Thursday, April 16th 2009
The Age of Twitter
Traditionally businesses have sold their products to make profit and grow their company. (Sounds obvious right?) In the early days of IT and software these same principles applied. Then in the late ’90s the rules seemed to change. Companies would sell their products as cheaply as possible in order to increase their market share and, hopefully, one day make a profit. Of course it all went horribly wrong and resulted in the dotcom crash.
So what did modern internet companies learn from this? Most ecommerce sites are now are much more sensibly managed and sustainable. Amazon have year on year profits since 2001/2 and other big players like play.com have followed their lead.
The new contenders for ridiculous business plans of the year are the social networking sites, the pioneers of web 2.0. While they have changed the way in which we use the internet and bought the world closer together, they’ve done it without ever making a profit. Youtube, for example, have completely revolutionised the use of video online. All of the site’s content is user generated and their main source of income is advertising. When they were bought by Google in 2006 everyone thought that the internet giant would be able to finally create a profit making giant. At $1.65 billion Google really needed to make Youtube work, but 3 years later and the site has yet to make any money and Google have found themselves bankrolling the site.
So if a company isn’t making any profit and is running at a huge loss, how is it worth so much money? It is the potential of the site that people are actually paying for. The site’s creators don’t need to worry about making a profit as long as people perceive the site to be worth millions of dollars. A larger corporation will take the risk believing that they are people that will be able to fulfil the potential. The original creators laugh all the way to the bank while everyone else watches in fascination as the company continues to lose money.
Twitter is much like Youtube. They are pioneering a new form of communication. They have a massive audience for potential advertisers and they’re hoping someone will buy them for a massively inflated price and make millions.
And this is the Age of Twitter – where companies are valued on their perceived potential. It’s just a question of time before this new bubble bursts.
Posted by Tasha on Thursday 16th of April 2009 at 2:15pm
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It's a pretty depressing state-of-affairs if there are young web-entrepreneurs building sites purely to be gazed upon by the all-seeing Eye of Sauron, er, I mean Google. There's an old Chinese proverb (that my gran translated into Yorkshire-speak) that says 'success only finds you if you're grafting...'
There are too many online startups that take an approach similar to that of a teenage girl whos only aspiration is to become the wife of a footballer. No substance - just look at the saturated iPhone App marketplace - a couple of gems amongst a sea of bug-ridden, non-too-helpful applications all hoping to be the next iPint.
I feel the bubble may be closer to bursting than we think.
Posted by Richard on Thursday 16th of April 2009 at 2:56pm