Facebook’s faltering stock price since the IPO shows clearly its has not yet the right business model. The social networks staff selling their stocks this week is the next great threat to its stock price. The decline in market value shows a fundamental strategic problem for the social networkers that want to make the world a better place. The smartphone revolution threatens Facebook’s advertising business.
Facebook is on its way down. The value of its stock has decreased by around 45 percent since it has gone public 90 days ago; it could still fall further. Thursday the holding period for 271 million employee shares will expire. Selling part of the employee stocks will depress the price further.
It’s possible that Facebook gets away unscathed because most employees who want to sell, may have done it in advance by warrant. In this case the end of the holding period would be already priced in. Nevertheless, the stock is likely to remain under pressure because other holding periods are running out in the coming months.
That fact that Facebook has to deal with such mundane things as expiration of the holding period is characteristic for the shift Facebook faces. As recent as May 18th, the date of their IPO, FB has been hailed as the new star. The stock has been so heavily overvalued that the company’s value even after the crash is still more than 48-times its annual income of 2011. FB’s market cap is about the same as behemoths like Colgate Palmolive, Monsanto, Sumitomo, DuPont, or Nike. A market cap of 48 billion dollars seems super optimistic for a company with such an uncertain outlook even when considering that we talk about the touted digital industry.
The share price reflects the hope that Facebook could somehow grow exponentially in the coming years. But the business model of the social network has been shaken to the bones. The boom of Internet-enabled mobile phones is the responsible game changer. End of 2011 a bout 6 Billion people have had a mobile phone. There are more people with a mobile phone than are connected to the electrical grid. Not only Facebook is in trouble but Google and other web giants too who earn their money mainly with online advertising.
The Dawn of a New Web Era
Gartner estimates that in the coming year the worldwide Internet access via mobile phone and tablet will be for the first time larger than the traffic from the PC at home or the office. Facebook experiences the mobile revolution already; more than half of its roughly 955 million users access FB from their phone. Many of us use mobile devices for our daily FB access. A recent survey of Google users shows similar results for web search.
This leads to the following issues. The page views on smartphones bring only a fraction of the always-connected ad revenue. New business models that compensate for these losses are still under development. I’m not sure that the usual suspects will be able transfer their always-connected Internet market leadership to the mobile web.
We are at the beginning of a new era, the third Internet era of mobile Web and interest networks. The first era were Web portals like Yahoo and Google search engine. Facebook, LinkedIn and Zynga have dominated the second era, the so-called social Web. Each Web era had its special needs. Usually, the rulers of one age had difficulties adjusting to the dawn of a new era. Jay Jamison calls the mobile era the Web 3.0 in his IT blog at TechCrunch.
The Web 1.0 pioneer AOL plays no role any more. Yahoo is a company that needs severe surgery. Google is still brilliant, but it earns its billions almost exclusively with its Web 1.0 business model of Internet search. Its ad sense churn rate is about 70% and its social network Google+ is a far cry from Facebook’s success.
Facebook has announced during its IPO to expand its mobile activities significantly. My friends at FB say that CEO Mark Zuckerberg tests all new features first on his phone. Implementing its mobile strategy Facebook faces similar problems as Google with its social network. The change requires nothing less than a cultural change.
Context on the Mobile Induces A Culture Change for App Design
When surfing the Internet on the phone we expect a very different app behavior than on the laptop though we use the same information from the Web. Mobile services have to be context rich. This means they have to include, location (from the GPS of the phone), user preferences, friends nearby and integrated payment via e-wallet (in the very near future). Mobile apps have to display less information on a small display and have to be usable with fewer clicks. This means they must be very well tailored to the task at hand – be it finding a nearby taxi, or a nearby fish restaurant recommended by friends.
Facebook’s approach seems very different. We are presented with more and more information that pushes us to ever-greater screens with higher resolution in order to display status messages, invitations to parties, games, advertising, chat and much more. Facebook has just transferred this app with its wealth of information from the static web to our mobile. The FB app seems overloaded, while the value of its location and context-aware services is very limited.
Companies that have designed their apps from the beginning for the mobile web deliver much better user experience closer to the customer. A mobile food service is just about spotting personal restaurant recommendations and about showing its users how it is cooked for example. One app per task is the credo of mobile app leaders like Apple, Amazon (Kindle) and Twitter.
Take the mobile photo community Instagram for example. Yahoo’s photo service Flickr and Facebook’s picture upload look shabby compared to Instagram. Instagram has gathered more than 80 million users in roughly two years. Early April Facebook bought the service for a billion dollars.
