My 2009 Prediction on Social Media and Beyond – The Flight from Growth to Value

So what does Bernie Madoff’s Ponzie Scheme, the financial services industry, the housing market, and Facebook have in common? They all look(ed) very attractive as they were/are growing, in other words rapid growth can obscure real value, as long as there is continued growth.

My prediction, is more an imperative and that is “The Flight from Growth to Value” and this is not just in social media, but also in business in general. 2008 demonstrated quite starkly that growth often obscures lack of ‘value’. This was demonstrated by the housing bubble, then the dramatic collapse of the financial services industry, then by the Bernie Madoff ‘ponzie’ scheme. All 3 of those dramatic collapses demonstrate how growth can obscure real value as long as there is continued growth. One of Wall Street’s greatest failures is it’s singular focus on measuring and rewarding growth, Wall Street IMHO is part of a systemic, management, and cultural problem that focuses our measures of business success on the wrong things. In fact the term ‘bubble’ is a fantastic term for describing this blind belief that somehow growth is the key, because as long as the bubble is growing all the participants feel like they are part of something valuable, this is of course the essence of a ponzie scheme and most multi level marketing businesses.

What has this got to do with Social Media? well I think there are several social media companies who are valued primarily due to their amazing growth, and it’s obscuring what the real value is that they create. The problem in social media is that it amplifies network effects so brilliantly that growth drives more growth, now this is great if you have a business model that creates and captures tremendous value, but if it doesn’t your burn rate goes up and revenue is always just round the corner… until you stop growing and then it collapses. In the end this is the definition of a bubble, everyone wants to join in as long as it’s growing.

It is when bubbles burst that winners emerge and they are generally not the ones you expect, the phrase from the first .com bubble was ‘Even chickens can fly in hurricanes’, and that’s the case with a lot of social media companies now. I think facebook is at great risk of collapsing if it doesn’t figure out what the real value is that it creates and figures out a way to capture it. Once myspace figured out it’s real value was in connecting bands, growth became less important than doing that better.

Two great examples of social media companies with business models that create value are Threadless.com and Yelp.com. Threadless was started in 2000 for $500 and by 2006 were doing 6 million in revenue with 11 employees (6 of them part time), this year they are on target to do 40 million+ in revenue.

Here’s my presentation that I gave at Inverge last year, it’s called “employing your customers for fun and profit” and it illustrates a lot of the ideas I think are important in social media business models, ie. it is the users/customers that create value, you just have to figure out how the help your users/customers do it better.

Lot’s of other people have put together some interesting predictions for what 2009 might hold for the Social Media space and Peter Kim has assembled a good many of them on his blog here. He has posted them to Slinkset where people can vote on them and you can even submit your own. Trendspotting also put together this excellent presentation that nicely illustrates some of these predictions. Some very interesting people contributed to this like Charlene Li, David Armano, Ann Handley, Rohit Bhargava, Read/Write Web, Ben McConnell, Jeremiah Owyang.

Now, some of the people on the internet that I believe are some of the most important thought leaders did not put any predictions about 2009 so I will urge you to go and listen to and read a couple of recent interviews with them. All of these interviews happened in December and if you dig into them and triangulate the ideas I think you have a pretty interesting framework to think about what’s going to happen online in the next 5 years, and to analyze existing businesses in the social media space.

1. Tim O’Reilly talks in depth about Social Media and value on NPR’s Science Friday
2. Clay Shirky’s recent interview on the Columbia Journalism Review
3. Lawrence Lessig on NPR’s fresh air talking about his new book : Remix: Making Art and Commerce Thrive in the Hybrid Economy

Tim O’Reilly is very active on twitter @timoreilly and I suggest following him, and even though not very active you should follow Lawrence @lessig and Clay @cshirky as well…. and you can follow my fractured though process there as well at twitter.com/karllong

Update:
I posted this to twitter and got some interesting questions, one in particular got me thinking from @warrenss

@warrenss @karllong Nice work and a great deck! It will be interesting to see what winners emerge.

And my response:
@warrenss two winners (i’ve expanded on the tweets considerably)
1. platform providers that enable people & companies to connect with, and enable niches to create value ie. twitter, ning*, etsy, google, yelp.com, myspace, Youtube, WordPress, crowdfactory, Etsy, SocialText, 37signals, Digg, TechMeme, Wikipedia, Stubleupon, Craigslist, 4chan.org Flickr, Dare I say Match, OkCupid, linkedin, Xbox Live, Mrtweet maybe Facebook, Nokia, OpenSocial.

2. companies and people that connect with either niches or lots of niches using some subset of the above tools ie. Dell, Apple, Nikon, Nokia, Patagonia, threadless, BoingBoing, etsy, Netflix, and personal brands like Barack Obama, Arianna Huffington, Shaquille O’Neil Ffffound, Gary Veynerchuck, Chris Brogan, Scobleizer, Kevin Rose, Michael Arrington, Hugh McCloud, Jeremiah Owyang, Mashable, Charlene Li, Zefrank, 4chan, Read/Write Web, (you may not know all of those personalities/pseudonyms and nor should you, but they are examples of people who are using social media tools to build incredible influence in their particular niches/communities).

*Ning’s ridiculous business move in shutting down it’s ‘adult’ communities due to concerns about advertisers, they have obviously not seen how much of a market there is for advertising in the ‘adult’ market.

UPDATE: Just read The Smart Growth Manifesto by Umair Haque on the HBR blogs and he articulates a brilliant concept of “smart growth” which focuses much more on the means of “value creation” that comes from growth. It’s a must read!

Tagged as: bubble, business-model, Social-Media, Strategy, value