As Social Sites’ Shares Fall, Some Hear Echo of 2000
nytimes.com
nytimes.com
"In an e-mail sent to founders last month, Paul Graham, the co-founder of Y Combinator, an influential start-up incubator, warned of possible headwinds. But Friday he said in effect not to worry — at least not yet.
"'It’s too early to notice any effect on valuations,' Mr. Graham said. 'Personally though, I have a lot of confidence in Facebook. I expect this is just a random fluctuation.'"
My prediction about Facebook is "Facebook will go the way of AOL, still being a factor in the industry years from now, but also serving as an example of a company that could never monetize up to the level of the hype surrounding it." I could be wrong, but that's my sense of where Facebook is in the market. Of course pg has a much better track record than I have in making investments, and my prediction is not wholly inconsistent with some near-term upside in Facebook's share price.
Facebook's users online intent is different from Google's users. People do not go to Facebook to show buying intent, they go their to pass time. On the contrary people search Google with an intention to buy hence Google can print money but Facebook cannot.
If I were in charge of their ad department, I'd be focused extremely tightly on increasing that behavior in users.
If I were in charge of their revenue in general, however, I'd be focused on Facebook Credits and how to become the top trusted marketplace for person-to-person transactions worldwide.
I've consistently thought that people underestimate the lock-in Facebook has. They have one of the strongest, if not the strongest, network effect in the history of mankind. They can be disrupted, but only when there's some sort of major leap in technology that wholly redefines what a social network is. Adding incremental this or add-on that won't get anyone anywhere.
E.g. consider the abundance of "SMS apps" that sends the message as an IM over their own network if both sender and recipient are users, but that will revert to SMS otherwise. Many of them sell themselves as cheaper, but also as having more features, such a more flexibility in what you can send, instant read confirmations etc.
Now, there's plenty of chances for lawsuits and extended wars of attrition trying to block it for someone trying to do that to facebook, but I think long term they're going to be a too tempting target.
such as Polaroid-like image filters
However, consider an upstart with nothing to prove. If they can put together a facebook competitive technology stack at a lower cost they can actually monetize less than facebook, and steal users that way. The fact that they would potentially make, say, half or a tenth as much revenue per user is irrelevant, because it would be their revenue vs. facebook's revenue.
That said, there isn't any viable replacement out there yet, not even one that's at the very beginning stage with only a couple thousand users. My thinking is that even if Facebook executes mediocrely from here on out, Zuck is at least smart enough to keep the whole thing afloat until something else comes along that's seriously disruptive.
That's going to happen, but it just hasn't yet. You have to keep in mind that the thing that replaces Facebook isn't going to look anything like Facebook. If anything it's going to look more like Udacity, Starbucks, YouTube, etc.
I would say that Google+ is probably both viable and has more than a "couple thousand of users", though right now it certainly isn't getting enough traction to threaten facebook.
But if something caused a mass exodus from Facebook, Google+ would probably benefit a lot. Either that, or some new entrant.
If anything Facebook is in an even stronger position right now when you look at what has happened with google+. The largest internet brand (Google) can't even beat Facebook with a (supposedly) superior product and already huge control over the internet.
Facebook is going to be around for a long time.
Google imagines that they can take away marketshare from facebook by implementing mostly the same featureset with only a few changes that only a tiny proportion of people care about (with the exception of hangouts, which so far is google+'s killer feature). But that sort of tactic only works if you can bribe 51% of the userbase over to your side in the first place. In that case then everyone else would follow, but in trying to disrupt an entrenched competitor it's going to be an uphill battle at best.
There are two ways to disrupt facebook, I think. One: on technology / featureset. Facebook has a terrible mobile app, that's an easy weakness to exploit. Google+'s hangouts are another aspect of adding features that facebook lacks. If you manage to come up with enough compelling features and qualities perhaps you can get people to switch. Two: socially. Facebook is a very one-size-fits-all system for social networking, but that's not the way social networks in the real world view themselves. For example, a site, or federation of sites, that more explicitly catered to different interests through layout, graphic design and branding, feature-choice, etc. could have a higher appeal to certain groups than facebook. A lot of facebook's appeal is because it is, or was, perceived as "cool", if other sites can change that perception then they can drain traffic away from facebook. Maybe not all of it, but if a thousand different sites each take a thousandth of FB's traffic, then what happens?