The New World of Advertising and Interest Networks
The mobile web changes the business models too. Companies who finance themselves mainly through advertising face a problem. User attention on the phone is different from the PC at home. Banners have not been made for the small mobile phone screens.
Advertising has to change from passive consumption to active participation. Take for instance the Groupon++ startup LOCALsense and mutu, a music video aggregator. Both startups integrate the user. LOCALSense rewards the user when he or she passes coupons on to friends; a cool way to learn about a person’s interest network. Who of my friends likes coffee, sailing, or go to the movies? All this information about the interests of my friends is readily available for LOCALsense but very hard to get for FB. How does FB even know what types of friends I have? How do they know who of my roughly 1000 friends is family, close friend, co-worker or business friend? They ask me to categorize my friends. Well, this is the reason why Google+ has failed with circles. Who on earth is going to keep all these relationships up to date manually? Interest networks go much further by understanding that relationships are multifaceted with regards to how people interact. For example, friends may sail together and be close friends, or friends share a passion for movies and are co-workers. LOCALSense analyzes the connections, interactions and buying behavior of its members with the advanced analytics platform Saffron Technology in real time and automatically. Its easy to monetize this information by feeding it back to sellers.
Mutu aggregates music videos and predicts customer taste in order to offer a Pandora like service to its listeners. Mutu starts out with an innovative business model. Besides ad revenue it earns money by selling back to the producers of music videos what videos people like, how long they watch them and what they share with their friends.
I think there will be two big revenue streams on mobile, gaming and interest networks. End of last year I have been on a panel with Bill Chang, Chief Scientist of Baidu in Shanghai, organized by Erik Brynjolfsson from MIT Sloan School. Bill predicted that gaming would be the most popular mobile apps in China. Gamming apps need context, interest networks and location too.
The successful companies of the information age will generate value by creating information from the ever growing sea of Big Data. Think about GE opening a center for Big Data analytics in the Silicon Valley for 1 billion dollars. GE intends to sell services and the value add it will generate from operations data – railroad traffic and congestions, or usage data of its medical equipment in hospitals.
Marketers know all that intuitively therefore they pay less for mobile ads. 1000 clicks on a mobile ad banner cost 35-40 cents according to the venture capital company Kleiner Perkins. Ads on Web pages sell up to 20 times more expensive.
The lower ad prices are reflected in the balance sheets of web companies like Google and Facebook. Google whose revenue depends more than 90 percent on advertising has shown steadily declining per click sales in the past three quarters; in the last quarter sales have dropped by as much as 16 percent. Google’s countermeasure is it’s free mobile operating system Android. This ensures that the Google has at least access to the handset market, and thus potentially to millions of advertisers. Where is the business model here? So far I see only Samsung making money with Android smart phones.
Facebook’s revenue depends to 85 percent on advertising too. Revenue has slowed down because ad sales and user numbers grow less than some month ago. The increase in ad revenue in 2011 was still 88 percent while it slowed to 45 percent in the first quarter and 32 percent in the second quarter of 2012.
This ailing growth is incompatible with the high expectations for the Facebook stocks. They need a new growth strategy for the mobile web. Transferring overloaded web apps on the mobile Web has shown very modest returns. Recently, Facebook has started to mingle ads with status messages when the user or their friends are befriended with the respective company. This seems the right direction, user interaction using context and the wealth of data FB has gathered about us. According to FB, its making half a million dollars in sales per day with these mingled adds.
Customers rather than clicks
Other companies have been off to a better start when monetizing mobile ads. Those Web 3.0 companies understand marketers asking, why pay for clicks when one can steer customers via mobile ads to a shop, restaurant or service?
Another location-based social app I would like to mention is Waze, an app that combines GPS with a social network. Motorists transfer their speed while commuting to work. Waze calculates road conditions from the speed taking into account reports from fellow drivers and delivers turn by turn navigation that automatically re-routes you when road conditions change. This is a great example of how dynamic interest networks are unlike the static social networks. I don’t even know the people who are in my interest network when driving to work. Still the commuters’ community helps each other to get faster to work.
Actually, Facebook, Google and the other incumbents are in the best staring position to deliver mobile services around interest networks. They have more users than any new Web 3.0 mobile community and therefore command the reach needed to get such services off the ground. However, the incumbents are not the ones driving the mobile revolution. I’m having a déjà vu from the Web portals era when the Web 2.0 newcomers ate the lunch of the Web 1.0 crowed.