Pinterest – a bubble waiting to burst?

“There are a lot of people who think we’re in a bubble,” Andreessen said, “which makes me think we’re not. I hope everybody thinks we’re in a bubble, though, because it helps keep prices [for making equity investments] down.” Marc Andreessen in conversation with Kara Swisher

When I think of eCommerce, a few companies come to mind.  The usual suspects with their multiple verticals are always on alert for new potential threats. Amazon, eBay and Alibaba are all on most shoppers minds and in most cases are habits. Habits are what all  e-retailers want, a subconscious process and actions that lead to profits. Remember those articles related to purchases during intoxication, that grabbed the attention of anyone associated with eCommerce.  It is a bit extreme but it makes my point.

Strategy is what drives the important players. Amazon always have a feel for what goes in their various verticals but if they cant compete with the market leader (which is not related to their holdings) then in most cases they buy the companies outright. Zappos is the example always mentioned as Jeff Bezos realised he needed to acquire them before any of his competitors do.  In other cases Amazon have invested in companies (LivingSocial) and then created their own version of the business (AmazonLocal) in growing vertical. This is seen in verticals that are created at great speed by competitors (Groupon) and then a response is needed. I call these market responses and these companies in general either survive or die at a very quick rate. (For the record, LivingSocial has been an investment hog and headache for Amazon).

The investor – Rakuten

This leads me to a company that both intrigues and fascinates me. Rakuten, the Japanese ecommerce market leader is one with a multiple holdings but no clear strategy. The have acquired companies in both developed and developing economies. They have a stake in Kobo which can be seen as the forgotten child of e-readers when compared to the Amazon Kindle or the Barnes and Noble Nook).

However, the most puzzling investment is their most recent one, Pinterest. While Pinterest is the much proclaimed traffic sender to eCommerce companies at the moment in comparison to Twitter, facebook and Google Plus. Pinterest is at the moment an unproven product. Why unproven? Well for starters if has not been around for years (Google Plus is an extension of a company that has been around since 1999) and there is no clear revenue strategy. Twitter, is in a similar boat but they seem to be aggressively working on that. Pinterest on the other hand is the media’s darling at the moment.

I might be a tad conservative but the really successful Internet companies are the ones that have thought about revenue generation from day one. It is only recently companies such as Pinterest, Twitter and Instagram have come along with the lack of planning. Is it a case of build it and they will come? I am not really sure..

One huge factor that is going to count in Pinterest’s favour is that they have created a vertical which does not directly compete with social media nor with any of the big Internet players. I firmly believe that Pinterest is an integral part in the product discovery phase for ecommerce shoppers? It is a clear way for users to view content, save content and amplify content. That for me is very powerful. So any ideas on a revenue making master plan?

For me, Pinterest could go one of 3 ways at that:

  1. Build a self standing affiliate programme for retailers that could monetise their traffic. The complication is that when they did this previously via Skimlinks, it caused some uproar with their users.
  2. Second sell advertising on their various content rich pages. The issue with this might be a third party problem. I would say a majority of their content is all created by others, so would all income generated be Pinterests’ or the content producers? I have not read their terms and conditions, but I sense there maybe legal issues with this idea.
  3. Market research. Yes, market research, they are sitting on a platform that can be seen as a taste graph for all their users. Brands and agencies who want to pitch products to users, can get the really good data which is a marketers dream. Whether Pinterest have the data saved in a usable and functional manner is another story.

No Amazon – Why did Rakuten invest?

The one question that I have to ask is, as it bothers me, is why did Amazon not lead the funding round? (I don’t work for Amazon nor am a spokesperson for them). Think about it, if Pinterest is such a hot company that drives so much traffic to ecommerce websites, then logically Amazon whom I consider to be marketleader in the space, is to be considered the most likely company to lead the funding round right? Hiroshi Makatumi has indicated that analytics played a role in them making the funding.  The lack of Amazon investment into Pinterest leads me to believe that Jeff Bezos and his merry men are sceptical over Pinterest’s future. So why did Rakuten feel the need to invest?

  1. One, I think this is direct result of not owning an ecommerce property that is blowing the market out of the water (those in general are the crown jewels of others). Their investments are scattered across the globe (Brazil, Japan, US, Germany and Spain) which leads me to believe that they do not have a clear investment strategy.
  2. If Pinterest leads to being a success and they don’t own it, then they miss out again.  I cannot think of one acquisition that Rakuten did that was expected by the market. Consider the case of Amazon and the uproar that was created when the acquired the Book Depository in Europe?
  3. This could be their attempt at having a slice of social commerce. All of their current holdings are B2C and the social aspect in all of them, are not worth writing home about. This is a challenge that most ecommerce companies will be facing going forward. If they have not acquired something to cater for the vertical that seems to be a chronic buzzword, then they lose relevancy.

Is the Pinterest story – an episode in a bigger series of events?

The main issue I have with Pinterest is not a product related one, but rather a funding one. A valuation of $1.2 billion based on what? Exceptional growth, traffic generation, a lot of media coverage and hot air?

So what does this potentially mean? I have been hesitant to say it out loud but I think Pinterest could be a signal that we are in a bubble (Thank you facebook for highlighting it.)

The counter to my bubble thought can be seen in this excellent post from Chris Dixon.

Fancy – The Rival

One other thing that I need to mention is that Pinterest does have competition in the curational ecommerce space. Fancy, a New York startup seems to be the most similar to Pinterest, but they have a twist. Instead of pinning a massive amount of products without real benefit to the user. Fancy has a business plan.

The fancy provide discounts to certain manufacturers products. I have seen this first hand and in actual fact believe that fancy might be the company that might become the market leader in the curation space. I know Sucharita Mulpuru from Forester Research agrees with me.

I yet have to see any idea that Pinterest has for the future.. The fact that Rakuten leaped to lead the investment round in them might just solve their problem for the future. In terms of the future – I am not sure about Pinterest.