Is there a social networking bubble?


Capitalism has never been cuddly. But the promise of the market is that if you work hard to produce a good product, consumers will reward you. In the short term, these rewards come in the form of profits. If your products consistently deliver, you can develop a reputation for unique and distinctive excellence that garners consumer loyalty—this process is known as branding. Branding both allows you to charge a premium on your products as well as partially protecting you from competition from other firms offering similar products. In short, branding is essential for the future growth of a company.

Differences in the competitive nature of given industries create differences in the way that branding functions. Compared to an industry such as department stores in which a few giants have dominated for decades, the technology industry is characterized by creative destruction. On crack. The Internet platform allows for low start up costs and fewer other barriers to entry, so new companies are constantly popping up—and dying out. In this sort of cutthroat atmosphere, branding can be the only thing that saves an Internet company from fading into the oblivion of the world wide web.

However, while for the department store industry, branding rests on having a storied, traditional name like Harrods and Harvey Nichols, for technology companies branding means something completely different. Given the enormous amount of competitors who can all deliver roughly similar products quite cheaply, branding isn’t just about quality. It’s about Cool. Crucially, Cool is both the most important quality to have and also that which is most difficult to engineer. And cases like that of MySpace prove that it can be the most fleeting too.

Given that branding with social networking services relies so heavily on the Cool factor, it’s hard to understand the hype around Internet companies like LinkedIn and Groupon. Admittedly, these companies have proved successful thus far. LinkedIn, which provides professional networking services, saw its shares more than double in value on its first day of trading. In addition, the online deal website Groupon is attempting to raise $1 billion through an initial valuation of $20 billion. This is for a company that has yet to turn a profit.

Some companies, such as Google, manage to have created that magical balance of Cool and reliable in a brand—for now, at least. But within the highly combustible technology industry, such success is often as transient as it is rare. Remember the cool girls in high school? Still think they are so cool now? Welcome to Myspace.