The most naive assumption is that facebook won't be disrupted. Nearly every online company is going to be disrupted in the next decade, the question is whether or not those companies can respond to it effectively and manage to survive.
One can only hope. The early 2000s was one of the best periods in the history of the Internet. The stuff that's hot today is all just extensions of stuff that was pioneered back then. Having the money go away for a bit so that folks can once again go back to truly innovating without the insane short term pressure can only be healthy for the longterm state of things.
If FB's content is really that valuable then put it behind a paywall and cha-ching! Just like Netflix or Hulu+. However I think it's the first massive-scale "default because I have nothing better to do" entertainment. Which may not lend itself to monetization as well as search traffic.
Facebook is well positioned for it. The android user experience is very slippery.
I see this as the market acting reasonably rationally actually. Facebook shares are off ~40% from their IPO because they were overvalued. They gained valuation in a hype bubble on secondary markets with limited volume between a small set of players. Once exposed to greater liquidity, easier price discovery and a wider market, the share price has headed towards something I would consider more realistic.
The risks for Facebook are enormous. Apple and Google (disclaimer: I work for Google in display advertising) are far more established and have a much broader product offering than Facebook across the Web, mobile and other areas. They are both profitable and can sustain a long drawn out campaign.
Facebook is reliant on social-gaming income (which is increasingly going mobile and out of Facebook's ecosystem to Apple's and Google's) and what amounts to display advertising, where they are competing with Google's Doubleclick offerings.
The price paid for Instagram is a clear warning sign on the risks to Facebook, that a company of 13 years in 2 years can become what amounts to an existential threat to Facebook should concern any Facebook investor.
I also stand by my (many) previous statements that I think the utility and value of "social search" is far more limited than it's hyped up to be.
But whatever the case, these are real companies with real revenues. This is nothing like 2000.
The folks managing the IPO all have egg on their faces, but nobody's trust fund got destroyed, no mass layoffs, no VC suicides, none of the "Hey the music stopped oh shit I'm still long on X, Y, or Z"
Facebook brought in over a BILLION dollars last quarter. They "lost" money because they are doing the 'count stock options as an expense' thing that was foisted on Tech companies post bubble. But they actually 'earned' a quarter billion dollars. Compare that to any number of companies that never earned a dime from founding, through IPO, through ignominious death. Sheesh.
One of the thing that is going to bite both Google and Facebook are some of the insane salaries they signed up for to keep people at one place or the other or to switch. Those are great engineers but most of them are never going to have a lifetime value of millions, even if they commit 20 years of their life to the company. That is a correction I don't look forward too, conversations like "Excuse me? You were thinking maybe $280K to start and an annual bonus plan? Uh Next!"
If the event results in a loss of value for existing investors isn't called a loss what should it be called?
From that page is this quote:
"David Zion, an analyst at Bear, Stearns & Co., estimated that S&P 500 companies would have reported an average of 9% less earnings in 2000 if options had been expensed on the income statement. For tech companies, this reduction would have been even greater; for some, profits would have turned to losses."
Which is the case for Facebook (profits turning to losses).
To the contrary, they have every reason to be delighted with the result! An IPO that pops dramatically after the beginning of trading means money left on the table that the investors and selling insiders (those "managing the IPO") won't get. It may be a disappointment to the rank-and-file employees with lockup agreements, and an awkward thing to explain to potential employees, but from the perspective of a pre-IPO stockholder, it was a great result.
As for whether this is 2000 again or not, time (and more data points) will tell. There were successful companies back then, too, that are still with us now. The transition to more traditional valuations will eliminate the indefensible businesses but bring stock prices, VC funding, and (as you point out) salaries to more sustainable levels.
Pretty shocking graph though: http://www.nytimes.com/imagepages/2012/07/28/technology/28fa...
If you take Zynga and GroupOn out of the graph though, the Facebook stock could just as well be on a slightly jittery ride to approaching an equilibrium.
And by the way, if you look at the stock market for tech companies for last two days. Almost all the tech giants (Google, MSFT, Apple, LinkedIn, Amazon, Yahoo etc.) were up. So I don't see if we can say it's like 2000 when stock markets crashed!
I don't know if that means things will better, things will be worse or doesn't mean anything.