May 22
Let’s pretend for a second that Facebook decided it needed other investors besides Microsoft and offered you the opportunity to invest in it. Would you? I am a Facebook user like a lot of my friends even though I am not exactly in Facebook’s prime demographic. I often describe Facebook as either “On-line Booty Call” for users under 25 and “Baby Shots On-line” for users over 25.
If given an opportunity, I would take a pass at investing in Facebook. Why?
- Facebook has no technological advantage right now which means it will be difficult to differentiate itself over time. This is always the problem with investing in technology; someone will erode your competitive advantage unless you have somehow tied your product with distribution (i.e. Microsoft’s operating systems are installed in approximately 90% of software installed when you buy hardware), bought up the competition (see Thomson) or have grown ubiquitous through ease of use (Google). Facebook is none of these things. In fact, it has a large competitor in MySpace and a lot of other competitors nipping at its heels.
- Facebook has no natural business niche and it becomes hard to deliver value that way. What is Facebook? A networking site? An advertising medium? A dating site? All of the above? I honestly could not tell you what niche Facebook has carved out for itself that someone has focused on better (the same could be said for MySpace as well). Facebook is the face of Web 2.0 but Web 2.0 is one of those cool terms that doesn’t translate into anything tangible (much like the thankfully forgotten “information superhighway”- what the hell did that mean?). From a business perspective, you need to show to investors you have carved out a niche that no one else can touch and you know how to commercialize that niche (see #4). Google dominates on-line searching and advertising. Craig’s List has replaced traditional newspaper classifieds. Thomson is the source for paid research and analysis in finance, law and accounting. What’s Facebook do better than anyone else?
- Management is inexperienced and that means it is mistake-prone. Facebook has a 24 year old CEO. Think about when you were 24. You didn’t know what you didn’t know. Although you can be technically gifted at 24, there are nuisances of managing people, dealing with investors and the media and steering a company through growth that you simply cannot gain through a wealth of life experience most 24 year olds have not acquired yet (or not acquired through mistakes in a less public forum). Some believe that this inexperience at the top has lead to a high-handed attitude to the larger Facebook community which has resulted in not enough champions for the product. Remember that Steve Job had just turned 30 when he was fired from Apple. He returned to Apple after more than a decade of life-experience running other businesses and growing more mature. It is not that Jobs became smarter in the intervening period. It is he became more mature and able to manage people better.
- A lot of hype, very little money. Fortune reports that, despite all its hype, Facebook made a measly $145 million in revenue in 2007 compared to $510 million for MySpace. Facebook hasn’t learned to turn hype into cash. It may want to spend less time hawking itself to the media and more time figuring out how to make money without angering its user base.
I like Facebook. It is a nice application. But, as a company to invest in, I would take a pass.
What about you? Would you take a chance on investing in Facebook?
May 22nd, 2008 at 8:08 am
I’d pass based on my own experience using it - and how much my use has dropped. Most of my friends are slowly reducing their time on it and how much they use it as well. I’ve noticed that younger people still seem to be using it quite extensively, but I can see them quickly migrating to the next greatest social networking site without much thought. As you point out - there is no “moat” in Buffett speak.
May 22nd, 2008 at 9:30 am
Interesting idea. I agree with the previous poster: my usage was huge at first, but I’m now bored with everything on the facebook site. Casual acquaintances from 20 years ago were fascinating at first, but I just can’t be bothered to follow their lives anymore.
May 22nd, 2008 at 11:42 am
I have to say that my usage has also diminished and that at first everything was exciting and new. I still use facebook today to load up pictures freeing up space on my computer. I also keep in touch with close friends. Thing is, facebook is expanding into other mediums and I believe they took a huge step with introducing instant messaging.
It’s also been stated that MySpace is a competitor, MySpace came first and facebook is taking market share away from them.
I like facebook and do believe with better direction (from it’s users) it could possibly be around for along time.
I’d give it a small piece of my money if it were to go public.
May 23rd, 2008 at 4:09 am
[…] My Wallet tears down Facebook as an […]
May 23rd, 2008 at 7:55 am
I wouldn’t invest in either for the reasons you mention and others, but to me, the Facebook vs. MySpace comparison always reminds me of Google vs. Yahoo.
Google’s real secret was its simplicity of design, I think. When I wanted to search for information online, I went to Google’s spartan homepage because it was devoid of clutter. I wasn’t bombarded with a bunch of crap I didn’t care for. Yahoo was and is too busy.
MySpace reminds me of Yahoo and Facebook reminds me of Google. MySpace pages always look like such a mess of seizure-inducing music and images. Facebook wasn’t, to start, although it is getting away from it with more and more crazy applications cluttering up profile pages. But I always liked the simplicity of facebook’s design.
That said, I have no idea who is going to win the race to monetize the innate human desire to see which high school classmates turned out to be hot.
May 23rd, 2008 at 3:52 pm
Well, Facebook is like Lavalife. You never know if those pictures are real or not!
May 24th, 2008 at 5:38 pm
I tried Facebook but didn’t find it very useful. There’s a novelty element at first but beyond that there was nothing compelling. There are too many “silly” features to chew up time and add clutter. Also I don’t know many people using it. I’ve read various articles about how Facebook is going to change the world but am not convinced.
I’d much rather post comments here on a public blog than in a “walled garden”
May 26th, 2008 at 10:23 am
I would not invest, but not based on the reasons you gave. I just would not invest in tech (except Microsoft, maybe). I just don’t know enough, for one reason, and for another, I don’t liie companies that don’t have something physical as their product, or somewhere in their product line. How do you value software against, say, steel? Someone will always come up with a new idea that can sell, but I’m not sure anything has staying power.
Having said that, I still use Facebook - just saw my ex-boyfriend has had a baby (with the girl he dumped me for 15 years ago, no less). Facebook showed me the baby, the boyfriend (satisfyingly bald now), boyfriend’s family, etc - way more info than I got when I read the birth announcement in the local paper - one week later!