driven 3,000 miles away, on Wall Street. Just how big the bubble gets will be determined by how much money investors spend in chasing hot IPOs.
"Having started my company in the shadow of the 1999 tech-bubble crash, I can definitely see parallels evolving between the 'go-fever' that pushed an industry over the cliff and what we are witnessing today," said Mike Seiman, CEO of digital advertising company CPX Interactive. "The problem comes as a result of the combination of a fear of being left behind in the fast-paced evolving world of social models and the fear of a still anemic economy, which makes investors hot for a quick turn around on their investments."
Seiman says he believes Facebook's purchase of Instagram was impulsive, and that Facebook likely overpaid for the app maker. But, ultimately, Facebook feared it would not be able to show Wall Street investors that it had a mobile strategy based on its existing product, so that fear drove the company's wild speculation.
Seiman, as we previously reported, does not necessarily think the acquisition is a fatal flaw.
"If Facebook has one advantage that could possibly make its own 'go-fever' a little less destructive, it is unique in its ability to bring unparalleled scalability to the table of its acquisitions," Seiman said. "No one doubts that it likely overpaid for Instagram in what seems to be an impulsive move, but if anyone can use scale to elevate a potential contender into the next Facebook... perhaps it is Facebook."
Next: Is Now The TIme To Launch Your Social Start-Up?
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