The inherent volatility of internet commerce

via Groupon Therapy | Business | Vanity Fair via The Coupon Company You Know

“Groupon isn’t a bricks-and-mortar business. It’s clicks rather than bricks,” says James O’Rourke, a professor of management at the University of Notre Dame. “As a result, they’re heavily dependent on owning the domain name and having local familiarity with their brand. If it’s not capital-intensive, if the barriers to entry are low, and if you don’t have proprietary technology, then anybody can get in the business. It’s not like you’re building airplanes.”

I’ve gone on famous rants about this offline in the past. My general theory is that 99% of internet-centric businesses have a terminal lifespan of (at most) 10 years. Of course there are outliers. Yahoo has survived, barely. Google has made it about 13 years so far. Amazon and eBay have survived. But for every Google and Yahoo there are millions of failed enterprises, companies that may have had success for a few years (if at all) but then fizzled out.

MySpace was the next big thing…for like 2 or 3 years. Then Facebook overtook them, and MySpace has been in a downward spiral ever since. A company once purchased for over $500 million was sold off months ago for $35 million.

Most internet companies revenue models are based upon clicks or subscriptions (think the demise of AOL). Clicks can change from one place to another in the blink of an eye. In 2005, MySpace was valued at $327 million. According to wikipedia, the peak value of MySpace was $12 billion in 2007. Today, six years later, optimistically, they are worth $35 million (could be worth nothing if losing money). That is a fucking roller coaster ride, and it is one that could not be possible in a brick and mortar business.

There may be no better example of internet volatility than MySpace. Not only is it an example of volatility, it is an example of how fatal competition on the internet can spring up nearly overnight (Facebook overtook MySpace in traffic on 2008), and there is often nothing a company can do to counter that.

Facebook has only been live for about 7 years, not yet reaching the 10 year mark. I suspect they’ll make it, but the historical entropy of the internet is against them. Overnight, a new company/idea may be born that could take the majority of their users. People might get bored. New technology may render Facebook useless. Google Plus is already taking away Facebook users. Never mind the schadenfreude about a ubiquitous company like Facebook that it has to hope doesn’t gain traction with the general public.

I suppose the big picture take-away should be: if a significant portion of our economy is built upon an extremely volatile platform, we better get used to a more volatile economy than in the past. Doesn’t mean the economy will crash every 3 years, but when any company can go from a theoretical worth of two digit billions to two digit millions in a few years, the uncertainty quotient is without a doubt higher than it used to me. And (perpetual) uncertainty is not a great economic foundation.

Maybe it doesn’t matter much, since it’s all mostly theoretical valuations when it comes to internet companies. But the 10 year theory is all the much more worrisome both in this economic climate and because of the fact that internet usage is only going to grow with time (and with it, volatility).



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