Buffett Is Right: Don't Buy Tech

Bad news for News Corp. (NYSE: NWS  ) : MySpace, once the nation's dominant social network, is on a fast track to digital irrelevance.

The numbers aren't encouraging. Researcher comScore says that MySpace had 71 million unique U.S. visitors in April, versus 67.5 million for Facebook. A year ago, MySpace had more than doubled Facebook's visitor count: 72.2 million vs. 35.7 million

Not just a Jeremy Irons movie
Talk about a reversal of fortune! How did it happen? My sense is that MySpace failed to become a platform. Software developers flocked instead to Facebook, which put up cash to help fund businesses whose software would work inside its service.

Some of those developers are profiting handsomely. Mob Wars, a Facebook game created by David Maestri, was producing $22,000 a day in revenue last summer. At least one blog now speculates that Mob Wars generates $1 million in revenue per month. Such numbers help to explain why Facebook is on pace to generate as much as $500 million in 2009 revenue -- it's a console, the social media equivalent of Microsoft's (Nasdaq: MSFT  ) Xbox, Sony's (NYSE: SNE  ) PlayStation, or Nintendo's Wii.

MySpace, by contrast, is seeing development activity decline weekly, according to blogger TechCrunch. We don't know where the coders are headed, but Facebook and Twitter seem to be likely options.

Especially Twitter. New data from comScore says that the site attracted 32 million global visitors in April. Wowza.

Buffett is right
In recent months, a former Facebook executive, Owen Van Natta, has replaced MySpace founders Chris DeWolfe and Tom Anderson. Page views continue to slide, and next year, a revenue-rich partnership deal with Google (Nasdaq: GOOG  ) is set to expire. Warren Buffett is right: When a superstar can be displaced this easily, you're crazy to buy tech.

Unless, that is, you're betting on platforms. Go back to what I said about Facebook. Whereas MySpace is a site, Facebook is a moneymaking opportunity for coders -- a platform supported by an entire ecosystem of interested parties, rather than visitors alone.

So if you plan to buy tech, buy platforms that feature these three traits:

1. Commitment
Customer commitment is obviously important, and it's one feature MySpace never lacked. Millions of users flocked to the site to post photos, find friends, and share ideas. Among public companies, Netflix (Nasdaq: NFLX  ) engenders similar loyalty, and it's eating up DVD rental market share as a result.

2. Innovation
For Motley Fool Rule Breakers recommendation salesforce.com (NYSE: CRM  ) , innovation is a competitive edge. But in this case, the company's not the only one innovating. Thousands of developers have created new software for salesforce.com in a market called AppExchange. Each widget enhances the platform and encourages further development, widening the company's already generous moat.

3. Profits
Historically, no platform has ever equaled Windows as a profit maker for coders. Today, Apple's (Nasdaq: AAPL  ) iPhone App Store is threatening to become Windows-like in its ability to confer wealth upon programmers. As a result, developers are flocking to the platform.

MySpace is a cautionary tale for tech investors, sure. But it needn't be the deterrent to tech investing that Buffett advises. History shows that platforms such as Windows have created massive wealth for developers and investors alike, a trend that probably won't change anytime soon. Invest accordingly.

Get your clicks with related Foolishness:

Google and salesforce.com are Rule Breakers recommendations. Apple, Netflix, and Nintendo are Stock Advisor selections. Microsoft is an Inside Value pick. Try any of these Foolish services free for 30 days.

Fool contributor Tim Beyers didn't own shares in any of the companies mentioned in this article at the time of publication. Check out Tim's portfolio holdings and Foolish writings, or connect with him on Twitter as @milehighfool. The Motley Fool is also on Twitter as @TheMotleyFool. Its disclosure policy is rushing to meet deadline. Sorry, can't talk now.


Read/Post Comments (24) | Recommend This Article (42)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 22, 2009, at 10:41 AM, 1270251800 wrote:

    This will be my last view of Motley Fool. I'm tired of the misleading headlines geared to collecting as many clicks as possible, and the subsequent discovery of ... nothing of value.

  • Report this Comment On May 22, 2009, at 10:45 AM, catoismymotor wrote:

    The situation with MySpace is exactly why I don't invest in the likes of Baidu, Sohu, Ebay, Yahoo!...There is nothing to lock you in, no moat. As soon as somebody comes out with a more compelling product all you need to do drop one for the other. There is no pain to be felt with the change.

