Can’t be helped. The subject is so omnipresent it came up during a lunch with parents of my son’s schoolmates, none of them either financier or technologist. Not quite Rockefeller’s alarm sign, but significant. Is Facebook worth it?
Well, IMHO, yes and no. It will probably not be a bad investment in the short and medium term, but I doubt it can live up to that valuation in the long term. Because I don’t think it’s the business some think it is. A look at its filings and recent news (it’s main income streams are curious) and at its fundamental streb.
Facebook commerce. The storefronts opened by brands to try and get something out of their investment in “fans” and “likes”… are crashing to the ground. Or many are. Quoting from the latest batch, “it’s like trying to hawk something at people while they’re hanging out”. Surprising? No. “Social commerce” is a good idea, or technique, but it does not mean “selling on a casual social network”.
Facebook advertising. It’s supposed to be great due to its ability to target groups and segments. It’s sold as if it were (high prices). I’ve been doing some unscientific research and very much doubt it has a significantly higher clickthrough rate than a forum, which means low. In short, its ads are not more relevant that AdSense-driven ads, and that’s the reason their current wild growth is not likely to last forever.
Partners and games. The Facebook SEC filing was very explicit about one interesting thing: the weight and concentration of income from commissions from Facebook-gaming companies. Something that is very logical (see previous paragraph) and healthy but is curiously skewed. Just one company accounts from 15% of Facebook income, if I remember right. Zynga, the maker of Farmville and compulsive idea predator, is something more than a customer for Facebook. Any company with that kind of dependence on a partner is in trouble.
The deeper play is in the open, and there’s competition. Facebook is not just about pleasant hanging-out in cyberspace any more than Amazon is just about online catalogues. It’s difference with other social networks was the capabilities that it was building around its basic operation. Once upon a time, and indeed not long ago, Facebook’s data on peer reccomendations and social linking was unique, and Bing paid to use it for social search. Now everyone is awake to that source of value and Google (to mention a notorious upcomer) has succesfully launched Google+. Facebook was making an impressive play on building the “identity infrastructure” for people on the web, but other large players woke up to the danger of supporting a monopoly; Apple’s plumping for Twitter for its Ping service was a watershed.
Growth beyond the cradle is harder. Facebook has tried to avoid becoming stale by aping services or features from other companies, as well as by continuous innovation in its own core features. But growth gets harder when you already are the dominant mainstream player. Specialised social services are springing up everywhere and some of them are resisting Facebook’s aping attempts. See Groupon (as a successful defendant) or Pinterest (as a new and fresher take on the “social casual” idea). LinkedIn is consolidating its Groups. Online video seems beyond Facebook sharing (yet).
Inertia is not forever. The Facebook rush has some way to run. It has all the business mindshare (and mainstream media have learned its name). Many people are not yet online or facebooked. And oh, yes, there’s a whole not-so-cottage industry devoted to selling the benefits of “being on the social networks”, and building or running Facebook pages for firms. A few are doing things that are relevant to business; most aren’t. And while the mass of would-be community managers keeps the prices down, somewhere along the line professionalization and healthy scepticism (see the point about commerce: “likes” are not future customers), already present in many places, will become established. This, together with competition, means the burgeoning growth of users and content on Facebook will plateau rather soon.
In a nutshell
In short, Facebook’s run for crushing hegemony is over. It won’t be the foundational stone of the web as it was trying to be. It is huge and very relevant, but it’s not going to be the dominant player. Just one of the top tier. Which isn’t bad, either.
Now, does that mean it will someday earn enough to justify the expectations that make up its current valuation, or not? IMHO, it looks increasingly unlikely.