Two of the most successful businessmen and investors alive today have warned against what they say is a growing bubble in the value of social media companies over the last couple weeks. But both Warren Buffett, chairman and CEO of Berkshire Hathaway, and Barry Diller, founder and chairman of IAC, also conceded that there will still be long-term winners along with all the losers, affirming the real value underlying social media as a revolutionary new communications technology. However there's still going to be a lot of carnage.
Speaking in New Delhi, Buffett was clear about the prospects of most social media companies in remarks quoted by Bloomberg: "Most of them will be overpriced... It's extremely difficult to value social-networking-site companies."
While Buffett declined to name specific companies he felt were overpriced, this general opinion echoed statements made by Diller a few weeks ago during an interview at the South by Southwest conference, where he dismissed multi-billion-dollar valuations for Groupon and Twitter as "mathematically insane" and observed that the bubble is "puffing... up pretty nicely."
As for potential winners among all the investors, Diller allowed that "some of them -- a very few of them -- won't turn out to be dumb." Again, Buffett ventured a similar opinion in his own observation that "Some will be huge winners, which will make up for the rest."
Fortunately, Diller noted, so far most of the investments in social media have come from venture capitalists and other rich investors -- a big difference from the first Dot.com bubble, which was fueled by stock market hysteria: "All the money that's going to be lost is going to be lost by people who can lose money. So who cares?"
Of course, that could change when social media companies start rolling out initial public stock offerings. In fact, it could be even worse this time around precisely because of the delay, as every new report of venture capital activity helps prime the market psychologically for a feeding frenzy when the IPOs finally hit.
COMMENTARY: I am glad that someone as respected as Warren Buffet, has spoken up and rung the warning bell about Social Networks. This supports everything that many social media experts have been saying for sometime. You will find a lot of simialr articles HERE.
It's true that big investor's are going to be the ones to lose their ass in the event of a social network bubble, but let's not forget the employees that work for startups like Facebook, Twitter, Zynga, Groupon, etc. Without their hard work and loyalty, these startups would not be where they are today. They stand to loose all their sweat equity.
A social network bubble will also have a boomerang affect, affect the values of other internet segments, temporarily stalling new venture capital investments in startups built on similar business models. I think it is definitely going to be bloody.
Courtesy of an article dated March 29, 2011 appearing in MediaPost Publications The Social Graf
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