After years of hype and build up, the Facebook IPO is off to a lackluster start. The initial price was bumped up to $38 (because of demand) and it hit $45 at during that first trading period and is now settled in the mid-20 (26 as of 6/6). In an odd way this is good for marketers and consumers (other than the ones who bought the stock over $40, of course.) To explain my point let’s take a step back to the late 90’s ebusiness/e-everything boom and the inflated stock market that came along as a companion. It was a crazy time to be in marketing and media and those of us that were in the middle of it should always be skeptical of the next big thing. For a review I will recommend a good book - Dot.con by John Cassidy.
Briefly, what happened is that web businesses were started with flimsy business plans that had no real way of making profits in the long run. The long run didn’t matter anyway as the game was to cash in quickly with an IPO or acquisition. Venture money was being thrown at web business that had some small sliver of business plan. In some ways it similar to the house flipping/risky mortgage fiasco we saw just a few years after the dot com crash. In both cases the masters of Wall Street did not come out as heroes. During the dot com crash they famously pumped the stocks and prospects of companies that were often no more than a couple of developers sitting around drinking Mountain Dew and dreaming of riches.
Ironically, these aspiring millionaires chose to promote their companies with good old fashion print and TV advertising. Long forgotten magazine like Business 2.0 and The Industry Standard were the size of phone books with ads placed to do nothing more than promote a name to better a chance at an IPO or to lift the soon to be worthless stock. It all came crashing down because there was no real value being created for consumers or businesses.
This brings us to Facebook and others such as Groupon and LinkedIn who have recently gone public. There is healthy and widespread skepticism to the business model for Facebook (and Groupon too). In contrast, LinkedIn grew incrementally, provides a unique value to businesses (recruitment) and has done well. When investors take a hard look at Facebook they see a couple of troubling issues effecting perceived value.
Virtually all of their revenue is based on traditional interruptive advertising. Yes, it is cost per click and behaviorally targeted, but the central fact remains it appears on your page when you are there to communicate with your friends. Many people are not in shopping mode when on Facebook but rather being social. The jury remains out if Facebook will be a significant marketing tool for B2B marketers or how users will feel about ads cluttering their mobile app or news feed.
For Facebook to have long term revenue growth they need to generate revenue from companies in ways other than advertising. They are starting down this road to charging to promote posts, but they may need to charge companies to maintain their pages and timelines. Why would a company with millions of fans (Disney has 36 million likes, Coke has 42 million) they can reach for free spend money to advertise on Facebook? And, Facebook needs to foster social commerce through the site and take a piece of the action for companies to set up storefronts.
All this being said, there is a real danger that any of these moves will alienate users, which could be a death knell. Without hundreds of millions sharing, posting and chatting on the site, they have nothing to monetize. I have seen usage and interaction drop off significantly among my 450+ friends over the past year. That is not a scientific projectable sample, but I think there is something there – the cool factor is long gone, beware the backlash. MySpace was once cool, so was BlackBerry and American Idol.
When you look at all these risks and uncertainly it appears that investors are being rightly skeptical to the company’s long -term prospects. After all the hype and anticipation the investing public put on the breaks and drove down the value that was being pitched to them by Wall Street and Facebook. After two bouts of wrenching economic turmoil driven by people’s desire to get rich quick for doing little this is a welcome development. Maybe we have finally learned the most basic of all lessons – there is no short cut to success or riches.