Fadbook: Why Facebook is Overvalued
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I was tipped off to a TVOntario debate on the value of Facebook as a tool. Within the debate, it seemed to be universally accepted that Facebook is a useful and sustainable tool for social networking and that Microsoft’s recent purchase of an approximately 2% share of Facebook was entirely justified.
However, the CEO of Microsoft himself, Steve Ballmer, has been quoted as saying Facebook is a fad just before Microsoft made its acquisition, a quote that has the distinct implication that the site won’t be anywhere near as popular within a year or two.
Is he right? I think he is, and here’s why:
1. Social Networking Clone Sites
One of the problems with a quality, popular site is that web designers and developers start coming up with clone sites to try to duplicate the success of the concept of the site. It happened with DMOZ; it happened with Digg; and it will happen with Facebook.
2. Commercial Domination/Dilution
Social media “marketers” are in the process of attempting to use Facebook and other social bookmarking sites to try and network with potential customers for their products and services. Facebook’s rise in popularity is and was largely due to the ability for friends to find other friends, not businesses to find customers. The vast majority of users of the site, right now, are end users, and if the commercial base continues to grow, the actual user base will shrink in greater proportion.
3. Privacy and Ad Marketing Issues
Om Malik generally came across as a clueless idiot in the debate. However, as Om quite rightly pointed out, the information being collected on sites such as Facebook will allow advertisers to geographically and demographically target consumers without their being aware of the advertising. While this doesn’t bother me personally, privacy watchdogs and consumer protection organizations will have a field day with an issue such as this.
4. “Why Pay to Advertise When I Can Do It For Free?”
Sooner or later, at least some advertisers will realize that they don’t have to pay to advertise their products and services; they can simply set up a Facebook profile to use it as a one-on-one targeted advertising tool, thus directly impacting advertiser revenues and profits.
5. “Dotbomb 2.0 Syndrome”
The valuation of the net worth of Facebook is likely far greater than its actual value, if we were to treat Facebook as we would any other business. When (not if) Microsoft realizes that their $240,000,000 investment isn’t paying off in the manner that they think it will, they will pull their funding.
6. “Facebook Exchange”
This hasn’t happened yet to my knowledge, but it’s only a matter of time before the social media marketers come across this idea: “Add me as a friend to your Facebook profile and tap into my network of X friends”, which in turn gives the marketer access to the other party’s network of X friends. I don’t know if it will be called “Facebook Exchange”, but there will be a similar name for it.
7. It’s Been Done (in a Similar Fashion) Before
There are a surprising number of similarities between Facebook and sites such as ClassMates.com (albeit with social networking and other benefits). When was the last time anyone you know of legitimately used ClassMates.com?
8. OpenSocial
Google has launced OpenSocial, a series of application programming interfaces designed to help developers build things to work across a number of social networking sites. Facebook is not listed as one of those sites, which should come as no surprise given its partial owner.
Even if OpenSocial succeeds on a marginal level, it will also cut into the value of Facebook.
So What Will Happen to Facebook?
I don’t think Facebook will “die”. One of the unique aspects of the Internet is that concepts that should have been long buried retain a certain sense of immortality (MLM programs and get rich quick schemes, link exchanges, clipart sites with really bad animated gifs, etc.) However, there will be a sharp downward correction in terms of Facebook’s market value and profitability, and there will be a certain sense that the bottom has dropped out. By the end of 2008, we’ll be talking about it on some level.
You might want to sell short on your Facebook shares if they ever get around to that IPO they were talking about.
November 9th, 2007 at 3:42 pm
Now that you’ve blogged about Facebook, you’re obligated to read what Fake Steve has to say on the issue. Trust me, it’s as informative as it is entertaining.
That said, you wrote “Facebook’s rise in popularity is and was largely due to the ability for friends to find other friends, not businesses to find customers.” Take Facebook out and replace it with the colonization of the internet by commercialism, and you’ve just described why spam pisses me off so much!
November 9th, 2007 at 5:42 pm
John: for the benefit of the class (and me, who’s too lazy to look and just taking a break from an admin I’m trying to build), please provide the link…and thank you.
November 10th, 2007 at 4:49 am
Hi there
You have made some good points there, you are right about the watchdog thing, we have a program called that in the uk, and facebook have recently been in the program, as people have had their identities stolen by using the information they have found on facebook about them.
Also workplaces in Uk have started banning facebook, so im pretty sure its a fad that will slowly ease.
Woc
November 10th, 2007 at 12:30 pm
Yeah, that’s been happening here too. A few companies find it to be a complete waste of time (which it is), and a few others seem to think it’s the greatest marketing tool ever (which it isn’t.)
November 10th, 2007 at 2:36 pm
Adam, you’ve made some good points there. I don’t think the sharp decline that you talk about is going to happen as quickly as you have predicted though.
The reason that Facebook sold shares for so much to Microsoft is blatantly because it’s Microsoft, not someone else. Few companies, especially such a large, well known one like Facebook, want too much to do with Microsoft. They really charged them that to sort of get “compensation” for what it might do to their image.
I think Facebook will decline eventually but its got a lot of financial backing at the moment and a strong market share and I believe it’ll be some time before it goes the same way as Digg did.
November 10th, 2007 at 3:16 pm
That’s a good point, Dan. Microsoft certainly has deep enough pockets to stomach a quarter of a billion dollar investment without blinking. However, this wasn’t a case of Microsoft saying, “here’s $250,000,000, what does this get me?” There had to be some sort of a bidding war going on there (although I’m not sure if there was, and I’m not sure of the details.)
November 11th, 2007 at 12:10 am
I’m sure Microsoft will pay ten times what anyone else would. But with Google’s open social, maybe they feel they need to keep up the rivalry? I mean, Bill Gates wipes his ass with more money then Microsoft would ever give me for my blog… Facebook has lots of users, although they probably count inactive ones, and that gets Microsoft into something ‘established’ in the buzzword laden web 2.0 social media space.
November 11th, 2007 at 3:17 am
It’s not a social media space, Forrest…it’s an infrastructure! And it’s very user-centric. What do you know about scalable and robust architecture and social networking as a viable corporate strategy, huh?
N00b! N00b, I say!
January 25th, 2008 at 9:17 am
[...] easily create a knockoff version of a popular site concept (it’s only a matter of time until Facebook is cloned, if it hasn’t been [...]
May 8th, 2008 at 11:37 am
Currently Google loves facebook, as many members of face book got PR upto 6.
What’s going on in facebook?
Does facebook pay google to increase page rank, so more and more people join facebook?
May 22nd, 2008 at 1:34 pm
[...] there for you spam them with your site. Please read this to know why it’s overvalued in itself: Fadbook: Why Facebook is Overvalued __________________ Conspiracy-Forums - THE Place to discuss Conspiracies Lightning Shock - My [...]