Facebook still seams on track to disappear in 4 years

http://www.forbes.com/sites/ericjackson/2013/06/06/facebook-still-seems-on-track-to-disappear-in-4-years-from-now/

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About a year ago, I wrote a post titled “Here’s Why Google and Facebook Might Completely Disappear In The Next 5 Years.”

Image representing Facebook as depicted in Cru...

Image via CrunchBase

To be honest, I’m not sure I’d write it again today.

It had a catchy title and some good substance to my arguments, so it ended up generating a lot of page views. It also came out at a time when the hype over the upcoming Facebook FB +4.5% IPO was at a fever pitch. Back then, people were saying that Facebook would be the nextGoogle GOOG +1.24% and would certainly surpass $100 billion in market value as soon as it IPO’ed. We don’t seem to recall now but many predicted that Facebook’s stock would go to $60 – 75/share immediately post-IPO.

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In reality, it hit the mid-$40s and then dropped like a stone until bottoming out at $17 and now being around $23.

The biggest problem I have with my old post is that I tried to articulate why both Google and Facebook “might” disappear in 5 years. That’s too much for one post. I should have split them up. So, today, I just want to revisit this year-old post and only focus on Facebook. I’ll try to do Google in the next few weeks if I have time (but – long story short – I don’t think Google’s going away any time soon).

The other problem with the post was the use of “disappear” in the headline. Many readers took this to mean that I thought both were going bankrupt. That’s not going to happen clearly. I said in the post that I meant that they would “disappear” in the sense that Yahoo YHOO -1.07% has disappeared. By that I mean that Yahoo is a shadow of its former self in terms of its perceived importance by many. Anyone who reads my stuff knows that I’m long Yahoo and love the company and new CEO Marissa Mayer. I think they can do great things still. But one of the reasons I got so bullish on them is that public market investors completely lost interest in the company and totally discounted the stock over the last 4 years compared to its underlying fundamentals or to its cooler rivals like Facebook.

Think about this, Facebook has a billion global users and Yahoo — post-Tumblr acquisition — has 1.1 billion users. Yahoo had $5 billion in revenues in the last year and about $1.5 billion in EBITDA. Facebook had $5.5 billion in revenues last year and $1.3 billion in EBITDA.

Yet, Facebook has a market cap of $55 billion while Yahoo’s market cap for its core business and its cash on its balance sheet is about $10 billion (I’m taking out the valuation of its stakes in Alibaba and Yahoo Japan). That’s still a huge gap.

It tells you that the market thinks Facebook can still generate a ton of future profits from its users while not believing that Yahoo can.

Facebook is still the bright shiny new thing. Yahoo is seen as yesterday’s news.

The main point of my post from a year ago was that I thought it was very possible that Facebook could be headed for the same place to where Yahoo finds itself today (or maybe 18 months ago pre-Marissa). A year ago — 3 weeks before the IPO — this seemed like heresy. However, that’s exactly why I wanted to write the post in the midst of that mania. And the title was a little sensationalistic, but I wanted to play contrarian.

So, a year later, what I’d say is that I’m much more respectful of the quality of management at both Google and Facebook. Google’s a really amazing company and has really showed the world that in the last year. I’ve met a bunch of Google people this past year and I’m just always blown away by the intellect and drive of these people. (However, I still think Google has some big risks facing it in the new mobile world we live in. Their future success isn’t assured and I’ll write about their risks more in the future.)

Facebook really has some great quality people too. I’m not a big Facebook user or fan of it either, but I have great respect for them as I continue to see them perform quarter after quarter trying to best leverage their billion users. (I also think they’ve become a much better company facing their future risks since IPO’ing compared to beforehand.)

However, a year after my original post, if the question is, “How’s Facebook doing in terms of a 5 year track towards’ Yahoo-like disappearance?” — you’d have to say, they are proceeding right on track.

Why?

Your Internet Generation Matters: In last year’s post, I used an organizational ecology analogy to argue that there have been 3 generations in the Internet world (Web, Social, and now Mobile). I said that companies born into one generation can’t really shake off the past and become another. So, if you’re a Baby Boomer, you’re never – really – going to be a Millennial. I still think that’s basically true. Facebook will always be a company born in 2004. It became the king of that generation for social. But being the king, means that you’re – by definition – big. And being big makes it hard to be nimble facing new shifts in the market that are threatening to your leadership position. As any new generation comes on the scene, the kings of the past generation are very vulnerable from new smaller entrants.

Brand and Money Helps Past Winners St ay in the Game: A lot of people last year said, ‘well, if Facebook became cool when the social generation arrived compared to Yahoo, why is Yahoo still around?” They were saying that, if Yahoo survived, so would Facebook. They wouldn’t disappear completely. I think the past generational winners accrue significant cash (and a high stock price) with which they can do acquisitions. These acquisitions can help stave off their extinction. The Facebook acquisition of Instagram was absolutely brilliant on Zuckerberg’s part — even if Facebook never makes a dime of revenue from it. If Kevin Systrom stayed independent – or sold to, say, Twitter – Facebook would be in so much worse shape today. Think about the recent Pew study that showed Facebook was losing its cool factor among teens to Twitter and Instagram. Now imagine if they didn’t own Instagram. It was worth $750 million to Facebook just to take them out of play as a potential competitor. Brands matter too. People keep going to Yahoo and AOL (AOL), even though lots of Silicon Valley elites think those properties are dinosaurs.

