The Bankwatch

Tracking the consumer evolution of financial services

FaceBook stock decline is a business model and management issue

This is an important piece at the NYT.

When the Network Effect goes into reverse | NYT

James Stewart covers Facebook, as well as Yelp, Groupon, LivingSocial and Linkedin.  The title is somewhat provocative and the article notes that the network effect has not yet reversed.  But he makes two main points that are possibly related:

  1. Revenue growth is not as rapid as user growth
  2. Mobile usage is the most rapid growth, yet traditional advertising on mobile is not clear given the small screen size

He also speaks about the FaceBook employee shares coming up for sale in November and notes others comments that this is a red herring relative to the share price decline.

I believe that FaceBook stock decline is a business model and management issue, and goes to the core of my beliefs about internet and marketing.

Lets look deeper.

Relevance to Bankwatch:

I have always been bearish on internet as an advertising medium, and especially social media for advertising and continue to to believe that.  This comment is in the NYT piece comments, and sums it up for me:

Stu’s Law: Over time, most of the value created by network effects will be captured by the users of the network, not by the builder of the network.


Everyone I know is active on FaceBook.  They use it to both observe their family and friends activities and to stay in touch.  For that use it is brilliant and fills a voice that letters and even emails cannot.  With pictures, stories and comments people can asynchronously and conveniently follow each other.  When we layer on the advent of apps smart phones with location and photo capabilities, that convenience factor grows exponentially.

But then what.  As the user base enjoy that convenience and new found access to their friends and family the network owner is increasingly pushed into the background and the winners are the users.  The idea that their convenience would be interrupted by intrusions such as ads flashing across the screen is considered ridiculous.

By the same token the network owner finds it ridiculous they must spend all this money developing the network with no benefit.

So we have a stand off, and meantime the stock is dropping and P/E ratios are brought in to question and stock prices will align with traditional media unless some creative thinking is brought to bear.  That would price FaceBook stock at $6 +/- just to put the problem in perspective.  But that speculation is for other blogs.  My concern is business model related.

Lack of creative thinking:

Online advertising has grown little since the original banner ads in the ‘90’s.  There is a host of sophistication in the back end designed to place the right ad for you based on your implied preferences, implied location, and implied demographic but at the end of the day its just a banner ad that intrudes on your time and screen space.

Is a banner ad really the only way to get attention from people?  This is is old thinking that comes from newspaper, radio, billboard and television.  I would have thought that by 2012 and 20 years after the first graphic internet web page, that someone would come up with new models.  In fact with the user base and smart people, why has FaceBook not accomplished that, instead falling back on the ancient advertisement interruptus model.

I do not even pretend to know the answer, but it has to have its roots on some co-operative model that engages users as part of the process.  The ubiquitous “Like” and “G+” buttons go some way but not very far.  The outcome will still be a banner ad, an email or some notification.  Where is the sophistication that takes the Likes and engages users without interrupting them.

Is internet even the appropriate place for advertising as we know it?  I have always been chastened by the idea that internet was designated ‘media’.  Somehow the marketers took over web site management in the 90’s, something I was not happy about but that’s another story.  Internet is a tool that provides utility.  I do not expect to see an ad on my hammer.

That’s why I believe this is a problem that will not be solved by marketers.  Sorry folks to all my marketing friends.   The tools and training just do not allow for a solution, and that’s why Groupon, and Facebook fail at advertising.  the more people they drive ads to the larger the ad supply and the prices drop.  What happens when ad prices drop to zero FaceBook.  That day is coming.

No, this is a technology problem that involves, algorithms, big data, site design, page design, different user engagement and more.  There are some clues in Vendor Relationship Management (VRM) which is a concept I believe in but has yet to manifest itself successfully.  The idea is that you, the user, control your advertisers (Vendors).  This is the correct line of thinking.  While as extreme as traditional advertising is on the other end of the scale, it should drive a better line of thinking that will allow for a model that produces revenue for network builders, and satisfaction for users.  VRM says that users decide if, when and how they will interact with merchants.  I can hear aghast marketers crying foul, and they will lose their 0.001% penetration rates.  Really?  How do you know you would not get better and more meaningful penetration?

Business model considers all alternatives for revenue, including subscriptions, freemium charges, and others.  Being stuck on advertising and advertising as currently structured is a losing proposition.

Meantime FaceBook is a short sell, and it is not because of all those employee shares coming on the market in November.  This is a business model problem, just as was Groupon.

Written by Colin Henderson

August 18, 2012 at 15:39

Posted in Uncategorized

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