The verdict is in from the Oracle of Omaha: social media is in a seriously inflated bubble.
In recent months a few developments with our beloved social networking sites led us to wonder whether social media was leading the charge in a second great internet bubble. There was the fly-by-night Facebook deal in which Goldman Sachs tried to sell stock of the private company to preferred customers. The plan was foiled as being illegal, but Goldman’s investment in the company alone helped bring its estimated valuation to as much as $65 billion.
All of which begged the question—can a company that doesn’t make anything really be worth $65 billion? Twitter was valued at as much as $5 billion, even though it’s still trying to figure out a revenue model.
This week Warren Buffett confirmed our doubts. Taking questions about his next investment strategy, he indicated he wasn’t believing the hype on social media companies: ”It’s extremely difficult to value social-networking-site companies,” he said at a conference in New Delhi, India. “Most of them will be overpriced. Some will be huge winners, which will make up for the rest.”
Of course, another company that doesn’t make anything tangible is Google, and they generated over $29 billion in revenue in 2010. But Google is a serious exception to the rule. Their user base is billions strong—as the mobile internet spreads across the developing world, it encompasses damn near everyone.
By contrast, Groupon, less than three years old, has a user base of just 70 million, generated less than $1 billion last year, and yet turned down an acquisition offer for $6 billion and is expected to go public soon at an initial valuation of $25 billion—a higher valuation than Google had when it went public.
Of course, commerce is ultimately about fostering new connections between people and monetizing the interactions. Social media, like Google before it, seems like it should be well positioned to sell boatloads of advertising into those billions of interpersonal transactions each year.
Still, in a time where the world is still reeling from economic meltdown, the money swirling around social media just seems like too much to believe. As the WSJ points out, the buzz network of the moment, Color, received $40 million in funding before even building a prototype. Path, the new mobile network that limits a person’s social circle to 50 friends, turned down an acquisition offer for $120 million from Google even though it only has a couple hundred thousand people signed up.
They don’t call Warren Buffett the Oracle for nothing. We thought that all signs pointed to a dot-com bubble 2.0 forming around social media, but what do we know? Warren Buffett, on the other hand, knows.
Photo via AP/ Paul Sakuma