June 2011, and there is increasing chatter in both tech and financial journals that social networking is the new bubble. What follows is my own opinion on this matter, although I must give props to Mazher Abidi (@mazherabidi) for confirming that I’m not wholly on my own in this train of thought. Clearly, you must carry out your own due diligence on any financial decision you take, rather than taking my opinion – or anyone else’s for that matter – as gospel. Caveat Emptor here perhaps more than anywhere.

Facebook. Photo ©giles-guthrie.com

It seems clear that the sunrise period for social networking is over. Already some of the bigger names have folded, faded or otherwise imploded, including the pioneering Friends Reunited, darling of the music world MySpace, and only real rival to Facebook, Bebo. And where there have been failures, there have been successes. It is hard to analyse the Social Networking landscape without coming to the conclusion that there is now a “big three” who will proceed through to own the sector.

Facebook counts 7% of the world as active users, with over 30 billion pieces of content shared each month (source: Facebook Press office). It is the darling of interpersonal relationships.

LinkedIn has gained real traction in creating connections between professionals. With more than 100 million users (LinkedIn Press office), LinkedIn has gained traction where other “global address books” (to borrow a term from Microsoft Exchange) such as Plaxo have not.

Last of the big three is the transient microblog service Twitter. Twitter has polarised people like few other tech services I’ve experienced. People either ‘get’ Twitter, or they don’t. There aren’t any official figures for the userbase, but the figure is somewhere between 200m and 350m users on a month-to-month basis (FT.com article quoting Twitter CEO Dick Costolo, sub req’d). Activity on the site is very high though, racking up some 1bn tweets every six days.

The consequence of these three players emerging to prominence is game-changing for others in the sector. Organisations with designs on overtaking one or more of the above services are setting themselves up for a big fall. Darlings of the previous tech bubble Google have completely failed to set up a viable social platform, having tried twice with Buzz and Wave. And while Apple has reconfigured itself as a purveyor of objets desire and taken themselves out of that space, Microsoft is looking increasingly archaic. Actually, Microsoft has made even more of a hash of social networking than Google. It has Hotmail (launched in 1996) and MSN Messenger (1999), both of which offered software-as-a-service and realtime person to person interaction before anyone even knew what SaaS was. That Microsoft failed to capitalise on these platforms shows how badly they got their internet strategy wrong. And that Google doesn’t have a social platform shows that you need something compelling, not just a bunch of coders and a bunch of hardware, which has characterised Google’s portfolio to date.

In my view, key to the health of the bubble is the spa-day-discount specialist Groupon. Last week Groupon announced plans for an IPO, selling off part of the business at a price that would value the whole at more than $20bn (source: The Guardian). Even in reporting this extraordinary valuation The Guardian couldn’t help itself from racking up a slew of investors and analysts whose view was that $20bn was either fiction or fantasy. Certainly it seems unlikely that a business whose 2010 revenue was $713m could justify a Price/Earnings ratio of 28x. And with only 80m users, more than 7x the staff base of LinkedIn and a 2010 loss of $413m, investors would have to be in it for the long haul.

Surely as a tech business, the way to make money from Social Networking now is to conceive a product which complements one of the big three, not competes with them. The model for this has to be London startup TweetDeck, whose multi-platform application provides a consolidated control centre for social networking power users. TweetDeck’s vision must always have been to make themselves an invaluable add-on, and consequently to be bought out by one of the networks whose content their application so expertly manages. And so it has come to pass for TweetDeck, bought last month by Twitter for $40m.

In this light, Groupon’s position is interesting. Its $20bn valuation surely prices it out of most takeover markets, but its best hope for success is in integrating with another network with a pre-existing userbase and considerable social traction. Then Groupon could scale back its sales force, because companies pleading for people to “Like” them on Facebook would have an integrated Like & Reward structure. Groupon’s overheads, and effort of doing business could be all but eradicated overnight with a Facebook tie-up. However, unlike Twitter, Facebook has been remarkable for how unacquisitive (if such a word exists) it is. Facebook’s platform and APIs are its property, and it has made no attempt to control its channel partners. To the extent that there isn’t even an official bespoke iPad app for Facebook. Twitter is still looking for a way to properly monetise its platform, so any business looking to join up that has a similarly onerous financial input stream is not a logical target. And there has to be a real question of affordability for Twitter. Finally, Groupon’s product and service model are too far removed from LinkedIn’s for a tie-up between those two to make sense on any level.

So with a crazy-seeming valuation, and no ready-made partners, what can Groupon do to take the next step as a viable ongoing business?

There’s a panoply of examples of “old” businesses buying “new” businesses, and vice versa. The AOL-Time Warner merger is possibly one of the best known, and that didn’t really go well for either party. Most recently was Microsoft’s borderline-insane purchase of Skype for an eye-watering $8.5bn.

Thinking along these lines, there’s a potential white knight in Groupon’s future, and that would be Google. The world’s largest ad broker needs a mechanism to move its business model into meat space in order to continue its expansion, and Groupon could be just the ticket.

It’ll be interesting to see how this one plays out over the next year or so. As cash-rich companies look to grasp the social network nettle, and new social startups with vapourware revenue streams & red mist balance sheets struggle to align themselves with partners from old or new sectors. Just look for companies with massive user bases, low startup costs, or value-add propositions for established players. The gold rush is over, but there are some nuggets in the stream for those who do their panning carefully.