Why the Social Media Revolution Is About to Get a Little Less Awesome

Social media is about to get much more annoying, and it's all Facebook's fault (kinda.)

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Reuters

In the wake of Facebook's disappointing IPO, Paul Graham, the cofounder of the country's most famous and successful tech incubator, Y Combinator, sent an email to his portfolio companies predicting a shift in the way venture capitalists evaluated start-up potential. Before the public offering, companies that build a large audience were not under much pressure to build a revenue model to match. But "the bad performance of the Facebook IPO will hurt the funding market for earlier stage startups," he wrote, "possibly a lot, if it becomes a vicious circle."

Facebook's bad IPO wasn't an aberrational day. The company's stock kept dropping. And dropping. From $38, the offering price, into the $20's and below.

Very little about Facebook, the company, technically changed. Total users kept growing. Time spent on the site kept growing. Average revenue per user in the U.S., Canada, and overseas grew too. But not fast enough for investors, apparently.

But Facebook, as a symbol of the attention economy, had already changed dramatically. Before the IPO, the company's value was a debate. After the IPO, its value was a stock price. One side had said all along that no company had ever achieved Facebook's scale, reach, and mastery of an audience's time and attention without being worth $100 billion. Another side had said that no company such an undeveloped business model could possibly be worth even half that price. We don't know who's right in the long term, but in the short term the pessimists are winning.

And the victory of their argument is having repercussions across the industry. This morning, Business Insider reported that investors in Tumblr, the largest new social blogging platform, are demanding a business model to match the awesome growth in users.

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"VCs feel the urge [to monetize] more now that the economic environment has changed," the source told BI. "Valuations have to be justified now. Things are different. Before it was like, you have a lot of users, that's great. Now it's like, okay, what are we going to do with them."

This is bad for start-ups in social media, for whom attracting investment was as easy as a one-pager on user growth and time spent per person as investors change the way that they price attention. But even more importantly, it's bad for you.

Look at your smart phone or your tablet. Some of the best apps out there are free programs that bring down walls, connecting you to businesses and information that generally makes you life easier or more enjoyable, whether it's finding transportation, ordering dinner, or naming a song. Many of these companies either have no business model, or have a business model so thin as to be practically imperceptible to its users. In some corners, this is a mockable fact, but rather than mock it, you should stop and appreciate how amazing this is: Some of the smartest and most creative entrepreneurs and developers of our generation are dedicated to making awesome stuff for you, and, bankrolled by deep-pocketed venture capitalists, their determining business metric was not "How will you make money from credit cards and marketing departments?" but rather: How many millions of people are you delighting with your exceptionally cheap product? It is hard to imagine an industry built on a more satisfying premise for customers.

If we're graduating from the "making delightful and cheap things" stage of the social media age to the "making money" stage, make no mistake: Things will get less delightful. In order to be profitable, it is highly likely that Twitter can only get more annoying, Pandora can only get more interrupt-y, Tumblr can only get more cluttered, Facebook can only get more devious, and the app baubles on your iPhone can only get more expensive.

The first few years of the social media revolution have been a golden age of tech utilitarianism, where maximizing users' delight was considered, quite literally, the only currency that mattered. In Part II of the revolution, the desired currency is poised to change from attention to profit. That's a shame. It doesn't mean that the programs you love are anywhere close to coming to an end. It just means that things are about to get a little less awesome.

Derek Thompson is a senior editor at The Atlantic, where he writes about economics, labor markets, and the entertainment business.


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