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January 29, 2012

The entire Tech world is waiting with baited breath for the filing of Facebook’s IPO next week.  I’m excited – the company is an absolute MONSTER, as the numbers will show.  It’s truly THE pillar company since Google and it has completely transformed the web.

But, as I’ve reflected on Facebook this past weekend, I can’t help shake a nagging feeling that the company’s success feels somehow…fleeting. In some weird ways, Facebook makes me think a bit of Yahoo. Not the Yahoo of today, but the Yahoo of the past and I wonder if Facebook will see a similar decline as Yahoo has seen over the next 10 years.

Here are the major vulnerabilities that I see:

1. Network fragmentation.  Facebook’s success is largely based on its ability to aggregate the biggest audience on the internet and understand and monetize that audience.  Social networks should be incredibly robust because of network effects. But I really have a hard time believing that Facebook will continue to dominate the internet’s page views 10 years from now.  I think we are already seeing that while Facebook serves as a great repository of one’s identity and relationships, deep engagement is starting to happen in more targeted, fragmented communities.  Photo sharing is done best on instagram. Social curation of products on Pinterest.  Self expression on platforms like Tumblr.  Etc. etc. Sure, Facebook participates in this activity somewhat and could copy these companies, but swiss army knives almost never win long term.

2. Not natively mobile.  I think the mobile internet will further accelerate the trend of network fragmentation.  Part of Facebook’s challenges will be driven by the rules of the app ecosystem that Apple has created.  But mostly, Facebook’s main challenge is that it was NOT built in a mobile-first context.  We are in (or will soon be) in a mobile first world, and I think it’s hard to expect a large company like Facebook to own that domain in the same way.  Just as Google ceded ground to Facebook because it was not natively social (and Yahoo was way way worse), I can see Facebook ceding ground pretty quickly to products that are built with a mobile, distributed computing context in mind from the beginning.

3. Advertising effectiveness.  Facebook’s impressive revenue relies largely on advertising. But I think the jury is still out on how transformative it as as an advertising medium.  Social advertising can be pretty compelling, but intent is pretty low, much like display advertising. I also think that Facebook falls pretty far short currently on its effectiveness as a brand advertising medium.  Do you remember any really impactful brand campaigns this year that were deeply integrated with Facebook?  I don’t.  I do remember many more that were largely driven through YouTube and Twitter.  Finally, Facebook hasn’t yet developed a meaningful off-Facebook advertising product that has scale.  These are more opportunities than criticisms, but if the company doesn’t maintain leadership in these areas, I see it as a further challenge in the face of #1 and #2.

4. Talent exodus?  This is a big question mark. I think one of the most incredible things about Google is the company’s excellent culture and unique ability to hang on to outstanding talent for a long long time. There were certain management practices that were core to Google that made it an exciting place to work.  From the distributed nature of its product teams, to its maniacal focus on valuing engineers, to its free-market-like prioritization of resources and products, to 20% time, etc etc. It means something special to be a Googler. And although some of these practices have evolved and the company has changed,  I’d argue that Google will maintain higher calibre talent much longer than other large scale technology leaders like MSFT, Ebay, Yahoo, etc.  Will Facebook be able to do the same?  I’m really not sure.  I’m sure we’ll hear much much more in the coming years about how Facebook is run and how it represents the next step in the evolution of high performing engineering organizations.  But if it can’t bottle some of the magic that Google was able to achieve, I think the company will risk sliding slowly from the center of the internet to its periphery.

All this said, it’s obviously easy to poke holes at a company from the sidelines.  Facebook is an amazing company and will continue to look pretty dominant for at least the next 5 years (much like Yahoo).  But I think its ability to remain a great company for 10+ years will depend on how well it navigates the four challenges/opportunities above.

I look forward to the company’s public offering and will probably be a buyer… at least the first couple years.

  • http://www.andrewkoch.com/ Andrew Koch

    Great post.  I suggested this to a good friend on the eve of New Years’ Eve and he nearly assaulted me.  How dare I compare Facebook to Yahoo!?!?
    I think that FB is indeed the next Yahoo.  (For the record, we should all be so lucky.  Who wouldn’t trade places with Jerry Yang?  Sure, he’s been beaten up by the press and his investors before finally throwing in the towel.  Before you start feeling sorry for him, though, remember that he can go home and swim in his money, Scrooge McDuck-style, and he will ultimately be remembered as the founder of the internet revolution.)Anyway, I’d argue that a focus on advertisers’ needs is necessary for FB to continue growing as they hit user saturation, and that it will be their downfall (with the caveat that “downfall” will mean Yahoo-style stagnation in the longer term, but still a ton of shareholder value).  To your point about advertising effectiveness, FB isn’t the amazing direct response medium that Google was, and no one remembers any ads they see on FB.  In order to satisfy the brand advertisers and continue growing revenue over time, FB will have to put more ads or more impactful ads on every pageview.  FB will turn into a NASCAR car or they’ll be tempted to add rich media interstitials over your newsfeed/timeline.  Neither of those situations is a win for users.

