Innovation in Software

If you need any proof that we’re in a bubble around Web companies, the valuation of Facebook at $15 billion thanks to the $240 million Microsoft just paid for a 1.6% share, must be it. Even the TechCrunch guys seem a little flummoxed by it – the comments are worth a scan.

To put that into perspective, if we assume $150 million in revenues next year is solid we’re talking about 100:1 price-to-earnings ratio there. If you’re the kind of person who normally yawns when hearing about P/E, here’s why it’s important.

There are lots of reasons a company might be valued with a high P/E. The six most common are:

• The market expects earnings to rise rapidly in the near future. This is normally the case with oil or gold companies who have little in the way of earnings right now, but who have secured income in terms of drilling/mining rights
• The company makes piles of cash normally but has had to take a one-time hit on something showing earnings being lower for this year
• The company has a business advantage that guarantees revenue for low risk. Think “monopoly”.
• Investors need to shove a large amount of money into the market to get it out of other vehicles, so the law of supply and demand means prices go up
• High demand for a particular share for some reason, for example a takeover bid
• The company is hyped, and we’re in a bubble

Going through each of these in the case of Facebook:

• Facebook’s revenues are not going to rise dramatically any time soon. They have not suddenly secured a huge pot of advertising revenue they have yet to “mine”, and my P/E is based on next year’s optimistic revenue figures, not past figures.
• They’re not making a lot of cash at all, and they’re not taking any major hits in terms of infrastructure, so that’s not it.
• Whilst everybody is raving about them, they don’t have a monopoly. It would be relatively easy to replicate the Facebook platform in open source (in fact, that’s an idea going onto the site tomorrow – unless you now put it up first and claim credit), so it’s hard to see how this sticks. The value is in the user base, but talk to MySpace if you want to hear about how fleeting they can be.
• Microsoft are in no hurry to diversify risk or in need to get money out of other “vehicles” – they might need to show their shareholders they’re hitting hard with their new advertising-driven model, but that doesn’t justify the expense
• 1.6% is no basis for an immediate takeover bid

That leaves us with…

• We’re in a bubble

It’s not like Microsoft are going to miss $240 million. It’s not that we’re in big trouble if this doesn’t hold up when Facebook floats in a couple of years.

It’s the mindset that bothers me.

People are no longer looking at figures. They’re thinking irrationally. They’re buying shares because they want to hold a chip. I’m not an IFA or your banker, but I suggest you make sure you don’t pay too much for any chip you want to hold on to yourself.

Apparently (and interestingly):

“The goodie two shoes, jocks, athletes, or other “good” kids are now going to Facebook. These kids tend to come from families who emphasize education and going to college. They are part of what we’d call hegemonic society. They are primarily white, but not exclusively. They are in honors classes, looking forward to the prom, and live in a world dictated by after school activities.

MySpace is still home for Latino/Hispanic teens, immigrant teens, “burnouts,” “alternative kids,” “art fags,” punks, emos, goths, gangstas, queer kids, and other kids who didn’t play into the dominant high school popularity paradigm. These are kids whose parents didn’t go to college, who are expected to get a job when they finish high school. These are the teens who plan to go into the military immediately after schools. Teens who are really into music or in a band are also on MySpace. MySpace has most of the kids who are socially ostracized at school because they are geeks, freaks, or queers.”

Or so says Danah Boyd in her essay “Viewing American class divisions through Facebook and MySpace”. Please note the title of this post is a pun on a famous political rebuttal, not a comment on the intelligence of Danah Boyd or her thesis.

The idea there is a class divide online is an interesting thesis, but her argument as to why this is happening is a little… strange.

“Most teens who exclusively use Facebook are familiar with and have an opinion about MySpace. These teens are very aware of MySpace and they often have a negative opinion about it. They see it as gaudy, immature, and “so middle school.” They prefer the “clean” look of Facebook, noting that it is more mature and that MySpace is “so lame.” What hegemonic teens call gaudy can also be labeled as “glitzy” or “bling” or “fly” (or what my generation would call “phat”) by subaltern teens. Terms like “bling” come out of hip-hop culture where showy, sparkly, brash visual displays are acceptable and valued. The look and feel of MySpace resonates far better with subaltern communities than it does with the upwardly mobile hegemonic teens. This is even clear in the blogosphere where people talk about how gauche MySpace is while commending Facebook on its aesthetics. I’m sure that a visual analyst would be able to explain how classed aesthetics are, but aesthetics are more than simply the “eye of the beholder” – they are culturally narrated and replicated. That “clean” or “modern” look of Facebook is akin to West Elm or Pottery Barn or any poshy Scandinavian design house (that I admit I’m drawn to) while the more flashy look of MySpace resembles the Las Vegas imagery that attracts millions every year. I suspect that lifestyles have aesthetic values and that these are being reproduced on MySpace and Facebook.”

I think she’s almost right. The problem is, the kids don’t know how to verablise what they mean and she doesn’t know enough about Human Computer Interaction to name it.

I don’t think it’s aesthetics that makes the difference, but ergonomics. Yes, it’s possible to customise MySpace pages to an endless degree and make it look gaudy, but most people don’t or when they do tend to keep it low-key (a point that Boyd brings up, and further analyses in terms of social divides).

However it is the ergonomics of the software that marks the real difference between the two sites.

Facebook is a simple, structured application. The control of the interface and how it works is in most part in the hands of the developers. The users are not invited to ‘improve it’ outside of the Developer API. MySpace allows the audience to tinker to their heart’s content but doesn’t allow the structured ‘plugging in’ of 3rd-party applications preferring to keep everything home-grown.

I would argue that Facebook is more ‘left brain’ and MySpace more ‘right brain’ in their approaches. Facebook supports a sequential way of thinking, learning the interface step-by-step and ‘climbing up in knowledge’ as they go. What you think of as ‘Facebook’ might be different to what I think of, as we will have taken different approaches in building up our knowledge of what it is, and what it is capable of. MySpace on the other hand is more ‘holistic’ and supports the notion of understanding the general concept in one go straight away and then learning the specifics. It is unlikely that we will have different understandings of what MySpace fundamentally is.

I would have predicted therefore, that those good at languages, mathematics, science, analytical thinking and structured learning would be drawn towards Facebook. Meanwhile, musicians, artists, those who like to daydream and imagine would be drawn more towards MySpace. Both have a place, both have fans and critics.

How to explain the class divide? It’s there but it’s a correlation, not a causation. It may be that children from higher-income households are likely to have genetically inherited structured thinking: the household is higher-income because those skills are more richly rewarded in the job market.

It’s also likely (given we’re talking about teens here) that peer group pressure is going to determine choice: who wants to be the only kid in the group on one social network when everybody else is on another? If you hang out with people who like to conform, they’re likely to be on Facebook. If you hang out with people who like to write poetry, they’re more likely to be on MySpace. If you want to carry on hanging out with them – especially in the cruel World that is governed by US High School cafeteria politics – you’d best turn to the same page they’re on. Or else.

This ‘where my friends are’ factor is critical in this space, for reasons that should be obvious.

Either way, I think it’s way too early to make a clear call on this: whilst teens are dominant on the networks right now, they’re going to grow up and it’s what happens then that is going to give us a better idea of causation and correlation around application choice. Right now, peer pressure within the demographics Boyd is talking about is too big a factor to call it a fair and even fight.