Faceplant — Is Facebook Failing?

Faceplant — Is Facebook Failing?

May 29, 2012

Ok, so Facebook is getting some bad press right now.

Facebook’s stock traded as low as $29.05, down nearly 24 percent from its IPO price of $38 on May 18. Investors expecting the stock price to go to $60 per share are understandably shocked and angry.  Facebook shares have slid over the past couple weeks following a messy IPO process and because of concerns about the company’s growth potential. On Tuesday, May 29, shares fell further as the company debuted on the options market, allowing investors to bet on the future of the stock with less money at risk.

Of course, it’s not all bad news for Facebook, as we will discuss in an upcoming blog.  Meanwhile, though, the DigitalEYE Media team thought we’d take a look at some of the negative analysis of the gargantuan Social Media bellwether to share some salient insights about Facebook’s weaknesses.

Facebook a Fraud?

“Facebook Is a Fraud” claims Rob Enderle in his 5/28 TechNewsWorld column.

“Facebook’s CEO has apparently always thought that users were stupid — not exactly the word he used,” writes Enderle. “Just as apparently, he has translated that belief into a ton of cash, because we weren’t able to figure out quickly enough there really wasn’t a fire under all that smoke. I have a feeling that is changing, and that we’ll soon find that Facebook knew it was selling fool’s gold and not the real stuff.”

Highlights of Enderle’s critique:

1) So out of the gate we have two elements we need to prove a fraud: Someone made a ton of money at the expense of someone else. But the third critical element is whether the buyers were misled.

2) The person being misled … isn’t the investor — it is the advertiser. The ad value that founds this company’s revenue simply isn’t there. Yes, advertisers are paying money, but the value they think they are getting isn’t there any more than it was in the dot-com years.  Name one ad you have ever seen on Facebook?  Just one.  Now if you can, and most I’ve spoken with can’t, name one time you have actually bought something based on that ad.

3)  How Many Facebook Users Are There? The number that is officially tossed out is 1 billion users, and there are 1 billion people who in some way come into contact with Facebook.  The numbers I’ve seen suggest there are really only about 250 million people who actually go to Facebook and can see ads. The number of people who actually do see them is probably less than a tenth of that — we’ve learned to tune ads out, and Facebook’s are very subtle — and of that fewer than 25 million, just a tiny number convert.

4) It is a given that Facebook knows a ton about you, it should be able to present ads you are interested in.  (But) Facebook isn’t actually using any information that apparently everyone else sees to serve up more successful ads.

5) Facebook isn’t really a corporation as we would think of it; it is more like a limited partnership in which the limited — and virtually powerless — investors are represented by a powerless board.

Just Another Ad-Supported Site

Next up, “The Facebook Fallacy” in Technology Review by Michael Wolff.  The author’s astounding claim:

“For all its valuation, the social network is just another ad-supported site. Without an earth-changing idea, it will collapse and take down the Web.”

Ouch!  Here are highlights from Wolff’s article:

1) At the heart of the Internet business is one of the great business fallacies of our time: that the Web, with all its targeting abilities, can be a more efficient, and hence more profitable, advertising medium than traditional media. Facebook, with its 900 million users, valuation of around $100 billion, and the bulk of its business in traditional display advertising, is now at the heart of the heart of the fallacy.

2) I don’t know anyone in the ad-Web business who isn’t engaged in a relentless, demoralizing, no-exit operation to realign costs with falling per-user revenues, or who isn’t manically inflating traffic to compensate for ever-lower per-user value.

3) Facebook is mired in the same relentless downward pressure of falling per-user revenues as the rest of Web-based media. The company makes a pitiful and shrinking $5 per customer per year, which puts it somewhat ahead of the Huffington Post and somewhat behind the New York Times’ digital business. (Here’s the heartbreaking truth about the difference between new media and old: even in the New York Times’ declining traditional business, a subscriber is still worth more than $1,000 a year.)

4) Facebook has the scale, the platform, and the brand to be the new Google. It only lacks the big idea. Right now, it doesn’t actually know how to embed its usefulness into world commerce (or even, really, what its usefulness is).

Strong stuff.  Let us know what you think.  Next blog we will look at the more upbeat side of the Facebook saga.