SocialMediaBust

Recently Twitter announced it's plans to build its own brand new data center to address various overload problems resulting from torrents of tweets, particularly during the world cup of soccer, and of course, so they could have greater control. You'd think that such growth would suggest the company is doing well, and would fare well in the future. But does it?

The Growth Addiction Prior to Dot.com Bust

In the latter stages of the Dot.com boom of the late nineties some very interesting things happened related to venture capital, the hype and hope cycle, and growth. Companies received large sums of capital investment to both start and run, during the boom, with the expectation of huge returns down the line. Since those investments were not based on actual revenues, or profits, it wasn't surprising, at least in retrospect, that most companies, while managing to expand their user bases, were not able to generate signficant revenue, let alone profits.

So, what did they do? They sought out additional funding to GROW, or expand, touting the necessity of growth as a requirement to harvest the huge returns down the road, and to protect the already invested money from venture capitalists.

It was, in effect, an addiction to growth, because not only did growth allow some sense of security to outsiders, but every major growth project was hugely trumpeted as indication that the endeavor, and in fact, the entire sector, was thriving.

It can best be summarized in a very simple statement: If only we could have [insert feature (our own servers, more staff, ad salespeople)] we could get "over the top".

It didn't work. If your business model is broken, throwning money at it won't work. If you don't understand your customers, throwing money at the thing won't work. If it's simply a bad idea, guess what? Throwing money at it won't work.

The truth was that investors wanted to protect their earlier investments based on hype and hope, by creating more hype and hope and throwing in more money.

Today - The Twitter Data Center

Returning to where we started, is the newly announced Twitter Data Center an omen of good things? Probably not. It IS probably needed in order for Twitter to be a more reliable service with less outages, and less loss of applicability, and it is probably necessary to convince investors, who must be starting to get a little impatient, that just a wee bit more money will push Twitter over the top.

That it is necessary for these things doesn't mean it addresses any of the fundamental reasons why Twitter appears not to be able to generate sufficient revenue and profit. Twitter's financial challenges have nothing to do with hardware problems. They have to do with a lack of features in the marketplace, and resulting account abandonment, over-commercialization, low quality interactions, reversion to lowest common denominators in content (i.e. spam, even though it is subtle), etc.

It may be fun, at least for a while, but it has no function that cannot be undertaken in better ways by other platforms.

You cannot "grow" through those problems, and you cannot "grow" through a bad business model.

So, in fact what Twitter is doing right now is consistent with a company within an industry that is repeating what happened in the late nineties.

Initial investment --> Additional investment --> Lack of revenue --> Attempts to "grow through it" --> Realization it's not working --> End of VC support (cutting losses), layoffs, contraction --> Closure, failure or acquisition for pennies on Dollar.

Conclusion

This is one example of the "grow through it" addiction, but if you look at many of the newer social media companies that are not yet self-sufficient with their revenues, I suspect you'll find the "if only we had..." mentality is common. It's a psychological component of starting and running a business, but in the absence of a firm solid BUSINESS model, it only ends up burning through money, albeit usually someone elses.

Coupled with some of the other signs -- there is still no question in my mind that we are approaching a social media crash that will rival the dot.com crash as the many companies that depend on the big boys also get taken down as the big boys struggle.

Coming next? Perhaps there will be a Part 4, so stay tuned.