Wall Street pundits have been calling for a significant market correction for the last couple of years. As soon as it starts to seem like it’s coming, the market quickly bounces back and makes new highs.  This has made many nervous. 

It seems the economy is in a recession for many Americans due to stagnant wages and the widening gap between the have’s and have not’s even though there’s officially no recession.

Not being in a recession or a booming growth period is odd since Americans have usually felt strongly one way or the other. This in-between makes the economy a lot different than during the boom of the late nineties and the dot com bust of early 2000. While times may not be great for everyone, we don’t feel like there will be bread lines like there were right after the financial crisis either.

If a market correction is to come, what will it look like? 

A market correction is not going to look like the financial crisis. It may look kind of like the first dot com bust though very different fundamentals will drive this one.  It will be triggered by an unlikely source dethroning a major success story.

We need to identify the major differences between the dot com 1.0 era and dot com 2.0 era.  Dot com 1.0 had companies going public with huge losses, little or no revenue and business plans that weren’t long-term viable (Webvan, Pets.com, CDNow). This era has social media companies generating profits, with significant revenue or huge cash positions that makes them much more able to survive a downturn (Facebook, Twitter, LinkedIn). 

While valuations are high, today’s dot com 2.0 companies are not on shaky footing in terms of their balance sheets.  What they have working against them is their lack of resistance to technological and psychological change in the world along with a growing lack of loyalty to virtual brands.

If you use any of the big three social media companies, (Facebook, Twitter, LinkedIn), you are not their customer. You are the product. Having control over your product/service and the source of that product/service is a key competitive advantage most companies have. 

A giant user base is not competitive advantage or barrier to entry.

All these years, the media, investors and entrepreneurs have seen a giant growing user base as a competitive advantage. The big three social media companies have well over a billion users combined. The market has rewarded them for this user base.  They sell the data from this user base to advertisers. They use the data generated by users to attract more users and the cycle goes on and on.

What people fail to realize, is that there is a big different between making money from a user base (they would be called customers) and making money off your user base (they are the product). This has worked for more than a decade and will continue to work…until it doesn’t.

Enter Ello.

Within 5 weeks of becoming available, Ello, the new bare bones social network hit nearly 40,000 signups per hour. It launched with a manifesto telling the world it was going to be different by saying it wasn’t going to make its users a product to sell to advertisers. Immediately, the media was asking, “How are they going to make money?” Their response was that they are going to sell premium features. Remember there was a time Facebook once didn’t have any ads. 

What would happen to the major social media companies if their product suddenly moved? It happened to Friendster and it happened to MySpace. 100 million people abandoned Myspace. Does it seem ridiculous to suggest that a billion people would leave Facebook? 

The market may not be a huge bubble ready to burst. It could simply deflate slowly and the high valuation companies could either increase profits to make valuations more justifiable or prices could slide down to match current profits. 

Or…something more sinister could happen. People could become tired of being the product and flock to a new business model like Ello. If Facebook went down, the market would panic, there would be a severe correction and ultimately welcome to dot com bust 2.0. 

That would be a time where startups with tons of users would not be able to raise huge amounts of money from VCs or have companies like Facebook offering billions to buy them. The entire startup ecosystem would get hammered as bad as dot com bust 1.0.

The good news is the rest of the world outside of the Silicon Valley bubble isn’t going to panic like it did during the financial crisis. Venture capitalists and tech elites will get hurt.  Entrepreneurs will have to go back to building long term focused sustainable businesses and the rest of the world will carry on.

Once again, it’s why Warren Buffet doesn’t invest in tech and it’s only a matter of time before a startup comes along to disrupt a behemoth.