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Being Big Lets You Make a Lot of Money But Isn’t Very Cool. But even though Facebook has moved incredibly fast to face its inherent weakness of being a big fat dominant website that had to become a mobile company — much faster than I would have guessed a year ago — it’s still a big company. Being big – with a billion users – lets you make a lot of money off of ads, but it isn’t very cool. Facebook is almost a decade old now. Analysts love to gush about how Facebook can keep making money by throwing up more and new ads in front of its users – like video pre-roll for example which is a hot idea now. I always hear Valley entrepreneurs and VCs talking about how Facebook “is going to be the social glue” for years to come — usually when they’re also expressing exasperation about how Facebook’s stock is being treated by the uneducated Wall Street investors. But the big weakness with being big for Facebook isn’t the users, or resources, or brand it brings, but the familiarity. There’s always an inherent drive in world of the Internet — and probably more so in social networking – for the next big thing. What’s new? What’s cool? That’s what is probably most scary for Facebook in the recent Pew survey results. What if the teens keep tuning out from Facebook and spending time where their friends are going?

Death by a Thousand Snapchats. Someone used that line for the reality that Facebook’s facing. In this new world of mobile that we live in — and maybe we’re going to shift soon to a “mobile 2.0″ generation or wearable generation or whatever — it’s not going to be a big new social network like Facebook that’s going to beat Facebook. It’s probably going to be a bunch of small little new apps that’s just going to steadily draw users’ attention away from Facebook. It will be a little Tumblr here, a little Snapchat there, a little Pinterest. And don’t forget all the new companies who are being hatched right now as I write this. Things go viral much more quickly today than they did even in Facebook’s heyday of growth in 2007 – 2009.

Can Facebook Buy Its Way Back to Cool? It’s unclear to me that they can. Could they just buy WhatsApp, Pinterest, Instagram, and Snapchat? Would they become cool again if they did? Maybe. With Instagram, they’re still seeing that property grow, although they haven’t touched it. If they start putting ads on it, they would probably kill the cool factor pretty quickly — and they seem to understand that. With Facebook’s weakened stock price, I don’t think they would embark on some big multi-billion dollar acquisition spree. And even if they did, wouldn’t there be a bunch of new apps that would spring up in their place a year from now who would be declared “cool” by a bunch of teens and the press? Who among us last year was saying that WhatsApp, Pinterest and Snapchat were going to be pressuring Facebook for its cool factor? And it’s only been a year. What new companies are going to be threatening Facebook a year from now?

“Life moves pretty fast. If you don’t stop and look around once in a while, you could miss it.” That was true for Ferris Bueller and it’s even more true for the world of mobile we live in today.

What If Social Networks Are Inherently Unstable? There’s a fantastic interview that Tumblr’s David Karp did with Charlie Rose a few weeks ago. You can see it here. He makes some really interesting observations about social networks at the tail end of the interview that’s relevant to this discussion of Facebook:

Karp: It’s been remarkable to watch how quickly those [social] networks move and are changing. I think we used to think of social networks as these big impenetrable networks. And we’ve watched them build up, and then erode, over and over again and in faster succession. I think it’s going to be very interesting to watch how these big networks, where we extend our relationships with other humans, how those move around, whether that starts to stabilize. I don’t think it will.

Rose: In fact, one of them was Yahoo….

Karp: I think what Yahoo’s a good example of is just media. What Tumblr is is media. People come here for art and media that they enjoy. Yahoo is media. And, by the way, I think that’s made it a pretty resilient network. If you like your movie trailers, you like your news, you like your editorial, it’s there. You can keep showing up and keep enjoying it.

One of the incredible things about social networks is how quickly they can be built up. They have the viral coefficient that allows them to just explode over night. And all of a sudden you have Vine or WhatsApp or Instagram… these things that have tens of millions of people who are interconnected. At the same time, once a few of your friends start to leave, the whole network can fall apart.

While if there’s great content over here, whether it’s a TV network or web site or a big network like Tumblr, if there’s something there that you care about, you can keep going whether or not your friends keep going there. That’s where I think media tends to be a little more resilient that social, but we’ll see…”

What if he’s right? Everyone who loves Facebook, always says, “oh they’re not MySpace” and “they’re not Friendster…. they’ll be around forever.” And that’s true, they’re not those past networks. Facebook will likely be around in some form for a long time.

But Karp is right that there is something about these social networks where they can grow incredibly quick on the way up, but also recede rapidly on the way down. Facebook isn’t turning people off like MySpace was, but is there any reason why Facebook couldn’t see a rapid drop off in engagement in the next 4 years? Zynga (ZNGA) — which I own because I think it has gotten way too cheap — has really struggled to keep its users in the last year as the rapid shift to mobile gaming from web gaming has occurred. I think Zynga can come back but the struggles they’ve gone through speak to the challenges that Karp pointed out in his comments.

4 Years Is A Long Time. I don’t have a crystal ball. Facebook knows how important mobile is to them. They are throwing a lot of stuff at the wall these days with their mobile app, some type of Graph Search, a new “phone app” in their Home product. They most likely will make a big push into video and commerce. If they get any one of these right — or they make some exciting new acquisition using their cash or stock — they could conceivably change this idea that their fate is to be forgotten about a few years from now. It’s certainly not predetermined. They have the best and brightest people working on this. However, they have enormous challenges facing their future pre-eminence. I think most would say that they have more challenges facing them today — not fewer — compared to 12 months ago.

Things move very fast in Internet time. The dominant “cool” companies of 4 years from now probably haven’t even been founded yet.

One year on from my original post, my conclusion is that Facebook is still on track to “disappear” in 4 years from now.

[Long YHOO, ZNGA and AOL]

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