In your economics classes, you may have heard of a small event called the dot-com bubble. Between 1995 and 2001, investors — and the whole world really — became fascinated with revenue opportunities emerging from the internet.
Enamored with the seemingly unlimited earnings potential of websites, investors bought highly in speculative stocks, skyrocketing their prices. A popular pricing device, the Price-Earnings ratio, had risen to over 200 for the NASDAQ. Compared to today’s P/E ratio which is around 28, the market was wildly overpriced.
The bubble burst around 2001 and only a few websites, like eBay and Amazon, survived. Most websites went bankrupt, dragging many investors down along with them.
Fast forward 15 years, and many investors have forgotten the lessons recent history taught them.
In case you haven’t heard, on Oct. 27 Twitter announced it would be shutting down its video sharing service Vine, which it acquired for $30 million in 2012. Vine, which in 2015 reported having over 200 million active users, is a perfect cautionary tale of the dangers of investing in mobile apps and online services.
Just like in the dot-com bubble, apps seem to be great investments because they have unlimited earning potential. Just look at the Kim Kardashian app “KIMOJI,” which had a revenue of $74 million in 2014. If a simple app like that can make millions, why can’t an app like Vine be an investor’s dream?
Let’s take it back to business 101. You, being an aspiring restaurant owner, open up a new burger place. With great tasting burgers at reasonable prices, you’re sure to make money as long as people come to your shop. A customer comes in, you give them food, they give you money and investors are happy.
Now with an app like Vine you have to throw a second variable into the equation. Vine has to provide a good service to bring in the customers. The app did this fantastically by providing a platform where top Viners had over 10 million followers. However, having millions and millions of customers does you no good if you can’t make money off them. We call this monetizing the user base.
Apps typically don’t sell a product so they have to monetize their user bases in one of a few ways. They can offer premium features for a price, like Spotify, place advertisements like Facebook, or sell information about their customers, which as much as we’d like to think this doesn’t happen, it does.
Of course, we all know placing advertisements on our apps is a sure way to get us to stop using them. This is why it’s difficult to make a financially successful app. Not only does it need to be good enough to entice people to use it, but you have to find a clever way of making money off that user base.
In reality, Facebook may be the only company to do this successfully. Since becoming a publicly-traded stock in 2013, Twitter has never made a profit and may not be around five years from now. Mobile game powerhouse “Zynga,” the maker of games such as “FarmVille” and “Words with Friends,” has been operating at a loss for the past four years.
While investing in apps is not what I would call a bubble, and it’s certainly not on as large a scale as the dot-com bubble, we can still draw comparisons to the misunderstood monetization of websites in the ’90s to mobile apps today.
Companies have yet to figure out how to make a profitable and sustainable app, and while you may think an up-and-coming app, like KIMOJI or Facebook, is a sure winner, the odds are more likely it will be a Vine.
Jay Cranford is a 22-year-old finance senior from St. Simons Island, Georgia.