    Increasingly, the trendsetters (and then the mainstream) will be spending their time on Twitter, Path, Instagram, Tumblr, etc until those companies figure out how to make real, scalable ad revenue and then become too focused on optimizing revenue-per-pageview for big brand advertisers as well.

    So… was the “fall” of Yahoo inevitable?  Is the “fall” of Facebook inevitable as well?

    • Anonymous

      Thanks for the comment Andrew – and from a real internet marketing pro!
      I don’t think it’s inevitable, I think Facebook obviously is aware of these challenges and working hard to address them. But I think they haven’t really found their “Adwords/Adsense” yet – a native, effective, highly scaleable advertising product that could form the core of a more sustainable company.

  • Anonymous

    Hi Rob,

    The below may be near sighted, but I think Facebook is a much bigger mountain to move than Yahoo.  As a disclaimer, I was too young when Yahoo was beaten by Google to have a nuanced understanding of why and how it happened.  

    I think Facebook has actually done a great job with their mobile product, in providing bit-size content and a UX that lets people consume a lot of it very quickly. I saw statistic (cited below) that 47% of an average users time on smartphones is spent on Facebook.  Facebook seems more like a leader than a laggard in this space.  I know there is an argument that Facebook isn’t natively mobile, but its difficult to imagine Facebook shedding their large lead in mobile so quickly. 
    Additionally, a new social network needs to be so much better than Facebook, because size is apart of Facebook’s its value proposition whereas Yahoo could be, and was beaten by a better algorithm and UX.  Objectively, Facebook has 800M members and that it has 1 in 4 pageviews in the US on the internet, which no other internet property can touch.  From my own standpoint, there is no other social network that comes close to having the same number of my “friends” as Facebook nor the same amount of  engagement and activity across that broad demographic of my network as Facebook.  In my next largest social network, Twitter, I only follow 90 people, and am now removing people when add new ones.  I have not adopted Google+ and when I do use it, its stealing time from Twitter and Quora and almost none from Facebook, because I have used Twitter/Quora/Google+ for my interest “graph” and Facebook for my social “graph.”

    I think your point on network fragmentation is a great point, though, I don’t think Facebook needs to do all of those things, and I don’t feel that it is being picked apart as something like Craigslist.   
    Regarding valuation, what value do you feel comfortable buying in at, because I don’t think either of us will be able to buy in the primary offering, and I think the sense is that it will shoot over $100B!
    I like the new look of your blog by the way.Billy
    Citation for 47% of smartphone time: https://twitter.com/#!/Bill_Gross/status/163785148469481472 Citation for 25% of internet page views: http://weblogs.hitwise.com/heather-dougherty/2010/11/facebookcom_generates_nearly_1_1.html

    • Anonymous

      Thanks for the thoughtful comments!  I admit, the 47% stat gave me pause. I’d like to see where that came from and really understand it.  There is an old saying: “torture the numbers enough,and they will confess”.  I don’t really think though that their position in mobile is because of an excellent mobile product.  It’s pretty clunky, I think. I think their online dominance is just carrying over to mobile.  It’s fine for now, just not sure if it will be sustained. 

      I could see Facebook still increasing in value 50%+ in its first 3 years post IPO.  But I don’t knwo if I see it as a Google-scale public company in 10 years. 

      • Anonymous

        Ha, I guess you don’t notice how bad their mobile UX is when you own a Windows Phone 7!!!!  I include the velocity of content from my network as apart of their mobile  product, as a lot of other services e.g. foursquare, don’t have critical mass for me so I quickly grew tired of them.  

        My worries is that there is going to be a huge pop on the price, and then a long wait for the companies fundamental value to catch up to market price based on behavior / name recognition.  They need a business model that captures the value from facebook pages and other sources of value on the site, because I don’t think display advertising is going to cut it.  I have only heard one company out and out say that facebook display ads are their go-to source of paid customer acquisition.

