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Are We in a Social Media Bubble?

I would like to preface this post by saying I am a Social Media guy, I am on all the sites, fully believe it will be around forever, and most importantly I make a living based on helping others with their Social Media. But the recent Twitter IPO got me thinking: are we in a Social Media bubble? And will it burst? Personally, I believe it will be here to stay for a long time, but that does not mean we won't have some busts along the way.

Twitter debuted last week with a stock price of $26 and quickly rose in the first few hours to $45/share, which equates to a market cap of $33 BILLION! That means Twitter is valued more than 300 companies of the S&P 500. Can a company that is not currently profitable be worth that much?

The question might be simple, but the answer is not. If you go back and follow the IPOs of popular Social Media sites, you will see generally the same line graph for each. Initially, a spike based on the excitement of the IPO then a downturn and then once again a gradual rise. The key is to spot ones that will go back up and the ones that are destined to fail.

To be able to spot the ones that will succeed, you have to, as they say, "follow the money".

Is the company currently making money? Do they have a system already set up to generate revenue? What future plans do they have and are they sustainable? Some companies such as Facebook and LinkedIn are beautifully set up for the long term. They have large mixed demographic of users, are profitable and have great money making products that work that should keep them around for years to come. Using Facebook a marketer can easily target their exact customers using all the rich data Facebook holds such as interests, hobbies, location, preferences, apps they use just to name a few which is powerful for the marketer.

Then we have companies such as Twitter that really are question marks. I love using the product, but as a marketer using its ads for my clients is not so great as of now. It is too expensive, the analytics are are a little thin, but that is not to say this won't improve over time. Additionally, Twitter has a very niche user base. For example, my mom is on Facebook and LinkedIn, but there is no way she will ever be on Twitter. The ability for Twitter to both diversify their user base and capture different groups such as baby boomers and grow its overall user base will be crucial.

Also, currently Twitter is much too reliant on corporations for revenue rather than small and mid-sized businesses. They can only rely on them for so long to purchase trends or use their expensive ads, so creating more cost effective solutions for small businesses will be vital for growth. To give you an idea of the price comparison between Facebook and Twitter, I looked at the industry averages for running campaigns on each platform and the data speaks for itself:

Average CPM (Cost per Thousand Impressions): Facebook $0.59 vs Twitter $3.50

Average RPV (Revenue per visit): Facebook $0.93 vs. Twitter $0.44

Average CPC (Cost per Click): Facebook $0.50 vs. Twitter N/A

Share of Social Referred Sites: Facebook 62% vs Twitter 6.8%

ROI: Facebook 109% vs. Twitter N/A

Mobile CPC: Facebook $0.40 vs Twitter N/A

As seen from the above, Twitter has not released information on some of the key metrics, and for the ones they have released Twitter has some work to do to make ads more affordable. The next couple years will determine whether Twitter will rise to Facebook/LinkedIn levels or crash like the once hot stock Zynga.

I believe Social Media is here to stay both from a practical usage perspective and an investment perspective, as long as you can spot the winners from the losers. So does that mean we are in a bubble? Possibly, but I don't think this bubble will burst like comparable ones from the past. What do you think?

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