A Problem of Perception: Dot-coms vs. Social Media Marketing

Ever since the buzz about the ‘coming tech bubble’ started – roughly speaking, sometime in the last month—I’ve noticed myself having this conversation a lot:

Some Guy: Where did you say you work again, man?

Me: I work at [a locally well-known marketing and SEO company.]

Some Guy: Oh, really!  Wow, so that’s like a Dot-com, right?

Me: No. Actually it’s nothing like a Dot-com. We work for our clients in a close partnership. It’s not like we just host a bunch of advertisements on a site that has funny graphics of kittens or aliens.

Some Guy: Wow.  If I were you, I would start my own company.

Me: Actually, it would be an act of insane hubris for me to start my own company and it would probably fail immediately unless I was extremely well-capitalized. We have an extremely complicated process that involves a lot of highly-specialized, seasoned people focusing on their mission-specific jobs. It’s taken us years to form business partnerships. And we still only get paid on a results-based system. You have no idea what it would take to go out and…

Some Guy: Yeah, but you should just go make your own company. You can be a millionaire! I wish I were in your industry!  If I were in your industry I would be a millionaire!

At this point, I politely terminate the conversation or change the subject. I’ve had this conversation with two of the baristas at the café where I go for lunch. I’ve had this conversation with the guy who does landscaping for my landlord. I’ve had this conversation with tons of older folks from my father’s generation. They don’t get it. I work at a business that produces a reliable, scalable product by means of an extremely complex and refined process. It takes work. It takes elbow grease.

I’m guessing their perception is somehow connected to the buzz in the news lately: the Skype buyout, Groupon Now’s rollout and LinkedIn’s stock debut.  All of which have happened in the last month.

Portents: LinkedIn’s Stock Debut & Big Skype Buyout

Thursday May 19th: LinkedIn’s stock debuted at twice its projected asking price. The company’s valuation shot up to $9 billion by day’s end, and shortly after the closing bell the blogosphere was abuzz with interpretations and predictions based on the day’s events.

A common sentiment appeared as the opening line in The Buffalo News: “There was an unmistakable echo of the Dot-com boom Thursday on Wall Street.”

The article goes on to recap the surge in LinkedIn’s stock prices over the course of the day. Issued at an asking price of $45, the price of shares jumped to $122 dollars before lunch and closed at about $95 dollars —better than 200% of the expected price tag – having sold 30 million shares.

Let’s see:  30m X 95 = $2.85 billion. That’s an impressive amount for anyone to rake up in one day. It’s the highest valuation for any internet company since Google’s 2004 debut.  And let’s be frank: LinkedIn is no Google. The potential functionality and opportunities for monetization at LinkedIn—even at their outermost limits—do not approach anything like the revenue levels Google has achieved.

The company’s revenue for next year is projected to be a mere $500 million. These ratios, then, are admittedly tilted. Google trades at about 5 times their projected revenue.  With a market value of $9 billion, LinkedIn is trading at 18 times their projected revenue. It’s going to be hard for their revenue to catch up with such an optimistic valuation, no matter how you slice it.

All of this happened just a few weeks after Microsoft bought Skype—a company that’s actually been running in the red—for $8 billion. Meanwhile Facebook is surging behind the scenes and Apple’s brand valuation grew by 81% last year. A cloud-based revolution is coming, we are told.

So it’s understandable that people are nervous about a bubble. And, indeed, I’ll venture an amateur forecast: whoever bought LinkedIn stock last on the 19th of May and is still holding onto all of their shares two years later is going to be experiencing some serious buyer’s remorse. I’ll bet you a round at happy hour, bottom dollar: LinkedIn’s valuation is not sustainable. Microsoft is going to have trouble making the money they spent on Skype back from Skype alone—although, depending on how they bake it into to their total brand package, I’ll bet their $8 billion gamble will pay handsomely in the end.

However, these two risky run-ups do not a bubble make.

I would argue that robust growth in the tech sector this year has not been a harbinger of another bubble anything like the one we saw pop in March 2000. To prove my case I’ll have to use anecdotal evidence.  The main difference I find is that in the late 90’s the ‘Dot-coms’ did not actually produce any product or service.

Dot-coms relied on ad revenue projections. Their long-term performance—and even their short-term performance—were not measurable or quantifiable. They were not self-monitoring. In short, their business model and process had nothing whatsoever in common with the contemporary tech industry’s model and process. The only similarity is that ‘Dot-coms’ made use of the internet, and so do we.

And we’re going to keep doing what we do, growing in tandem with the recovering economy. So calm down, everyone.

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