The Coming Social Networking Crash Is Good News

Social networking is in its own Internet bubble.

The valuations are insane. Facebook is worth $65 billion? Really? Really. For a company that claims (not made, claims) to be bringing in $2 billion/year? 

Even Google, which we know makes money hand-over-fist, has a valuation to sales ratio closer to 6, based on last year's $29 billion in sales and $8.5 billion in net income. And that's for a company that controls its own infrastructure, that's the low cost provider of Internet everything, and runs the biggest ad networks ever seen.

Twitter's worth $7.7 billion? Groupon's worth $25 billion, when its traffic is down 13%?  And its revenues are off as well? And it can't scale, because people have to sell the deals and write the offers?

I have seen this movie before. I know how it ends. It does not end well.

Now, we can date the end of the Internet bubble precisely. It was the day in January 2000 when Time bought AOL.  Why did that pop the bubble? Because it placed a top price on what was considered the Internet's best real estate. Remember, AOL had continuing service revenue streams, plus ad revenue, and it was paying almost nothing for its content. If all that is worth X, then anything else must be worth X-minus.

And, of course, AOL wasn't worth X. It wasn't worth half X. It wasn't worth doodly, because any lead on the Internet not based on technology and real costs is only as good as a site's reputation.

The dot-bomb was inevitable. So is the social network bomb.

Here's something I learned watching the dot-bomb. I can date the end of the social network bomb precisely too. It will happen, at the latest, on the day of Groupon's IPO.

Why is this good news? Because, unlike the situation with the dot-bomb, the public isn't invited to this bubble. I'm not going to lose much on it, and neither are you. Goldman Sachs and other big investment banks have tied these companies up in neat little bows. They're doling out stock only to their very bestest customers.

And those are the fools who are going to take the hit. Not you. Not me. (Unless we're stupid enough to buy Groupon.) It's going to be Joe and Jane Billionaire, the last idiots who really believe Goldman Sachs cares about anything other than Goldman Sachs.

And when the scales fall from their eyes, when Republican heavy hitters realize that the difference between Goldman Sachs and Bernie Madoff isn't nearly as great as they've always been led to believe, that's when you can expect get change we believe in. Because if big investors decide the casino is crooked, they'll finally let the cops in to arrest the dealers. We may finally get some meaningful financial reform, and some enforcement of transparency rules, once the Republican super-rich find they've been taken to the cleaners by these guys, and the money they were planning on putting into the Tea Party is as phony as a $3 bill with Ron Paul's face on it.

So it's all good.