  • Report this Comment On May 22, 2009, at 10:49 AM, catoismymotor wrote:

    Bye-bye foul named rude person.

  • Report this Comment On May 22, 2009, at 1:06 PM, kpinvest wrote:

    @FY2, if you want free stock advice, I would recommend that you move to Wall Street and setup a nice cardboard box. Otherwise, keep your opinions to yourself and the rest of us (those with an inkling of analytical or critical thought) will welcome your departure.

    On topic, the downfall of Myspace, imho, was when they made the distinction of being a social networking site to being specifically a Music Orientated network site. A semi-static company in the technology industry becomes obsolete in a year. Had Myspace had the same ingenuity that Facebook does (like, opening the API to a broad range of developers) they wouldn't be in the situation they are now.

    Don't buy tech is a strong phrase, buy tech, but keep a very close eye on it.

  • Report this Comment On May 22, 2009, at 4:10 PM, FinancialFellow wrote:

    Good article. Social media is a funny and powerful beast. It's a big business that has the unique aspect of "what's cool and hip" having a major pull on it. Friendster was great when it came out. Then it got rolled by MySpace. Now MySpace is losing out to Facebook and Twitter. (With Facebook now losing out to Twitter). I've read articles that Twitter is seeing some issues as well. Yes, business decisions about incentivizing developers have an impact but, the ebbs and flows of what young folks find cool and hip also have a large effect.

  • Report this Comment On May 22, 2009, at 6:35 PM, kakpa wrote:

    "Don't Buy Tech"

  • Report this Comment On May 22, 2009, at 9:26 PM, rritterson wrote:

    Netflix is essentially a tech company that suffers from the same shortcomings this article highlights. I don't understand the continued love for the company. Yes, it has a lion's share of the rental DVD market, and yes, it is working to protect against electronic/internet based rentals of movies.

    However, when movies are largely viewed on-demand via internet connections instead of via hard media (whether that be DVD, or blu-ray), the moat Netflix maintains instantly vanishes. Do you have full faith netflix will be able to navigate the post-DVD world and keep its position of dominance? Blockbuster became irrelevant in a fairly short flash and I see the same fate for netflix.

    A company like Apple, that stands to benefit when movies are delivered via the internet, no matter what the method (via the number of iPhone users it has) seems like a much more reasonable investment.

    Blockbuster became fairly irrelevant quickly. Will netflix suffer the same fate?

  • Report this Comment On May 22, 2009, at 9:37 PM, ARJTurgot wrote:

    Blockbuster's customers hated it. The abuse they experienced with the late fee racket got Bb sued by multiple state AG's and when an alternative showed up people ran to it.

    Netflix is adapting, and I still have DSL and will for a couple more years. Movies come slowly at 256KB. Plus, I like the fact the DVD sits on top my television until I'm ready to deal with it.

  • Report this Comment On May 23, 2009, at 3:48 AM, crazygood wrote:

    No, Netflix will not suffer the same fate as Blockbuster. Definitely not. Netflix management is smart, and very forward-looking...they're busy now branding themselves and getting a lot of customer loyalty and good feeling, and simultaneously busy upping their server-power and all the tech capabilities they will need, so as more and more people are getting movies delivered via the Internet, Netflix will have a major share of that. I've studied them a lot, and I keep discovering things I like about the management and how they look at things. Also, I bought NFLX a year ago, and it's up 71%, which is not true of a lot of stocks in this market. I'm thinking about buying another chunk of it, actually...just not sure when!

  • Report this Comment On May 23, 2009, at 1:17 PM, HectorLemans wrote:

    "This will be my last view of Motley Fool. I'm tired of the misleading headlines geared to collecting as many clicks as possible, and the subsequent discovery of ... nothing of value."

    Have to go with 1270251800 on this one. I'll probably be back but seriously Motley Fool - you're eroding my confidence every time you do this. Keep up the ridiculously mis-titled articles for much longer and I'm outahere. For this article might I suggest "Myspace vs. Facebook", "How to Value Tech", or "Facebook has a Platform to Stand On"

  • Report this Comment On May 23, 2009, at 2:07 PM, jmontgomery86 wrote:

    Calm down. It's the internet and everyone has opinions. If you don't want to hear the opinions, then don't read them, otherwise stop wasting your time and ours by posting stupid stuff.

    Anyways, it seems to be extreme to say "don't buy tech." Instead, buy tech, but if you're more of a defensive investor then buy a tech ETF just to be safe and diversified.

