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Finance | John Tate | 28 Feb 2011

John Tate predicts turbulence in the social-media market and considers the best strategy for charities.

10 March 2000, 11 years ago, is an interesting date on the IT calendar. The US NASDAQ Composite index peaked at $5,133 nearly double the level of the year before. This was due largely to the rise in the valuations of internetbased companies. One year later the index had fallen to below 2,000. The dot-com bubble had burst.

The ‘get rich’ schemes from new internet retailers and others had failed to deliver the results they had predicted. It had become obvious that the meteoric projections dotcom companies had made were not going to materialise.

Step forward to 2011. A number of relatively recently founded ‘internet’ companies are again attracting huge attention. In January Goldman Sachs came up with a valuation for Facebook of $50bn. Not bad for a company with an annual turnover estimated at $2bn and a projected profit of $600m for last year. Discussions in the US suggest a valuation for Twitter of $8bn to $10bn – this time based on 100-times projected revenues, making the valuation of Facebook look modest. A string of other new web-based companies are also being put under the analysts’ slide-rules and an industry valued at billions of dollars is now regarded as having serious investment potential.

History has a habit of repeating itself – but is something different this time round?

Well, Facebook is at least making a decent profit, which is more than can be said of many of the hyped-up companies on NASDAQ in 2000. We also have a lot more experience of the web this time round. So maybe this means that we can predict the future with more confidence?

Countering this view, one thing we have learnt is that things can change very quickly on the internet. The flavour of the month can be exactly that – what is seen as a winner one week becomes history almost overnight. Users have switched from Friends Reunited (remember them?), MySpace, Yahoo and AOL in their millions. Will this happen with the likes of Facebook and Twitter?

People have switched from these sites for a reason. The likes of Facebook spotted gaps in the market and launched something better.

Two possible reasons can be given to justify their current valuations. Firstly, that we are moving to a more mature phase of internet applications and that there will not, therefore, be another company that launches and develops new products that bump-out the likes of Twitter. Or secondly, the companies with huge valuations have the skills and resources to forecast future trends and develop their own products (or buy others) that will continue to give them the leading-edge in the market.

My own view is that we are only just starting to get to grips with social media and using the web to interact. Much is going to change. Whether the likes of Facebook can continue to keep their product ahead of the competition remains to be seen. However, the track record across the industry is not good.

So what does this mean for charities?

Firstly, you need to take a view on where we are in the market in terms of maturity. If you accept my view that much will change, you need to make sure you get a quick return on any investment you make in developing new-media activity and/or web presence. Otherwise you may be still implementing a new technology when it is past its sell-by date. Payback periods for investment should be a maximum of one year, ideally less. By the time projects have gone over budget, and been subject to the almost inevitable delay in implementation, a starting position of one-year payback looks pretty challenging.

Secondly, you and your team need to invest time in keeping up-tospeed with what is going on in ‘web land’. Tactical opportunities can pop-up one day and a solution that helps your organisation can be put into production almost the next.

Thirdly, whilst many social media applications are easy to implement from a technical perspective, the time it can take people to manage/update should not be underestimated. Make sure you think through, and plan thoroughly, the work required to make this a success.

For those who don’t agree with my view about the uncertain future for social media, you could of course consider investing your charity’s cash in this space. However, I suspect not many FDs in the sector would feel this was a safe bet!

John Tate is MD of ChangeBASE, IT adviser to the CFDG and a visiting lecturerat Cass Business School

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John Tate

John Tate is a qualified accountant and has over 20 years working in the IT industry. He is also a columnist for Charity Finance, IT advisor to CFG and a lecturer at Cass.

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