Friday, August 17, 2012

Why Facebook Will Disappear

A financial analyst hit the mainstream headlines recently when he declared that Facebook (NASDAQ: FB) could disappear in 5-8 years, in a similar manner to how Yahoo! (NASDAQ: YHOO) has declined. It is a bold claim but is it grounded in reality? I happen to think it is.

Time and time again, we have seen the pace of technological change leave behind companies that were once seen as insurmountably dominant. In addition, Facebook’s challenges are already apparent with its inability to outline a coherent strategy for monetizing the trend to mobile, but I think it is also susceptible to an absolute decline in popularity.


Myspace or Messy Space?

For example look at rival social networking site Myspace. The company was bought in 2005 for $580m by Rupert Murdoch’s News Corp. It still kept on growing and, Murdoch must have thought he was onto a winner. Just six years later, eclipsed by the rise of Facebook, it was sold for $35m.

All the usual arguments about user longevity and loyalty would have been used to defend Myspace in 2005. The truth is that Myspace and Facebook have user generated content and it tends to be very topical. I doubt anyone goes on Facebook in order to see how someone or other, might have replied to a post somebody else put up in 2008. In other words, when users stop generating content, the site quickly loses popularity. In Myspace’s case it was simply due to Facebook having a better interface and, having less freedom to customize the page. Facebook kept things simple.

Facebook should take heed. Myspace had a dominant position but within a few years, it disappeared thanks to a rival doing the same thing, but better.


Friend’s Reunited

Another warning should come from the, once wildly popular, British site Friends Reunited. It was launched in 2000 and, by 2005 had 15m members. It was then sold to British television company ITV for £120m plus earn-outs. Just four years later it was sold on again for just £25m. It’s new owners now value the site at £5.2m.

In many ways Friends Reunited had a key jump on Facebook. It was a site based on reuniting school friends and was able to tap into pre-existing relationships that users had at school. This creates instant familiarity and the site was hugely popular. Unfortunately, its owners were very short sighted. The ability to interact was very limited and, users were forced to pay for usage. This meant that content growth would be limited and, despite the site’s natural advantages, users began to turn away in droves.

The lesson is that the decision to act and monetize a site has to be made with a delicate understanding of the effects of the consequences of this action. Friends Reunited failed because its desire to make money alienated the desire of its users to interact with the site. Facebook needs to be careful not to do the same thing, especially via its privacy issues. Companies like Zynga (NASDAQ: ZNGA) may generate revenues on Facebook, but there is a limit to how much FarmVille can be put in users faces.


Lastminute.com

This was the UK’s ecommerce champion. It essentially morphed into a standard travel site but was initially a kind of ‘concept’ website. The idea being that subscribers would receive daily emails with suggestions for ‘lastminute’ vacation offers. The idea was fatally flawed on the back of the fact that ‘lastminute’ implies a discounted deal. This is fine but when customers are expecting a discount with a few clicks of a mouse they might find a cheaper option so ultimately lastminute purchases will always be viewed as a discount option and nothing else. However, its founders were well connected and it was the dotcom boom. They got backing.

The company floated in 2000 with a value of £571m. Five years later it was sold for a similar amount, but the shareholders who bought in the IPO lost half their money due to the constant acquisitions that led to their equity being diluted. Moreover, the company had never reported a profit until it was taken over. The two founders –unlike so many other ecommerce pioneers- have not gone on to lead any other significant company. This speaks volumes for their abilities. 

There was nothing special about lastminute or its tediously PR savvy management. They were just in the right place at the right time, with the right backers. If you throw enough money at setting up a travel site at the right time, it will work. Facebook need to understand this, because trends change and, the good fortune that Zuckerberg has had may not last.


Google+

Whilst still a junior player, Google (NASDAQ: GOOG) has a social network which will prove to be a serious impediment to growth for Facebook. Should Zuckerberg try and excessively monetize Facebook, users may get suitably irritated to shift to Google+. Similarly, the more that user ire is roused via Facebook’s privacy policies, the more Google+ comes into focus. The integration with Youtube and Google search, is seamless and I can see Google+ gathering strength.

There is no reason why users should be intrinsically loyal to Facebook. After all, it is really just a template to get an online presence for free and swap pictures with you friends. As we have seen above, fashions can change quickly and, plenty of others have fallen by the wayside when they haven’t adjusted to changes or they alienated users via attempts to monetize someone else’s social life.