Last May, as a hypothetical question, I wondered if I would invest in Facebook if I even had a chance. The answer was no. On the cusp of Facebook’s latest version being launched next week, Fortune Magazine had a cover article on Facebook and asked, upon other things, whether Facebook would ever make money.
To recap my post last year, I was not questioning the utility of Facebook. My question was whether I considered it a viable business that I would invest in like any other stock. With Twitter becoming popular, and the media jumping en mass onto social media as this week’s invention of the century, I thought it would be topical, and a diversion from the world, to revisit this topic.
After reading the Fortune article, I am even more convinced I would not invest in Facebook. The article reports approximately revenue of approximately $280 million last year with approximately 175 million users- that’s less than $2 per member.
The more troubling bit is the passage in the Fortune article which indicates Facebook is not as interested in turning a profit as signing up as many members as possible. A market share over profit strategy seems nonsensical from a business perspective- unless you are massively profitable already and now are seeking to crush the competition (see MS, see Walmart). But for a business that has to pay the bills, I really don’t want to hear- “we added another 10 million users but we are broke.”
At the very core, I am not sure that Facebook or social media is the marketing machine big corporations want it to be. Let’s assume that most members are ok with having their privacy intruded upon and you get past that hurdle (a whole post in itself). Even with that, have corporations explored the common sense reason of why we use social media?
Social media/web 2.0 is an on-line high school reunion. You are there to tell people in your life what you are doing and find out about what people are up to. The primary function is not to buy but to interact. So even if my on-line high school reunion is sponsored by Acme Inc., I am actually not in a buying frame of mine so you don’t exactly have a sticky buying audience at the outset, meaning lower than expected sales.
Compare this with Google or Amazon where you are searching for something so your frame of mind is on consumption (of either information via Google or content). So you don’t mind if you see an ad for the thing you are buying. I would make the analogy that Google or Amazon are like the drugstore. The stuff you want is in the back of the store but there’s a bunch of stuff at the front you may buy on your way to the back. But the point is, you were in the store to buy something.
Don’t get me wrong, I think Facebook is a great application. But I find Facebook is like the government: it is there to provide access and it does a terrible job making money.
Thanks for the indulgent post. Next week, I ask whether I would invest in Twitter (I do have a Twitter profile: @thickenmywallet).
Anyone care to share their thoughts on Facebook?
March 12th, 2009 at 9:30 am
Well personally if you compare Twitter with Facebook, Twitter seems to have a more promising future but I still not sure how either one can make money.
Facebook can and probably is a huge time vacuum that sucks time out of peoples lives, unless they actually use it for something productive. Twitter is good for finding friends quickly, much better then facebook I would say.
I did read that article and he said he wants facebook to be like a phone book but in reality, isn’t that what google is becoming? You can find more information on someone by going to google than facebook.
Maybe facebook is too broad and doesnt have a specific niche and thats why they cant make money.
Those are just my thoughts.
March 12th, 2009 at 10:10 am
Tom- you hit the issue on the head. Facebook really doesn’t know what it wants to be and you can’t invest in something like that does not have a clear niche.
March 12th, 2009 at 11:30 am
I personally would not invest in any of the social network business, I think they have a short boom period after which they all slowly die out. Facbook 2 years ago was the thing to have, now twitter it’s twitter’s turn a few years ago it was MySpace and so on. Every few years you’ll have a new social media outlet, so dont find it attractive.
March 12th, 2009 at 11:47 am
Ray- that’s tech companies for you in a nutshell. Remember everyone getting a CD-Rom in the mid 90’s to sign up for an AOL email account?
March 12th, 2009 at 11:48 am
Bang on analysis. Great idea, lots of usership, very few ways to make revenue. If Facebook tried to get too aggressive with revenue generating ideas, people would just flock to the next social media website and leave Facebook to go broke… there are far too many free options out there.
Can it ever turn a small profit? Possibly. But I highly doubt it could turn a big profit. And being in a tightly competitive market, there isn’t much of a moat (to use Buffet’s term) around the company to protect it from future revenue loss. I guess this is why their primary strategy is increasing the userbase: the more people using it, the more popular they become, they more they separate themselves from the other social media sites.
April 1st, 2009 at 1:00 am
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