Facebook: The Beginning of the End?

I was late to the Facebook world, and I use it reluctantly and haphazardly. (If you’ve found me there, tried to friend me and gotten no response, it’s probably because I keep my network to about 100 friends, relatives, and colleagues. If I don’t know you, I don’t add you.) I can see its uses in keeping people connected, as well as for the new evangelization, but I’ve always been extremely dubious about “free” products because, of course, nothing is free. No company gives away its product, which means that we aren’t Facebook’s customers: we’re what they’re selling.

Zuck is selling widgets, and we’re the widgets. We dutifully turn up each day to exchange cute kitten pictures and post articles and links so he can give his real customers–the advertisers–access to that most precious commodity: our preferences, our time, and our eyeballs. In a world where people gladly walk around wearing giant corporate logos on their clothes (and paying top dollar to do so), I assume most people are fine with that.

I’m not. I don’t like being part of a corporate machine. Right now, I’m okay with the tradeoff I get from Facebook: I get a few features I like, and they get to put advertisements on my screen which I can ignore. (You get a similar deal here at Patheos, but with more Mormons.) If that balance shifts too much, I won’t stick around for long.


Facebook’s recent IPO is still dominating the current news cycle, with financial analysts making all the noise they usually make about whether it’s good or bad, whether it was a success or failure, and What it All Means. I’ve come to the conclusion that “financial analyst” is a modern synonym for “shaman.” They might as well switch to reading entrails for all the actual value they add to any discussion. Go surf through YouTube and you’ll find videos of the best financial minds in the country ballyhooing the dot-com bubble, poo-pooing the idea of a housing bubble, and generally being insanely wrong most of the time. You’d do as well to get your stock tips from Madam Kulagina’s Tarot Card Readings and Hot Wings.

This morning the stories are heavily weighted towards the “FACEBOOK IPO A HUGE FAILURE!” meme, with an occasional contrary soul saying, “FACEBOOK IPO AN AWESOME SUCCESS!” Unless you’re a day-trader, reacting to tiny fluctuations in the market is pointless. It’s not even worth reading the stories.

There is, however, going to be a long-term impact from all this, and in time it will change the social network landscape.

Facebook did not want to go public. They were forced to do so by an old SEC regulation that pushes companies with more than 500 “shareholders of public record” to disclose the same information which public companies are required to disclose. Facebook was intensely well capitalized, even though it did so through some financial monkey business, such as treating a large Goldman Sacks investment as a single “investor”, thus keeping them below the 500 shareholder threshold for a little longer.

The problem with this is that it’s a profoundly un-American way to capitalize a huge company like Facebook. American capitalism has always worked from the idea that ordinary people could buy a piece of a new company at a low price in order to help it start and grow, and then watch their investment increase. Facebook kept Main Street investors out of that loop, leaving only the employees and the big money as investors.

The rules exist so that moneyed oligarchs aren’t allowed to just trade up the value of a company while keeping ordinary people from reaping any profit. And that’s exactly what happened with Facebook. It was priced out of the range of ordinary investors.

The Future?

The point of investing is to increase your investment, but Facebook may well be valued at just about what it’s worth. This why everyone is ready to pounce on all these price fluctuations: they’re desperate to figure out if it’s going up or down. I don’t pretend to know whether it will be a success or a failure, but my long-term prognosis, from a pure tech standpoint, is not particularly rosy. Facebook was where they needed to be in terms of revenue and value. In order to give investors a return, they have to grow at a steady rate. I’ve seen various estimates about just what that rate should be to make an investment worthwhile, but let’s just pick a round number and say it should be in the 20% range.

Unless Facebook finds some new way of monetizing the internet that has thus far eluded everyone else, their revenue will remain wholly dependent on advertising. Those little ads you ignore in the sidebars? Yeah, those are going to get a lot bigger, and they’re going to be popping up in the main timeline. I’m already seeing “sponsored links” in the timeline, and I’m already annoyed by them. Facebook is also about make serious changes to their mobile experience, and by “serious changes” I mean “more ads”. The IPO means nothing to you from a financial standpoint, because most likely you’re not an investor. But the IPO will, over time, change the Facebook experience, and probably not for the better.

Everyone out there is worrying about one thing: is Facebook a fad? Can it fade away like MySpace? Will attempts to monetize it destroy the experience enough that people will go elsewhere? Are people already growing bored with it?

I believe the answer to all those questions is “yes”. I’m already noticing that younger people are using it less than they were a year ago. They’re just not checking it and updating their status that much. I’m not quite sure what could replace it, but there are a number of alternatives percolating in the tech world: Diaspora, Path, Pinterest, Tagged, and, of course, Twitter, LinkedIn, and the ghost-town known as Google+. Microsoft is working on So.cl with all the skills they brought to the Zune, other mobile-driven services already have a serious following, and who knows what enterprising aspie is right now hard at work on a Facebook killer in his dorm room?

In fact, the entire social networking paradigm has been shifting from desktop to mobile, leaving Facebook’s crummy apps running a distant second. Absolutely no one is saying, “Do you know what Facebook mobile needs? More ads!” Yet that is where Facebook has to make changes in order to satisfy investors.

I am not saying that Facebook is going to go bust. I just think we may well be at the high-water mark of Facebook’s success. There isn’t a ton of room for it to grow, and in a public company, lack of growth is frowned upon.

There something else that’s been tickling the back of my brain. One of the unquestioned success stories in tech is Amazon. I’m struck by the idea that a retailer like Amazon is poised to monetize a social network like no other company currently in existence. Perhaps they could forge an alliance with Facebook which could completely change the equation for both companies, but what if they started their own social network. I’m not sure they would, or even could, but if they did, it would exist in the sweet spot between commerce and networking. And by sweet spot, I mean “an utterly terrifying place where a retailer knows everything about you.”

And there’s one final point. Somewhere out in Menlo Park, a bunch of techies just became millionaires. Some of them will cash out and start up their own companies. The money being flushed into Facebook is going to emerge in all sorts of interesting places. It will create new tech, new opportunities, and new jobs. Some of those might even be new social networking companies.

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Thomas L. McDonald writes about technology, theology, history, games, and shiny things. Details of his rather uneventful life as a professional writer and magazine editor can be found in the About tab.