Welcome to tMa Bubblewatch, an ongoing look at the question everyone in Silicon Valley is asking: Are we in a bubble? Given that I lived through the first one and then started the agency in the worst economic downturn in our nation's recent history, I may have some good insights on the topic. This week, the tMa team and I have been talking about two important news items which point to a bubble for very different reasons:
SnapChat and the Rise of One-Offs Apps
A lot’s been said about Snapchat refusing a $3 billion cash acquisition offer from Facebook, but to us, it’s just the latest example of a concerning trend: The rise of too many one-off apps that do too many similar things, which have no solid revenue model, but are nonetheless highly valued by the market (or in this case, by Facebook). Alongside Snapchat, consider Vine’s acquisition by Twitter, even though Instagram (acquired by Facebook) has a video sharing feature similar to Vine -- and neither have revenue. Snapchat’s refusal of Facebook only makes sense if it can grow to become another Facebook, or if Snapchat’s execs think they can get a better offer from another Internet giant (possibly Yahoo?) But at this stage, it’s extremely difficult for a standalone app to mature with its audience and scale quickly enough to become a service that’s competitive with incumbents the size of Facebook, YouTube, or Yahoo! This excellent CNET article by Jennifer Van Grove lays out the challenge Snapchat faces, succinctly expressed by Brian Solis of Altimeter:
"If you look at it solely from a monetary perspective, yes, they're absolutely foolish.I don't know who's going to give them more than that -- or that they're going to generate more than that in terms of revenue."
And it's unlikely (and probably undesirable) for Snapchat to monetize through ads, as David Berkowitz points out. So in this market, it’s far more likely another giant will swoop up Snapchat and other one-off apps. (Let's also not forget Groupon's huge fail at walking away from Google's hefty offer a couple of years ago. Fast forward to "Where are they now?") This all points to a tech industry that’s unable to grow its existing audience -- and points us to a time when the market will recognize this stasis, and adjust stock prices accordingly.
Solid Chegg’s Fall During Shaky Twitter’s Rise
While we were all hyper-focused on Twitter and its massive IPO, textbook rental service Chegg sunk in the market, falling 22% in a matter of hours. This despite the fact that Chegg has a really good model, has been growing revenue over the last 3 years, and has 30% market penetration among its core audience of US college students. Compare this sharp decline to the explosive acclaim of Twitter, which is a great, transformative service for a lot of reasons, but is still struggling to generate a solid revenue model, and we see another point of concern: If the industry is going to keep growing, new services which offer new ways of helping consumers must succeed; if the industry to keep growing, Internet giants must succeed not just due to enthusiasm, but solid revenue growth over the long term.
So looking at these two news items, we’d say the likelihood of a bubble seems pretty strong. To be sure, there’s going to be different opinions on this, and we welcome them in Comments here or via Twitter, with the hashtag #bubblewatch. And the next time we post a tMa Bubblewatch, our own opinion about the bubble might change -- or grow even stronger.
Unicorn image by Berni
Update, 11/15: Adding to our Bubblewatch regarding Snaphchat, Om Malik just Tweeted a rumor that Google offered even more for the app - $4 billion! Comment from tMa's James Au: "It's really scary that Google was seemingly rash enough to offer so much money to compete with Facebook. It looks like two lumbering giants, Facebook in its middle age and Google a senior citizen by Internet standards, are trying to buy their way into continued relevance with Those Kids Nowadays."