Wednesday, January 5, 2011

Is Facebook the Next AOL?

Facebook is the next AOL.

On NPR - National People's Radio - this afternoon, a gushing "tech reporter" went on about Facebook, and how they've taken on another 2 Billion of "investment".   A real hard-hitting investigative piece that was.  Not.  I only hope it is not money from my 401(k).  Six years into this gig and they are barely making money and have no cash on hand.  The tech reporter goes on about how great Facebook is and how they are going to grow to a Billion subscribers and make all this money.  Really?  I don't see it.  If anything, Facebook has already jumped the shark.

In a way, the story of Facebook reminds me of the story of so many other Internet companies before it, and after.  AOL comes to mind - a company run by a brash, incredibly young executive, with a staggering market valuation that boggled the mind.  And everyone drank the Kool-Aide with AOL - it was the biggest thing on the planet - big enough to buy out a "real" company like Time-Warner.

But we all know how that worked out.  In retrospect, it is almost humorous - that a dial-up ISP would persevere into the DSL and cable-modem age.  That people would willingly lock themselves into a monopoly space (AOL Keyword: STUPID) instead of just using the Internet.  And when it all fell so horribly apart, the same pundits who hyped the price of AOL stock all said they saw it coming.

Internet companies are dime-a-dozen, and the "next big idea" is percolating in a garage or college dorm room right now - there are few barriers to entry and the cost of getting into the game is small.  Facebook has to keep being "the next big thing" to survive, and that can be hard to do when there are millions of people out there trying to make "the next big thing" themselves.  Facebook should realize that its own roots were in copying similar "Social Networking" sites like Myspace, Friendster, and the like.  It's success was due to luck and circumstance, not to any big idea or great coding or "product".

Before you jump on the Zuckerman bandwagon, consider the following:

1.  Facebook has not made a profit until recently - still has no money to speak of:  This link, talks about Facebook's finances two years ago.  Since then, they are "profitable" but no one talks much about the profit involved (slightly more than breaking even is profitable, you know).  For all the hoopla, they had to take in more investment money recently to invest in new "products".  They have no cash on hand.  Six years in business and only barely breaking even.  Without staggering growth, or spamming with ads, there is no profit model here.

And sorry, no, the "dot com" theory that "profits are a thing of the past" was proven WRONG a decade ago.

2.  It's a website for crying out loud!  It's just a website.  People like to say "its the next Google" but Google has a browser, a cloud computing system, e-mail, the most used search engine on the planet, and a demographics harvesting machine.  Facebook, on the other hand, is just a place to post pictures and short notes on a "wall".  Where can you go with that?  A search engine?  e-mail?  Applications?

Yes, Facebook has a "message" feature, but it is no threat to Hotmail, Yahoo, or Gmail.  Facebook Messages are clunky, short, and hard to use.  And since many people don't check Facebook regularly, it is a poor way to send messages.

And yes, some people are dumb enough to play "Farmville" and even pay hard cash for a virtual cow.  I hope they enjoy the virtual milk.  Dumber than gambling, frankly.

3.  Remember MySpace?  All the same things being said about  Facebook today were said about Myspace five years ago.  They started spamming their own users to make the company turn a profit and the users ran away in droves.  Myspace is profitable - barely.  But these internet websites turn out to be marginal deals.

I left Myspace when they started pushing bands.  They made me have a mandatory "friend" named "Tom" who suggested new indie bands every week.  Not very subtle.  Of course my account is still "active" there, so they count me as a "subscriber" the same way all these con-job websites count subscribers.

4.  Remember Friendster?  Same deal as MySpace, almost exactly.  Didn't last nearly as long.  Still out there, cranking out some money on the margins.  You'd make more money building cars, frankly.

5.  People's Tolerance of Ads:  The problem with these website deals is that once you start SPAMMING the customers with more and more ads, there reaches a saturation point where people turn away.   Call it Bob's Law of the Internet.  You can crank up the advertising to increase revenue, but then you lose subscribers.  As they try to make Facebook more profitable by putting in more ads, they will turn away more and more subscribers.  Frankly, anything I see advertised on Facebook, I turn away from, as they are all Internet Ads, and everyone knows that something ADVERTISED ON THE INTERNET is usually a RAW DEAL.

6.  Have you seen the ads?  Many are for cons:  Facebook accepts ads from "users" - anyone can create an ad and anyone does.  Many are for outright bad deals and cons.  When I see the "trick for the tiny belly" or "Obama wants Moms to go back to school" I think, "Gee, Facebook sure gets in bed with some sleazy people" and "Gee, Facebook doesn't have my best interests at heart, here."

7.  Not selling oxygen (no compelling reason):  You don't HAVE to use Facebook.  There is no compelling reason to use the site.  A banking site has a compelling reason - I save money, manage my finances, and can pay my bills online.  e-mail has a compelling reason - comunicaitons.  Even has some function - news (sort of).  Facebook?  You log on and read a post about how an old friend of yours is making cookies or bought a new car.  Um, yea, I need to do that.

8.  Getting Lucky is Not the Same as Being Brilliant:  In the tech sector, as in many others, some people hit it big with the right product at the right time.  Bill Gates was in the way when IBM dropped a lucrative licensing agreement on his head.  Being in the right place at the right time (RPRT) when lightening strikes is not a matter of marketing insight, but luck.

Facebook was in the RPRT when it launched, and got a good buzz going.  And unlike Friendster (which was a fad that quickly faded) or Myspace (which totally fucked the pooch by going too commercial, too fast) Facebook has been lucky - so far - in not turning off legions of users, just yet.

