Out of hand and about due to collapse is the modern definition a “bubble.” The surging prices of dot-coms in 1999 and 2000 is foremost on the mind. Yet, not all bubbles have to do with rises in P/E ratios, in fact, many bubbles have nothing to do with asset prices. Irrational frenzies have created the MBA bubble, the lawyer bubble, and the higher education bubble. Markus K. Brunnermeier, faculty with Princeton’s Department of Economics, captured the definition well, stating that, “Bubbles arise if the price far exceeds the asset’s fundamental value, to the point that no plausible future income scenario can justify the price.”
Are we swimming in a sea of change or racing to buy the next lottery ticket? Everyone remembers the Amazon.com winners, few recall the longer list of losers such as “The Learning Company” bought by Mattel in 1999 for $3.5 billion and sold in 2000 for $27.3 million. Facebook’s $19 billion purchase of WhatsApp in 2014, appears questionable. WhatsApp only generated $10.2 million in revenue in 2013 or three cents for each of their 400 million active users, resulting in 2013 net losses of $138.1 million. Was this a mistake? “Many investors have mistaken earnings growth for expected return and great companies for great investments,” stated Asness in his article, Bubble Logic. Accepting this premise as plausible, the inverse may also be true: lack of earnings represents bargains and questions whether equities will always beat inflation and/or short-term cash) over the long-term?
However, making money by giving things away is not new. Monetizing FREE is the spirit of platform competition in two-sided markets, where the value of a product shifts with the number of users. Facebook and Twitter are both good examples of this platform competition. A classic example of a two-sided markets is the credit card linking consumers and merchants. In order to build value the two groups of users in this case, the consumers and merchants, need to be brought together. Products and services that align groups of users, in a two-sided network, is called a platform. These platforms provide the foundational infrastructure to link groups of users. Facebook knows that for revenue realization on both sides of the network, a platform is required. This desire to monetize the network effect is driving their acquisition strategy. Does Facebook have a sustainable competitive advantage?
Yes, it does. Stop worrying and let’s watch Facebook ride the bull.
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References
Asness, C. S. (2000). Bubble Logic: Or, How to Learn to Stop Worrying and Love the Bull. Unpublished. http://doi.org/http://dx.doi.org/10.2139/ssrn.240371
Collins, J. (2000, March). Built to Flip. Fast Company Magazine. Retrieved from http://www.fastcompany.com/38659/built-flip
Fox, J. (2014). What’s That You’re Calling a Bubble? Harvard Business Review. Retrieved from https://hbr.org/2014/01/whats-that-youre-calling-a-bubble/
Gupta, S., & Mela, C. F. (2008). What is a free Customer Worth? Harvard Business Review, Nov, 102–109.
Sekai, A. no. (2014). Balance (online image). Retrieved January 24, 2016, from https://aikidonosekai.wordpress.com/2014/06/06/balance/
Stone, B. (2014). Facebook Buys Mobile Messenger WhatsApp for $19 Billion. Businessweek. Retrieved from http://www.bloomberg.com/bw/articles/2014-02-19/facebook-acquires-whatsapp-for-19-billion
Wikipedia. (2016). Dot-com bubble. Retrieved January 24, 2016, from https://en.wikipedia.org/wiki/Dot-com_bubbleFelderer, M., & Herrmann, A. (2015). Manual test case derivation from UML activity diagrams and state machines: A controlled experiment. Information and Software Technology, 61, 1-15. doi:10.1016/j.infsof.2014.12.005
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Peter Nichol, empowers organizations to think different for different results. You can follow Peter on Twitter or on his blog. Peter can be reached at pnichol [dot] spamarrest.com.