This column reads like a basin of ice water thrown in the faces of all those hoping to hide the coattails of Facebook’s IPO to riches, or perhaps it reads like Ecclesiastes.
Lex in depth: Facebook - Robert Armstrong and Stuart Kirk via FT.com
Before turning to the future, remember the immutable laws of finance. Stratospheric growth never lasts. Returns fade. New threats emerge.Stratospheric growth never lasts. Returns fade. New threats emerge.
Hence that first big question: can Facebook burrow into all aspects of computing and stay there, as Microsoft did – or will it give way to the next new thing? Clearly, social networks are unstable in their early years. But once they reach a certain scale they become more resilient. Any communication tool that is already popular has an advantage in attracting new users – the “network effect”. Software designers will aim their best new stuff at the biggest platforms – a phenomenon from which Apple and Android are benefiting in mobile computing.
With 900m active users, Facebook looks dominant already. But investors must consider the possibility that, like most products, its usefulness will peak and decline. Many of the connections users have formed could cease to be of interest. The network starts to carry more noise than information. People look for something more interesting. Social networks have inherent stabilisers as they grow but may also have a big destabiliser: boredom.
This problem is compounded, it seems likely, by the ever-increasing probability that your mother (or father or teacher) is on Facebook. That is, as user numbers increase, it becomes less cool. The company would argue it does not need to be cool. Once its user base reaches a certain size, it becomes irreplaceable. Should Facebook attain a stable monopoly on social networking, it would be easy to dream of a time when searching for information, reading news, watching television, writing a document or talking on the telephone are activities conducted on the Facebook platform or given a social dimension imported from and controlled by Facebook. It is this picture that makes some analysts think the company could be worth $100bn or more. Certainly, the potential revenue pool is enormous.
But users may not stay loyal for ever. True, all the data that make up a user’s identity – comments, pictures, likes, connections with friends – are in effect owned by, and trapped on, Facebook. The company has carefully made it costly to leave. The question is whether the costs are high enough to prevent flitting among the networks and tools that have not been invented yet. It is hard to quit using Microsoft’s software or Google’s search engine, not just because of network effects but also because almost everyone needs to do things those tools make possible. Competitors are more expensive or not as good. Facebook simply is not essential to life or work in the same way.
And remember that Facebook was developed at the tail-end of the PC era. As the smartphone ascends, the company is already playing catch-up with competitors born and bred on mobile devices. Naturally, Facebook could survive without monopolistic control of the social dimension of computing. But it would need to spend aggressively to protect market share, implying lower margins.
Making a Google-like buy of Instagram for $1B just before the IPO? The only thing that would have been more Google like would have been to shut it down after the founder left to start something else.
(via Fred Wilson)