Posted on February 24, 2008
Filed Under Web 2.0 Kool Aid |
I’ve always been skeptical of Facebook. Unlike many of the people who are only now pointing out that Facebook is looking, at best, significantly overvalued, I am on the record as having questioned the long-term viability of Facebook when most others were drunk on the Facebook kool aid.
In my September 16, 2006 post on the now-deceased blog Dead 2.0, I asked:
Is Facebook the new Webvan? While it’s not an apples to apples comparison, Webvan burned through $1.2 billion of investor money due to lack of cost control, was never profitable but at one point had a ridiculous market capitalization of $7.5 billion and eventually fell victim to competition and market forces. Facebook is facing the same problems: overspending, a bloated valuation and fierce competition.
I believed that Mark Zuckerberg should have taken the $750 million offered by Viacom in 2006 and certainly should have taken Yahoo’s rumored $1+ billion offer in the same year. While some might argue that he’s smarter for waiting and getting a $15 billion valuation (on paper) less than two years later, turning down several hundred million dollars in cold hard cash when you’re in your early twenties is bizarre to say the least. Dean Martin said, “You’re nobody until somebody loves you.” Drama 2.0 says, “You’re nobody until you’re liquid.”
More recently, of reasons Facebook isn’t worth $15 billion and have even posted of why I think the company is fucked.
It increasingly appears that Facebook’s troubles are becoming obvious. The company saw its for the first time last month according to Nielsen Online and now TechCrunch, which has typically been pro-Facebook in the past, whether there is “Facebook fatigue” after the latest comScore data seems to show a leveling off in US traffic (and a dip in January). and the chief revenue officer to pursue other opportunities while essentially stating that he’s done all he can do for Facebook. Of course, that everything is going great.
Coupled with on social networks and the news that even online advertising wizard Google can’t seem to figure out how to make social network ads profitable, it’s looking like Facebook would have a very hard time convincing the public markets to give it a $15 billion valuation if it were to go public anytime soon.
But perhaps more important than all of the tangible, substantive indicators that the Facebook winning streak has ended is the noticeable shift in public sentiment. The same media outlets, bloggers and consumers that propelled the rise of Facebook are increasingly propelling discussions about its demise.
The number of negative comments being posted on the rise and not surprisingly, some even seem to be cheering on the company’s fall from grace. From The Register’s article entitled “Facebook loses a few bitches” to PC Advisor’s article entitled “Facebook is…dying” to The Times Online article entitled “Is Facebook finally losing its glow?” it’s evident that Facebook no longer represents the type of underdog upstart that everybody feels compelled to root for. Even those who typically describe themselves as optimists are starting to ask questions.
While I don’t think Facebook is going to “die” anytime soon thanks to the plethora of stupid money it has raised, I do think its decline is well underway for a number of reasons. Consider this a forward-looking post mortem.
Slower Growth + Increased Costs + Undermonetization = Big Problems
Facebook’s growth is, as was inevitable, slowing. Had the company scaled in a sane fashion, this would not have been so problematic. Unfortunately, the company actually intends to scale even more rapidly going forward. It has earmarked $200 million for capital expenditures in 2008 and plans to more than double its employee count.
At the same time as growth is slowing and the company continues to grow costs, its ability to monetize is still stuck in first gear. More traditional ads have provided paltry results, it’s pretty obvious that brands paying $50,000 to $300,000 for Facebook pages are wasting their money and the company’s “innovative” experiments, such as the “revolutionary” Project Beacon, with consumer and advertiser enthusiasm.
Slower growth coupled with increased costs and already-underperforming business model does not bode well for a company whose current valuation (on paper) is 300 times projected EBITA for 2008.
As I’ve pointed out before, it’s also important to note that a significant amount of Facebook’s revenue reportedly comes from payments guaranteed to it by Microsoft under a that is similar in nature to the $900 million MySpace ad deal that has been a . Since I think that Microsoft, like Google, is likely losing money on the deal, it’s worth considering that Facebook’s revenue should be looked at as being artificially high because this type of revenue cannot be counted on long-term unless the company makes deals like the Microsoft one profitable for all parties involved.
Facebook Can’t Be All Things to All People
Facebook’s mainstream success has been expensive. Once the exclusive online gated community for America’s college students, Facebook in 2008 looks a lot more like MySpace than it does its original self. This is not appreciated by many of its most passionate early users - college students who would rather receive a poke from a hot coed than from a parent.
As observed by Nic Howell, deputy editor of New Media Age magazine, “Social networking is as much about who isn’t on the site as who is - when Tory MPs and major corporations start profiles on Facebook, its brand is devalued, driving its core user base into the arms of newer and more credible alternatives.”
Of course, Facebook was forced to open itself up as it increasingly had to live up to the valuations being placed on it by investors; a continued focus on college students only would have significantly limited its potential market. While the financial outcome of increasing the size of its potential market by opening itself up to the world may be worthwhile short-term, alienating those who helped spark its success poses long-term risks for Facebook.