People ask the founder of Facebook, Mark Zuker-whatever, what the next tech trend is, as though this 20-something has an insight into the computer world and, like Bill Gates, was not just incredibly lucky.  Will he keep being incredibly lucky?  Probability and the history of the marketplace says No.

9.  Everyone's Facebook Page Looks the Same:  It's true, and depressing.  People are so worried about secrecy on Facebook.  Why bother?  Your Facebook page looks like anyone Else's.  It is like a piano with only four keys.  There are not many songs you can play on it.  You upload pictures of your children and pets, post a few comments and likes and dislikes and.... well, it looks like anyone Else's page - no different.  After a while, you lose the wow factor and stop going back.

10.  The Twitter Effect:  While a website may garner a lot of news, like Twitter has, the reality is often that not a lot of people outside of the media use it.  Twitter has a tiny following and the growth rate has stagnated.  Facebook claims 300 million users (how many of those are dormant accounts) and claims a goal of 1 Billion users.  Really?   Where are the new subscribers coming from?  Is there anyone on this planet who hasn't tried Facebook that really wants to go on it?  They seriously think they can grow the user base to 3X the United States?  I seriously doubt this - unless they continue to count dormant accounts.

11.  My Dad's on Facebook:  Nothing says "uncool" to the kids like having their parents on Facebook.  A cartoon in the New Yorker said it best about Myspace - when you Dad got a Myspace page, it was not cool anymore.  The same is true for Facebook.  As older people jump onboard, their kids will use it less and less.

12.  Facebook Friends versus Real Friends:  Facebook friends are often people you don't interact with in real life.  They may be old high school friends, or people who moved away.  But people you know?  You see them, you call them, you e-mail them.  Facebook friends are like this group of people you used to know - or sort of know - but aren't part of your inner circle.  After a while, you tire of telling a buddy you knew 20 years ago that you went jogging today.  And you tire of hearing about the minutiae of his life as well.

Sometimes you meet old friends on Facebook and after talking a lot online, you make plans to meet and never pans out.  Who wants an awkward lunch?  And you know that is how it would work out.  So you stay "Facebook Friends" for now and leave it at that.

13. Fads are Fads - Recognize That:  On the Internet, more than anywhere, fads abound.  People want to get into the "latest thing" whether it is online gaming, or video poker, or uploading funny cat videos, or whatever.   YouTube was supposed to be "the next big thing" but has yet to make dollar one.  Yea, you can find stuff on there - and a lot of junk.   Organized video sites, like Netflix are becoming more of the "go to" place for content - but it remains to be seen if even that profitable company can make a lot of dough at $7 per subscriber.

14.  No One Owns the Internet:  Everyone wants to own it, but no one person can.  Investors foolishly look for "the next big thing" on the Internet, not realizing that the Internet has an infinite number of "big things" than can come and go in a heartbeat.  Everyone wants YOU to make THEM your default page, or to visit THEIR SITE exclusively.  But no one - not Microsoft, Google, Yahoo, AOL, Facebook, Amazon, eBay, whoever, has yet to be able to snag users exclusively.

And that is the beauty of the Internet - low barriers to entry.  ANYONE can put up a site in a matter of minutes - claim a domain name, and start a business.  If it works, great.  If not, nothing invested.  It is one of those "tail end" deals.   The little people have a level playing field with the big boys - for a change.

15.  Don't Confuse "Market Cap" with Real Value:  Know-nothing "tech reporters" like the fellow on NPR like to say things like "Facebook is worth umpteen billion dollars.  But Facebook is, at the present time, not listed (they have stock, but it is privately held).  Where do they come up with these valuations?  Whole cloth.  If you calculated the value of the stock based on the rate of return (that old hobgoblin, profit) the value is far, far less.  The values touted by the "experts" are based on "forward-looking" models on profitability down the road.

hen companies like this go public, the same "market experts" fail to grasp fundamentals of the market.  They routinely say things like " has a market cap of 20 Billion dollars" by multiplying the outstanding shares times the latest share price.  However, as we all know, if you sold all those shares, you would not realize the latest share price, but rather a much lower value.  It is only the small investor "chumps" like you and me that get suckered into paying the last-man-in pricing.

It was touted on the Internet that Facebook turned down a $6 Billion buyout offer.  However, no one really knows for sure what the buyout amount was, as it was not publicly disclosed.  So again, we are basing valuation on rumors.  Doesn't this have the same rank smell as the con-jobs we got back in 1995 with the "dot com revolution?"  Everybody back then was also licking their wounds from a Real Estate debacle and looking for "the next big thing" to invest in.  Facebook is in the RPRT for a lot of desperate investors who still want to believe in Santa Claus.

* * * * 

Facebook has ambitious plans, to be sure, but I don't see anyone as snagging all of us or even a large portion of us - for any length of time.  Sure, a lot of us will go online to a popular site and see what the noise is all about.  That's why some of these sites go ballistic in growth.   But many never return, others will stay awhile and then get bored with their new toy - like small children.  Unless you can make it addictive, like television, or continually have a new attraction (and it had better be good!) people will get bored and move away.

And increasingly, Facebook is, well, boring.  I mean really, isn't it?

So what does this have to do with YOUR finances?  Well, no doubt, Facebook will want to go public and go soon.   As noted in the link above, Mr Zucker has no real money - just phantom equity in Facebook, which, according to rumor (a nicely placed and timed rumor) has turned down a $6 Billion buyout offer.  You can't go to the Porsche dealer and spend phantom equity - you need cash.

So the Facebook shareholders will want to "cash out" in an IPO someday - and perhaps someday soon.  And when it comes, the hype surrounding the company - carefully nurtured hype - will drive the share price through the roof.

And like with AOL, five or ten years later, we will wonder, "What the heck were we thinking?"