The $4 billion lesson Clubhouse taught us

Does anyone remember going on Clubhouse during the shutdowns?

It was the audio-based social media app where users entered virtual rooms to listen to anyone about anything – possibly even getting to throw their own two cents in somewhere along the way.

There were celebrities talking about how they made it big or what they were working on next… investors discussing business opportunities… politicians discussing politics… and complete strangers talking about whatever they wanted to talk about.

People went nuts over the collective, camera-less expressions, with Clubhouse gaining 100 million users in less than a year. Everyone talked about how it would change social media, disrupt podcasts, and maybe even replace radio.

By early 2021 – not even a year after it debuted – Clubhouse was valued at $1 billion. By April, that figure jumped to $4 billion.

It seemed certain the app would take over the work-from-home, eat-at-home, engage from-home world. And maybe it really would have if things didn’t start reopening, allowing socially starved, pent-up people to engage with society directly once again.

As it did, consumers found they had more important things to do with their lives: physical places to go and people to see. And when they did want to engage online, they had their old social media sites to fall back on – sites, incidentally, that came up with their own competing products.

Twitter created Spaces. Facebook had its Live Audio Rooms, while Spotify, LinkedIn, and Discord all got in the game as well. So Clubhouse’s massive appeal faded away.

Looking back, I think the reason why is simple: It didn’t have a wide moat.

In fact, when I really analyze the business, I have to conclude that it didn’t have a moat at all.

Moats are, as Warren Buffett has famously explained, economic barriers to business competition. They make it difficult or even impossible for rivals to steal customers, market share, and profits.

The wider the moat, the stronger the fortress it surrounds. The smaller the moat, the easier it is for marauders to storm the company castle.

Moats come in various forms, from proprietary products to first-mover advantages to brand-driven customer loyalty – just to name a few – all of which Clubhouse lacked.

For starters, it didn’t invent anything. It simply created a new space for people to do something they’ve been doing for millennia: talk with each other.

Clubhouse invited people into virtual rooms with speaking and listening capabilities. That's essentially the whole product.

So, yeah. Other well-established, well-known, well-used, well-funded companies noted what it was doing and did it themselves. That’s one of the biggest questions investors should ask when analyzing new and exciting companies…

Is the main product being offered an actual sustainable business? Or is it an easily duplicatable feature?

If other companies can easily make it just one more part of their own repertoire, that’s a vulnerability. A big enough one that I probably don’t want a part of the business in question.

At first glance, it appeared that Clubhouse might have had a moat by way of the “network effect.” This is when a product or service grows in value as more and more people hear about it and start to use it.

To be sure, Clubhouse’s initial network effect was impressive, with Elon Musk – not yet the owner of Twitter, at the time – getting onboard and Mark Zuckerberg doing the same despite being a clear competitor.

Global influencer Oprah Winfrey. Singers as big as Ariana Grande and Justin Bieber. Hollywood celebrities Ashton Kutcher and Jared Leto. Comedians Chris Rock and Kevin Hart… They all went on, giving Clubhouse enormous star power.

Even so, those stars could take their power anywhere else whenever they so chose.

So many people came to the platform because of who was promoting it. But there was almost no reason for those personalities to stay – especially when life opened back up and their schedules did, too.

Once those big names stopped frequenting the platform, so did their followers.

In the same fickle fashion, another part of Clubhouse’s network appeal was its initial exclusivity. When it first debuted, it was an iPhone-only, invite-only platform. Like an elite restaurant with hard-to-get reservations, people wanted what they couldn’t get.

The company therefore did itself a major disservice when, not only did it open up to Android users in April 2021, it also allowed anyone to join without member permission shortly after. Just like that, it became much more like your neighborhood diner than a five-star restaurant.

And then it lost even its diner appeal as the one real advantage it did have faded away.

Really, when you get down to it, Clubhouse’s biggest booster was Covid-19.

While founders Paul Davison and Rohan Seth had been working on the app for years, it just so happened that they launched it the very month the shutdowns began. At the time, it seemed like dumb luck, giving them a captive audience that was eager for engagement.

People weren’t going to restaurants, sporting events, parties, churches, or any kind of gatherings at all. That was detrimental, since we human beings are social creatures. We naturally crave interactions with each other.

And Clubhouse seemed to offer the next best thing to in-person contact.

But as soon as in-person contact became acceptable again as society reopened? Well, people gravitated to that instead.

While many people truly thought the shutdowns would last forever – the “new norm,” as we called it – they didn’t. So neither did Clubhouse’s popularity.

Davison and Seth acknowledged this problem outright in 2023 when they announced that Clubhouse would be downsizing by 50%. As the world reopened, they said, users had more responsibilities and engagement options that made it more difficult to fit long conversations into their schedules.

Clubhouse’s live, long conversations just weren’t convenient anymore. And it wasn’t as if you could pause it and come back to where you left off like a podcast.

Whereas you could (and can) check X, watch an Instagram video, or scan Facebook real quick while standing in line for coffee. If you don’t finish it, it’ll be there when you do have time again.

That’s part of the appeal.

Netflix (NFLX), of course, was another Covid beneficiary – and one that shares a lot of similarities with Clubhouse in its heyday. They’re both digital businesses that seek to engage audiences through pseudo-interactive experiences.

Both ultimately run on convincing people to spend more of their time on online platforms.

However, while Clubhouse attracted users, Netflix built an enormous economic engine of customers. And while both grew intensely because of Covid, Netflix’s growth was built on a carefully laid foundation that allows for sustainable repeat business.

Clubhouse’s was not.

Consider this: A smaller streaming competitor can make a great TV show or movie. But Netflix has the scale to make them over and over and over again, sharing those products with larger audiences, and making more money as a result.

Nobody else is offering Stranger Things, Squid Game, or Wednesday. They can’t. Those are proprietary series, just like the global phenomenon KPop Demon Hunters – as silly as it sounds – is only available one place.

That’s why Netflix was able to report Q2 results that included:

All because it knew how to make a moat and knows how to maintain it.

Keep that in mind the next time some supposedly revolutionary investment opportunity comes along. Instead of going all in on popularity alone, ask yourself what protections the company has against competitors. And are its offerings truly sustainable?

If you can’t figure out viable answers to those questions, you’ve probably identified a fad, not a sustainable trend.

In which case, there’s a very good chance your money is better off being put somewhere else.

Happy SWAN investing,

Brad Thomas
Editor, The Wide Moat Daily