Facebook: Why It Wasn’t “Different This Time”

There are a plethora of so-called “experts” running to and fro commenting on why Facebook® the former darling of the IPO (Initial Public Offering) investment world dashed all their hopes and dreams. Most are missing the point in my view because it was pretty clear to anyone whom looked at their developing love affair without the rose-colored glasses. All one needed to do was put down the rose spectacles and view the model through the prism of business for a clear view. The business model showed cracks right from the beginning.

Let me state right here that I have great respect for Mr. Zuckerberg and what he’s accomplished, and is still trying to. However as of today the IPO and business model that was used to bludgeon anyone critical of its claims is currently trading not only lower, but near half its original price. For those expecting to be rich by year-end they now might be facing losses of nearly half their money, and quite possibly more. But what’s the real reason why? Here’s how I see it…

First, you have to remove the debacle that was the IPO’s opening day. Although this hurt it originally why were there not buyers at these now discounted prices? If Facebook was everything they claimed shouldn’t everyone be clamoring for as many shares as they can get at such reduced prices? Can’t use the excuse of it’s a horrible market because the S&P 500 and other major indexes have screamed to new highs. Yet Facebook at this same time hit new lows trading at what some call “teenager” levels. If only hitting the “Like” button could bolster the stock. But as of this writing, banks and others don’t accept “Likes” as legal tender.

We heard and we still hear that FB has 900 million users or “eyeballs.” All they have to do is find away to convert them and it was off to Shangri-La. All one needs to ask is, if that were true, why aren’t every billboard advertiser the richest on the planet? Last time I looked billboards barely break even for advertisers. But billboards and other forms of media have a very distinct difference that is currently unavailable on FB. Control of its presence, or in other words, you don’t control your layout on FB. They dictate what you can and can not do. Why would a company that spends millions of dollars trying to perfect or maintain an image subject themselves to looking the same as everyone else within FB? And that’s not even including that wonderful feature that everyone hated and is now nearly unstoppable by dictate from FB…TimeLine.

Another hurdle that FB defenders never truly addressed right from the start was very telling. You didn’t need to be a genius to understand intuitively that the vast majority of users don’t buy, won’t buy, and wouldn’t spend a nickel to use FB if they had to. All one needed to do was either watch or ask any teenager interacting with social media sites. As soon as you ask or hint at money or information they’re gone. Just ask yourself this question: If FB charged $1 per month for access and MySpace® or others remained free, just how many of FB core audience or users would move to the free site? I’ll contend 10’s if not 100’s of millions of them. Just like they migrated from where they were originally. That’s not an easily resolved  kink in any business model in my book. It’s a possible fatal flaw that might just be non-correctable or worse, inevitable.

In the case of business models and pleasing investors (rightly or wrongly it’s part of being a public company) Mr. Zuckerberg was heralded as not caring about stock prices or valuation. He was about building a social platform in the tradition or views held by Steve Jobs. This was easily seen as a disaster waiting to happen. First off, the comparison of M.Z. to S.J. is misplaced at best. S.J. came back to Apple® after both himself and the company he founded had been totally humiliated in many ways. S.J. came back not only with a better understanding of what he wanted or needed to accomplish, but brought a company that was near the edge of oblivion to its current day incarnation. M.Z. is starting near where S.J. ended. What he does from here will be how he should be compared. (If there is a one) Not the other way around.

The investment, and social media world was far too eager to pat themselves on the back before the ink was even laid to paper, never mind before dry. This is where you heard the incantations of “It’s different this time.” Everyone, and I mean everyone from so-called social media “Guru’s” to angel investors to true Venture Capitalists were touting their satisfaction on how brilliant they were or why happy days were here again. It’s the Dotcom era 2.0! This is where many set themselves up because all you needed to do was look, and you could see things all too similar in justifying why it wasn’t different this time. It was more of the same, and would probably end in a similar way.

For an understanding of the tenor that surrounded FB here’s a sample. It’s an excerpt from August Capital’s David Hornik on his blog named VentureBlog.com.
dated 5/18/12.
“It is impossible to ignore the economic impact of the Facebook IPO. It will make many people very rich. And it secures what has been known for a long time — Facebook is the best Venture Capital investment in the history of the industry. The individuals who made that investment deserve a huge amount of credit for seeing the value that could be created there.” You can read the entire article here.

Understand I am not throwing barbs at Mr. Hornik. I have great respect for whom he is, what he has done, and his prowess as a venture capitalist. I have great respect and admiration for him as I know many others have.  What I am trying to demonstrate is what the tenor was everywhere from everyone almost in a synchronized chorus. It’s also one of the most dangerous aspects of business. It’s when one finds their heads are not above the clouds breathing rarefied air but instead they’re inhaling their own exhaust. Not only did the investment world suffer this but come to find out the State of California is now bemoaning the fact that the BILLIONS of dollars they counted on from the tax revenues from all the millionaire’s created has gone up in another puff of smoke. Everyone was on-board the bandwagon. Except the band.

It’s quite possible that FB can turn itself around and be the dominant force that so many believed it would be. But as of this writing what happens next resides in the hands of Mr. Zuckerberg himself. Hopefully there were never any orders placed for a mascot at any sock companies.

© 2012 Mark St.Cyr