  • http://AlexBain.com Alex Bain

    Either amazingly coincidental timing, or Josh Constine wanted a bigger platform to respond to your post: http://techcrunch.com/2012/01/30/facebook-worth/

    • Anonymous

      Ha! He has a better soapbox than I do

  • http://twitter.com/donmak Don Makoviney

    IMO Google is more in danger of becoming Yahoo than Facebook. With their Android fragmentation issues and focus on social at the expense of search results (Google Plus Your World) they are in danger of losing their way. I’m a Google fanboy so it hurts to say that :-)

    Regarding point #4 in your article, I’m not so sure how “special” it is being a Google employee. Just last year (Jan 2011) Google gave an across the board raise to all employees because of Facebook poaching employees from Google. From the Wall Street Journal:

    “Moving to plug the defection of staff to competitors, Google Inc. is giving a 10% raise to all of its 23,000 employees, according to people familiar with the matter.”

    (…)

    “The pay hike comes as Google ramps up its battle with competitors, especially neighboring Facebook Inc., in a fight to secure talented staff. Roughly 10% of Facebook’s employees are Google veterans and other Silicon Valley companies have aggressively poached employees from the Internet giant.”

    (…)

    “Over the past year several former Google executives who helped run the company’s advertising business, as well as Google product managers and engineers involved in Chrome and Android software projects, joined Facebook.”

    Full article: http://online.wsj.com/article/SB10001424052748703523604575605273596157634.html

  • http://twitter.com/hi5at5 Jonathan Lee

    You are crushing it with your insightful entries these days. This is one of my favorite ones. I’ve heard someone say something similar, but you’ve really thought this through. Thanks.

    • Anonymous

      Thanks Jonathan!

  • http://www.facebook.com/timchae Tim Chae

    Good post Rob. While I am definitely skeptical about their potential talent exodus and essentially, Zuck’s ability to retain his talented employees, I had a couple of thoughts regarding your other topics:

    Re: Network Fragmentation - Sure, Instagram is a better place to share photos and Pinterest is for curation. While Facebook will never have a photo effect for its uploaded photos or a social curation value that of Pinterest, the fragmentation of these different “niches” spur off of Facebook, itself. For the first time in web, there is a central and personalized place where all of your most interesting and engaging activities are shared and take place. Facebook *is* the center of the web. The social graph ecosystem that Zuck has been talking about since ’06 *is* going to be the web.Quietly, Facebook has been shaping into what will ultimately end up becoming your web. Notifications from web-apps pinging into your FB, the rise of the Open Graph applications. While Facebook’s user growth will slow down tremendously, its value will only rise exponentially as new niche sites like Pinterest, Instagram, Path feed into Facebook. ie. Mobile apps integrating with Facebook’s app.

    Re: Not Natively Mobile - Facebook just recently started to allow other apps to integrate with its mobile app to display notifications from other apps. While it’s only in its beginning stages, give it a year, Facebook’s app will grow out its ecosystem and the ecosystem will end up feeding back into Facebook as integration with FB’s app will become a major source for user retention for 3rd party apps.My concern for FB is whether or not they will be able to capture the *revenue* from their crazy usage of the mobile apps (47% of usage – I read somewhere recently… whether or not it’s correct, doesn’t matter, its app is being used heavily) as they do on the web. *Mobile’s lack of real estate is what’s tough.* With the average mobile screen only able to show 2.5 “stories” compared to ~4 stories on computer screen, they won’t be able to monetize through the side ads like they have on web, and they will have to be very careful about placing ads into the Newsfeeds on mobile devices.

    Re: Advertising Effectiveness - This has two parts. I definitely agree that running advertisements on Facebook sucks. However, I also believe people complain about the lack of advertising effectiveness on Facebook because – frankly – social media marketing is new. No one truly understands or knows what it’s best suited for from a marketer’s view. Personally, I think FB Pages are *the* place to educate and nurture potential customers into trusting your brand/business (which no other ad mediums can provide) who will end up customers and hopefully advocates for your business. But, in order for this to happen, there needs to be a method to TRULY be able to track ROI like you can today with SEO.Also, while I’m sure this is very far back in the product pipeline, Facebook Credits will end up playing a HUGE part in creating a revenue source that will be greater than ads. Facebook controls the Newsfeed – *the* most valuable digital real estate for marketers today. They can harness that and capture revenue similar to how Apple captures 30% of proceeds from iOS apps, if they can truly integrate FB Credits into the UX – and execute on it well. I would bet sometime this year, Facebook is going to make a big play on its Credits product (and not some half-baked product like Deals was).

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