Biggest Challenge for Social Media Stocks: 24-Hour Days

Many of us remember Napster, Friendster, and MySpace. Services that we used quite a bit for a while, only to see them fade away into obscurity as we moved on to the next cool thing. A more recent example is Zynga (ZNGA) and the FarmVille frenzy that took over Facebook (FB) for a while a couple of years ago. FarmVille users have fallen off by millions since then. Today Candy Crush is the hot game (and its creator, King, is rumored to be considering an IPO) but that too is likely to fade over time. Zynga timed its IPO well just as its user base had exploded, but now (as the stock chart below shows) that honeymoon is over. King would be smart to avoid the public spotlight and simply focus intently on not becoming an afterthought a year or two from now.

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I think the biggest issue social media companies are going to have, especially the ones that go public and see their initial valuations soar to the moon, is that there are only 24 hours in a day. And by that I mean, we can’t possibly use every single app, or visit every web site, or play every game, on a regular basis. There is simply not enough time. And as a result, when something new and cool comes out, we are forced to abandon the last cool thing in order to try it out.

There was a teenager interviewed on CNBC a couple weeks back and the anchors asked her what social media apps she uses most with her friends. She declared that her Facebook (FB) usage was declining (which jives with recent reports that teenage usage is stagnant or even beginning to drop) and that Twitter (TWTR) and Snapchat were hot right now. Within days we learned through media reports that Facebook offered to buy Snapchat for $3 billion. That is how fast these things move. It was once thought to be foolish to buy a company with no profits, but now Facebook feels like it has to fork over billions for a company that doesn’t even have sales, let alone profits. It seemed like a desperate move by Facebook to try and remain relevant with teens.  But what if Snapchat goes the way of Friendster, MySpace, and FarmVille?

The huge increase in the number of online choices consumers have is going to be a big problem for investors, I believe. There is simply no way that we can devote enough time to fully engage all of these different services. Maybe for a short time, but not over the long term. How long can you keep up religiously checking your Groupon (GRPN) and LivingSocial daily deal emails, Facebook wall, LinkedIn (LNKD) profile? Don’t forget to listen to your Pandora (P) music play list, play some rounds of Candy Crush, tweet to all of your followers, share photos with Instagram and Snapchat, check out the flash deals at Gilt and Zulily (ZU), and review the restaurant you just tried on Yelp (YELP). Eventually you have little choice but to weed out some of these services. Maybe you try a new one for a few months, but your technological schedule has its limits.

I point this out because right now there is a huge bull market/bubble in internet-related start-ups, especially social media apps. If you use the stock market as a barometer you would conclude that they will all be wildly successful; continuing to maintain and grow their user base and figure out how to monetize all of that customer engagement, to the tune of tens of billions of dollars. The problem? They can’t all be successful. There are only 24 hours in a day and we can’t possibly integrate all of these services into our daily life over the long term. Sure, there will be some winners, but I suspect far more will fade into oblivion over time and the newest hot app will just keep replacing the slightly less hot app and so on and so forth. We’ve seen this game before and it does not end like Wall Street and the Silicon Valley-based venture capital world seems to be suggesting right now. They all can’t be winners. For every Google there will be duds like Excite and Lycos.

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