Are We Getting Too Social?

There is nothing particularly original about what Instagram does.

When it started 552 days ago, the company wasn’t really offering anything you couldn’t get elsewhere.

You’ve been able to share photos over the web for years. You were able to create vintage-style shots on your smartphone through apps like Hipstamatic well before Instagram. And you could post photos to Twitter and Facebook pretty easily using your smartphone.

So why is an app which essentially has nothing new to offer now worth $1 billion?

For the answer, you need look no further than the company buying it, Facebook. Facebook wasn’t in any way the first social network – it just did it a lot better, and pursued users a lot more aggressively, than its erstwhile rivals like Myspace and Friendster.

Instagram’s value (at least as far as Mark Zuckerberg is concerned) lies in its enormous (30m) and growing user-base. Facebook, which would rather everyone shared their photos through its webpages, saw Instagram as a threat. After all, it enables users to bypass Facebook (and its clever face-recognition/marketing algorithms) when sharing their photos.

But none of this explains whether the company is really worth that much money – or indeed whether the high price tag is a sign that the dot-com bubble has gone mad for a second time.

My hunch is that there is indeed a bubble in the social media sector – though as every smart investor knows, every bubble starts with a good idea.

Last year I spent a few months at the Massachusetts Institute of Technology on their New Enterprises course – the tech entrepreneurship class at the Sloan School of Business. At least two things were obvious:

1. There was an absolute surfeit of money sloshing around looking to invest in good ideas. Call it irrational, call it a fad, call it quantitative easing; the fact remains that if you are an entrepreneur with a half-decent idea there has rarely been a better time to get funding.

2. There is almost limitless appetite among investors for an network-based idea which is social and scalable (eg Facebook, Twitter, Instagram). But there is next to zero appetite for a company producing a stream of content (eg journalism, consultancy).

Whereas the first internet bubble was about setting up a business on the web – whether it be a transfer of a traditional merchant idea on the web (eg Amazon, Expedia), a search engine or piece of web infrastructure (eg Google, Wikipedia) or something inbetween (eBay) – the second bubble is about social networks.

Everyone wants to create the new Twitter, and for good reason: once you’ve set up the infrastructure – the website and APIs – you can, in quite short order, generate hundreds millions of users. And the fact that it’s social means that it’s your users who do all the rest: creating the content, drawing in fresh users, marketing your company.

Your returns are potentially limitless provided (and this is the big if) you can find a way of monetising those users. Instagram hasn’t yet. Facebook has, by using the staggering amount of personal information we share online for its marketing purposes. But there’s already a backlash: Facebook is no longer cool –because as subtle as the network is about it, users are increasingly aware that they are being used to generate revenue.

It’s quite feasible that users could abandon the social networks just as quickly as they joined them. After all, look at what happened to Myspace. But because this sector is such a new one, we simply don’t know how to predict such things. That’s why the $1bn price-tag is inherently guesswork.

Social network users are loyal to their networks only to the extent that they’ve invested so much time and effort in the ecosystem. They’ve put all their photos on Facebook; they’ve honed their favourite people to follow on Twitter; they’ve drawn up all their playlists on Spotify.

But such barriers are not without faultlines. And if a network is not cool, there are ways to leave it relatively easily. Right now, Facebook’s place in the social network cosmos seems almost unassailable, but it’s not inconceivable that, if it lost its cool entirely, it could fade as quickly as it rose from obscurity.

Which is why I’m slightly sceptical about the extreme level of excitement about all things social networky. It’s not because I don’t buy the economic model: it’s completely genius. It’s because the downside risks are greater than for many other business models. Cool matters – it lifts you up very quickly; but as many stars know to their misfortune, it can also chuck you back in the gutter pretty fast too.

I’ll leave you with a tale of two vogue-ish companies: Evernote and Pinterest. They both do something vaguely similar: providing a kind of online scrapbook for your favourite pictures/documents etc. There are some differences in tone: Pinterest is more focused on the visual; Evernote more on storing all kinds of documents and giving you an app with which to organise them.

But the key difference is social. Pinterest is all about sharing your favourite things; Evernote about storing them (for yourself, although you can share some with colleagues/friends). While there’s a difference in tone, both companies have enormous scalability and a fast-growing userbase.

So which will make it bigger: the social, sharing scrapbook or the straight-faced, private one? Or do they both win? The world is an inherently social place, but I do wonder whether we’ve slightly lost perspective on the power and sustainability of social networks.