  • Report this Comment On May 23, 2009, at 8:00 PM, Netteligent09 wrote:

    Motley Fool seems to be a place for stock speculation, useless analyst recommendations, etc.

  • Report this Comment On May 23, 2009, at 9:21 PM, HarryCarysGhost wrote:

    Did Buffet actually say don't buy tech. I believe he said Don't buy companies you don't fully understand.

    If you understand tech then by all means invest in them.

    You could take his teachings to all sectors, but just trying to mirror him would be foolish.

  • Report this Comment On May 25, 2009, at 4:10 AM, eaenglish10 wrote:

    I think Netflix will ultimately suffer due to the growth of pirating torrents. Demonoid.com and thepiratebay.com are some good ones.

  • Report this Comment On May 25, 2009, at 7:08 AM, somethingnew wrote:

    No, Buffet never said "don't buy tech." He said he doesn't buy tech because it's something he doesn't understand and gave that as one of the main reasons he never bought into Microsoft even after he met Gates very early on and recognized his brilliance.

  • Report this Comment On May 25, 2009, at 7:01 PM, kellogg9 wrote:

    I was looking through the Alexa list and boy have things changed. MySpace was #3 in the world which to this day still baffles me seeing as how the site continues to sport the chaotic look but like all social networks their audience has little patience for the old and always move to what's new. The younger nation always is looking for something new and when they do try it and like it they end up telling their friends which start a mass exodus..>This is always commonplace for social networks and always shifts the power of whos tops every so often. Currently it is Facebook but in 3 years time it will be someone else

    Kelly

    http://www.stockcoupons.com/

  • Report this Comment On May 25, 2009, at 8:32 PM, huibs wrote:

    ..since when did "myspace" become "tech"??..

    ..poor article, and a stretch of a headline at best..

    ..huibs..

  • Report this Comment On May 26, 2009, at 12:35 AM, ozzfan1317 wrote:

    Their is nothing wrong with buying tech. Just do your homework and only buy companies with a Moat..EG MSFT,AAPL.

  • Report this Comment On May 26, 2009, at 12:33 PM, PricePro12 wrote:

    Myspace and Facebook. What is Fool comming to, to have to have articles about this crap... no one cares. Tech does not equal Myspace vs. Facebook. bad article

  • Report this Comment On May 26, 2009, at 1:15 PM, PricePro12 wrote:

    Upset With fools False Articles. i am the same i am jumping ship to a pretty cool market site for pro's. I head of it from a guy on marketwatch it is called greenfaucet. check it out. See if it helps you.

  • Report this Comment On May 28, 2009, at 1:08 AM, JakilaTheHun wrote:

    Actually, I think you're dead wrong on MySpace having "loyalty" on its side. That was the exact problem. It was a social networking tool that everyone got on board, but most people viewed it as utilitarian, clunky, and spammy.

    No one was ever truly loyal to MySpace. They were just there b/c everyone else was there. Once Facebook came along with a cleaner interface and better setup, people slowly started drifting over. Once the "everybody" was removed from MySpace, people slowly began to lose interest.

    I think MySpace is pretty much doomed at this point. I barely use it any more and talk to most of my friends on Facebook. By 2011, I'm betting the70 million figure is cut by at least 50%, if not more like 70% - 80%+.

  • Report this Comment On May 28, 2009, at 7:05 AM, zpn4 wrote:

    I agree with the comments above - definitly misleading titles. That's why I don't visit MF much.

  • Report this Comment On May 29, 2009, at 3:12 PM, ziq wrote:

    Just because you use a computer for it doesn't make it "tech".

  • Report this Comment On June 01, 2009, at 10:33 AM, FreeMortal wrote:

    Tech is what powers growth but nowadays it is too transient. By the Buffett standard, even Google is not a safe bet. The moat is only ankle deep. Google remains #1 only because the company is on the top of its game and runs a tight ship. The second Google ossifies or loses the wrong people there are dozens of portals ready to fill the vacuum.

    Now Microsoft -with its marketshare muscle and cash reserves- has a sizable moat. But it still needs to pass the second Buffett test: Is it cheap? Not so sure about that.

    MF Gem Akamai might pass both tests. Its business has huge barriers to entry in terms of infrastructure and talent, massive market share, and most folks (even geeks like me) have never heard of the company even though half of everything you do on the net ends up routing through Akamai.

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