Courtesy of Joshua M. Brown, The Reformed Broker
One of the biggest market events of the coming year will undoubtedly be the Facebook IPO. You will read seven million articles about it in the next three months (sorry about that). It will likely come public as one of the largest IPOs in history, with a starting valuation somewhere in the vicinity of $100 billion. It is a tech giant to be sure, one of the most important companies in world right now.
But there is a major difference between Facebook and the other tech giants of the past and present like Microsoft, Apple, Google, Oracle, IBM, Yahoo, Netscape and Cisco. The difference is that Facebook will be the first tech giant to have come public after it’s growth rate peaks. it will be the first almost-mature tech giant to IPO at the end of it’s biggest growth phase rather than in the early stages. The others offered public investors the chance to invest ahead of the Golden Age – but in this new era, the lion’s share of valuation growth has been awarded to a relatively small handful of early stage investors and people need to accept that.
Facebook is a Red Giant, a star larger than the sun – but a dying star nonetheless. Red Giants are mid-sized stellar bodies that have already exhausted the hydrogen within their cores. They begin to live off the hydrogen surrounding them, burning it in a lower-intensity process called thermonuclear fusion. Similarly, Facebook is likely peaking right now in terms of new users, page views per user, engagement and so on – it will burn brightly off of the massive scale it’s already built and that’s pretty much it going forward.
This does not mean that the company won’t become wildly profitable as they turn on the engines and monetize what’s already there (which is obviously a huge amount of web real estate and mindshare at the moment). What it does mean is that, like the Red Giant, Facebook already is what it is. It is highly doubtful that the company’s web presence and engagement can get any bigger or better.
In fact, it is more likely that:
1. Something new comes along – It is laughable how seamlessly, completely and quickly Facebook supplanted MySpace – let’s not act like anything on the web is permanently dominant forever. Facebook is picking up major steam in countries like Indonesia and Brazil right now, the rate of new users signing up is breathtaking. But consider that they are pulling people from Google-owned network Orkut and that one day someone else will do the same to them.
2. Users lose interest in the faddish social games – The dirty secret of the early days of Web 1.0 is that pornography was the only revenue source that allowed companies to survive until real business models evolved. Social gaming has thus far provided the same service to Web 2.0. We are currently in an Air Pocket of Retardedness where kids and housewives have figured out how to submit their credit card information for utter stupidity like Farmville and Mafia Wars but haven’t yet realized how dumb they are for having done so. It is only a matter of time before the spell wears off and people realize how utterly ridiculous it is to be buying virtual crops and power-ups with money that can otherwise be used in the physical world. Remember ringtones? How about The Sims? Or Garbage Pail Kids or Pogs or Pokemon or Texas Hold’em or Beanie Babies or any of the other "flush your money down the toilet" fads of the past 20 years? These things pass and we eventually laugh at ourselves. That moment is coming soon for social games that require continual charges on our credit cards.
3. Kids rebel against a social network that includes their dorky parents – Can you imagine being 15 years old and being involved in any kind of socializing that involved your parents and aunts and uncles and Sunday school teachers and god knows who else from the dark side? There is an Facebook hipness hourglass somewhere and it has already been turned over…it is only a matter of time before the grains of sand slipping from the top to the bottom become noticeable and the tide turns. The kids will be first, the advertisers will follow. In the end, Facebook will be comprised of dormant and inactive profiles with a majority of its "engagement" coming from people in their forties stalking their exes from high school in the late 80’s. For the younger generation, talking about Facebook at all will become painfully lame. Every generation mocks the one that came before. This moment rapidly approaches, the emptying of that hipness hourglass is inexorable.
4. My life, my content – This will be the rallying cry of Gen Y, then the Millenials, then each successive generation after. People will wake up and realize that every minute spent in Zuckerberg’s walled garden is a minute that they are creating content for "Facebook Inc" that they do not own themselves. And who the hell would do that other than people who have no choice? Eventually, Twitter and Instagram and Google Plus and Tumblr and WordPress and About.me and a host of other platforms and services become way more interesting. The initial appeal of creating a Facebook profile for the average person was that the ability to code or "understand" the web or HTML was completely unnecessary. Which was brilliant, it allowed users to generate a page with next to zero knowledge about the ways of the web. The problem is, as time marches on, ignorance turns into curiosity and then experience. The web is now a native environment to the kids born in the 1990’s, they don’t know a world without it. And their ability to create their own blogs, web pages and websites will place them at the vanguard of an eventual mass exodus from the closed-off, institutionalized Facebook.
5. Monetization will be both a blessing and curse – Facebook is going to make a shitload of money. Unfortunately, this monetization push will alienate the user base and involve more aggressive and invasive tactics as surely as night follows day. There is no way around. Have you seen what Gmail looks like these days? There’s not a centimeter of the page that isn’t covered with advertisements of some kind. But I can’t think of a single one I’ve ever noticed or clicked. Because like you, I’ve subconsciously trained myself not even to see them. I know they’re there but I would wash my eyes out with bleach if I ever accidentally read one and would seek to have my mouse hand amputated should I ever – gasp – click one. And don’t give me this bullshit about "contextually targeting the ads to each user". You don’t know me, man. Facebook, like other web companies before it, will find new ways of monetizing. But don’t you ever forget what product is. It’s you. As has been remarked before, if you aren’t paying Facebook to use their service, then you aren’t the customer – you’re the product, homeboy.
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So god bless the soon-to-be billionaires who got involved in Facebook early. They will win (and have won) regardless. But in terms of the IPO this spring, I can’t find an answer to any of these five threats that would make me want to buy in at a $100 billion initial valuation.
Can you?
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