As evidenced by past migrations of users on social networking websites (i.e. Friendster), the loyalty of Internet users is questionable at best and many are willing to with a particular social network even if they don’t leave altogether.
It’s Hard to Be More than You Are
When Facebook launched its application platform, many noted that the move was an attempt to turn Facebook . Many heralded this as a revolution and even started asking whether Facebook could become the next Microsoft.
Unfortunately, many of the complaints of Facebook users are today directly related to the applications created for this platform. “Application spam” has become prevalent and the source of much consternation from Facebook users. have even asked Facebook to provide an easy way to “opt-out” of the application nonsense.
When one considers that most of the Facebook applications resemble novelties more than they do utilities, and that these applications have become the focus of looking to leverage them as advertising vehicles, I think it’s clear that Facebook’s application platform lacks the type substance some would like to think it has.
At the end of the day, no matter how hard it may try, Facebook is a social network, not an operating system.
The CEO is Out of His League
As my readers know, I’m not a huge fan of Mark Zuckerberg. That said, I can only tip my hat at the way he’s taken a simple social network and turned it into a company that the world’s largest software maker valued at $15 billion. Regardless of the fact that I think he was in the right place at the right time more than he was a visionary, it’s hard to completely devalue what he’s accomplished, even if a talented monkey could have done the same thing given Facebook’s viral growth.
That said, there comes a time when a company outgrows the entrepreneur who founded it and it makes sense for new management to take over as a company enters a different phase of its existence. This is a natural part of the evolution of a company and it’s not only entirely healthy, but oftentimes necessary.
Zuckerberg’s repeated gaffs, including the caused by Project Beacon, and the ensuing apologies, have demonstrated that he’s increasingly out of his league. I would argue the innocent-looking, if awkward, boy wonder that once served as an asset to Facebook’s PR machine has become a liability as , and become more apparent.
Even though Facebook is having trouble making money commensurate with its valuation, by all measures, Facebook is a big startup. When you’re dealing with 1,000 employees and $200 million in planned capital expenditures, execution becomes a lot more important than vision.
For Facebook to have any chance at growing into its $15 billion valuation, Facebook needs experienced leadership more than ever. If you believe Zuckerberg is a genius, there’s still no denying that he has limited leadership experience and is learning on the job. Given the company’s current position, there’s little room for this and a seasoned leader should be brought in to call the day-to-day shots while Zuckerberg is left to do what he does best (i.e. advertising and media industry executives that “Once every hundred years media changes.”).
Unfortunately, Zuckerberg seems reticent to show some true wisdom by giving his CEO role to a better-equipped successor.
Conclusion
Facebook is still fucked. The writing is on the wall and even if the company doesn’t “fail” per se, it’s evident that living up to its $15 billion dreams is going to be about as easy as keeping Lindsay Lohan sober.
Given the and the company’s stated intention to , Facebook is in a risky position. Because of its exorbitant valuation, it’s unlikely that any major player is going to buy Facebook (unless Microsoft doesn’t get Yahoo, Steve Ballmer goes ape shit and decides to go on a shopping spree to deal with his depression). And while a delayed IPO gives Facebook time to try to figure out a business model that works, I’d argue that time is not on the company’s side. After all, the mainstream media and blogosphere have turned quite quickly on Facebook and the more time there is for Facebook’s perceived momentum to erode, the less likely it is that the company will find a receptive market for its IPO.
In other words, Facebook probably overplayed its hand. Instead of cashing in its chips while it was ahead, it’s likely to experience the proverbial rise and fall that so many other once-hot Internet startups before it experienced. C’est la vie.
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Drama 2.0 spikes the Web 2.0 kool aid by providing critical analyses of Web 2.0, its people, its startups and its impact on the world of media. Other topics are explored when Drama 2.0 has been drinking too much 1975 Dom Perignon. Read more about the Internet's version of Keyser Söze here.
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You have a very forceful entry about Facebook. When I was in grad school (i am a dropout PhD student), I ask some of my fellows about whether they were stick to Facebook. Young guys said it was cool, older ones say no, it’s useless. In my opion, as older, people are more close to those who are around them and related to their life/work, instead someone who is far away or long time no see. That implies special social networks (for older), and MySpace (for young) are more valuable, and more interesting than Facebook. Although I am not a fan of MySpace neither, I see it is more open and more intereting than Facebook. Facebook is becoming more and more boring. Hope someday, Mark will have something more interesting to introduce in his overvalued network
note to self: if someone puts a billion dollars in your hand, close your hand.
who represents who in the video?
David Craig is the future Mark Zuckerberg. Sting is the blonde Drama 2.0.
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I’ve been thinking this for a long time, can’t agree with this article more, and while we’re on that, how many users will facebook loose due to the “new layout”,,, a whole bunch, because only 7% facebook users are apparently using the “new facebook”