Why Social Media Matters To You

There is a growing consensus among VCs and top executives that some sort of shakeout is coming in the social media world. There are simply too many companies fighting for a fixed number of advertising dollars and too little money coming in the door in the short term. A report by IAB showed online advertising revenue in the United States was $42.78 billion in 2013, up from $36.56 billion in 2012. On a worldwide basis, Statista reported $117.2 billion in 2013, with predictions that number will rise to $133 billion this year. Google alone accounted for $50.5 billion of that number. Facebook, meanwhile, is on a run rate for more than another $10 billion.

But even the big guys are beginning to stumble. Twitter is on track to bring in $1.33 billion in advertising revenue in 2015, but its net loss nearly tripled this quarter, sending its stock price sharply down. As with the dot-com bust in 2001, there are too many players investing at a faster pace than the market is growing because it is the only way to stand out from the pack. Wikipedia lists 210 social networking sites serving all sorts of diverse communities.

While this may seem worlds removed from semiconductors, so did the dot-com bust. But there are a few factors that bear watching when this market begins to crumble. First, a common rule of thumb is that money changes hands five times. When one market sinks, it sends waves in multiple different directions. That could include everything from real estate to restaurants to automobiles to consumer electronics. A collapse in a large, heavily funded market is like dropping a large rock into the center of a lake. The waves ultimately will ripple all the way to the shore.

Second, one of the hardest hit segments will be the cloud, which are big consumers of software and semiconductors. This occurred in 2001 with the dot-com bust when makers of communications servers—Sun, Compaq, HP, IBM—watched their earnings and much of their future erode in that market. Sun was sold to Oracle. Compaq was sold to HP. And IBM sold off its low-end server business to Lenovo. There also were a slew of Internet hosting companies—the precursor to the current day cloud providers—that took a big hit. Exodus Communications, Hotline Communications and a long list of others disappeared or were absorbed into other companies.

Third, there is a question about whether other nascent markets will pick up steam in time to soften the blow. In 2001 there was no new market poised for rapid growth. The iPod was just introduced, the cell phone market was relatively static, and flat-panel TVs cost more than $10,000. And while each of those markets eventually took off, it took years to rebuild those individual sectors, offset by a global economic downturn in 2008 caused by entirely different sectors—global speculation in banking (derivatives), real estate (balloon mortgages) and insurance for both of those.

There is a huge influx of new opportunities with the Internet of Things, automotive and medical electronics, and the movement of data outside of devices and into the cloud. The question is how quickly these markets will take root and grow. It’s the rate of growth and the rate of investment that will be the key metrics to watch. They will determine the water level and the height of the fall. Jumping into a pool of water from 10 feet is generally painless. At 500 feet, the water has the same effect as jumping onto concrete.