The Tycoon Report

Is the Tech Boom for Real This Time?

Google, iPod, iPod Mini & Nano, Social Networking, etc… All the new buzz words could drive anybody crazy… But what does this all REALLY mean? And more importantly, what do these emerging technologies mean to you as an end-user – and most importantly as an investor. Some of them may be a new fad and will go out the window tomorrow. Or the companies that are pioneering these technologies today will be tomorrow’s old news.

What I hope to do for you is to give you an overview of these technologies – an overview of the industries they’re having the biggest impact on – and who the major players are. This will be a 3-part article - concluding with a thorough analysis of Google and the phenomenon it has spawned across the software industry.

I’m here to equip you with information that will help you make intelligent investment decisions… or at the very least you’ll sound really cool at the next cocktail party you go to.

So here we go…

Social Networks…What are they?

This is actually one of the latest and simplest technologies out there. Instead of creating a directory of web pages like most search engines do – Social Networks create directories of people. So if I sign up on one of these networks, I get my very own “Profile” page. On this page I can add pictures, short blurbs or entries on what I’ve been up to these days, and also list my friends’ profile pages.

They then list me on theirs, and the Social Network is born! The networks typically allow you to see friends of friends of friends and show you how you’re connected to all of these people… Think: 6 degrees of separation in the digital world!  It’s really quite remarkable and from a technical perspective didn’t take much to build. Which would lead one to ask the question, “So why doesn’t every community site have a social network component?”

Great question! I’m glad you asked…

The real value is in the size of the network – this is a perfect example of the Economics 101 principle of the “network effect” (every user adds an exponential amount of value to the network – the whole is greater than the sum of its parts.)

So even though this is a relatively simple system to create from a technology perspective…to reproduce the (and I hate to use this word – it’s so 1999) “viral nature” of the networks is extremely difficult.

Social Networks have a strong demographic from an advertising perspective. The majority of their users are broadband enabled, very tech savvy and have an average annual income exceeding $75,000 per year. Some of the larger networks are banking on this affluent demographic as their way of building a long-term business.

Some of the more popular players in the game are Friendster, MySpace, and even some niche players like TheFaceBook. These guys all have networks numbering in the millions and provide a wide variety of extra services for their users such as dating, instant messaging, blogging, etc…

Even though many of them have lukewarm (if any) revenue models, some of the smartest money out there is pouring into these companies.  It’s definitely making me a bit shaky having lived through the last tech debacle where the mantra was, “Oh, now we just have to monetize the traffic.” Easier said than done!

To date, Friendster has received over $53 million in funding from Benchmark and Kleiner. If that doesn’t make your jaw drop, consider the fact that Google initially offered to acquire them for $30 million outright! MySpace.com is another story that really amazes me.  It’s another Social Network, with the same lackluster revenue model – however, the site gets a ton of hits and was owned by Intermix Media (formerly eUniverse).

The company was acquired a few months back for over $500 million by Fox! Mind you, Intermix had been losing money for the last two years!  One day, maybe us common folk can learn to value businesses like the guys over at some of the world’s largest media companies do.  I wonder if some of these people slept through the late 90’s and early 2000’s – I also wonder how the conversation went when they decided to do this…”Hey guys, let’s buy MySpace.

It makes no money, but it’s really cool, and they have a lot of visitors! Sounds great – cut ‘em a check for $200 million….better yet, make it $500 million…”

Maybe a Social Network with a lot of traffic has a strategic fit within a media company as a new distribution channel…or maybe they want to use it as a way to get customer feedback on new products.  These are all worthwhile strategies and may even significantly help Fox one day, but to me, people are ignoring fundamental business valuations once again, and it’s getting me nervous!

One of my early mentors told me to become a student of history.  “Human nature never changes,” he said. “If you understand and observe history, you’ll never be ‘doomed to repeat it,’ as the saying goes.”  I wish some of these investors would remember this great piece of advice sometimes.

Is there money to be made in Social Networks? I’m sure someone will figure something out one day, but at the end, from a purely historical perspective, unless you are a transaction based business – you don’t stand a chance!

And in the end, things get worse before they get better – so expect valuations to run up, maybe even a spin-off or two – but as for seeing a super profitable Social Network, it’s this writer’s opinion that we are a long way off.  So, as an end-user, certainly enjoy these sites, and as an investor, keep your eyes peeled for a Social Network that people start paying for!

Now what’s up with this whole iPod craze? Good question…and I’ll be sure to give you an answer next time. As of right now, I think I’m going to go update my Friendster profile.

Until next Tuesday!