Sunday, December 5, 2010

The Pro Bursting-Bubble Argument

Facebook brings in $1.5B but the market values it at $35B. Why? Because historically, the greatest profit you can find in an era of tumult lies in seizing control of territory where you can charge rent. The argument for Facebook's colossal valuation is that the territory they seized will become one where they can charge rent.

This argument assumes that Facebook is like the Yellow Pages, a virtual monopoly (to use Warren Buffett's term) in the making, which will one day set its own prices, and continue to do so until the passage of time takes us all to the very, very tail end of Geoff Moore's brontosaurus.

In 2007 I outlined my reasons for believing differently. tl;dr: Facebook is not the Yellow Pages; Facebook is a nightclub. Like all nightclubs, it will one day close its doors. Like a very few nightclubs, it will never be forgotten.

This points to the likelihood of a bubble bursting.

But I'm not 100% sure I was right when I said that. Like many twentieth-century phenomena, The Yellow Pages appear to be following Moore's technology adoption curve in slow motion, so the real question is not whether Facebook is mortal, but whether Facebook dies before making $35B or after. I don't doubt Facebook will make money off its virtual monopoly. I just don't know how much or how fast - or how much time they have.

I am skeptical, of course. There's no doubt the financial classes caused the housing crisis by gambling with the lives of millions on an everyday basis. Whether they win or lose on any particular round of roulette, however, is difficult to predict, in the same way that the motion of a river is. In a sense, predicting bubbles in an age of rapid change and volatile economics is very much like predicting when bubbles will rise in a river. Math can describe it perfectly but not predict it at all.

But then, if you've been building your business on solid, sensible principles, why would you even care? Always remember, you can't con an honest man.