Are We Certain Facebook Is Doomed, Vivek Wadhwa?

VampireWomanOutOfCoffin650Vivek Wadhwa, a research professor at Stanford University, published a diatribe on LinkedIn a few months ago titled, “Facebook Is Doomed.” Contributing to the debate on the medium- and long-term sustainability of one of the biggest social networks is undoubtedly a healthy endeavor. However, this excessive public statement distinguishes itself with rather frivolous arguments on Wadhwa’s part.

Wadhwa took a strong stance by concluding, in a much-learned fashion, with the statement, “You can look at Facebook as a classic example of what not to do when you achieve success.”

First and foremost, it is to be noted that this paper I stumbled on recently was originally written in September 2013, and since then, Facebook has continued to expand its hold on our usage and advertising budgets.

However, given the credibility of the author, it is necessary — or, at the very least, interesting — to examine his analysis and hypothetical theorization of a future without Facebook, a colossus with feet of clay whose adverse fate is apparently inevitable.

Let us take a closer and more detailed look at each of his points.

Facebook is squeezing every penny it can out of its customers to justify its inflated stock price: Facebook, in recent times, has been valued at $164 billion — a value that is 20-fold its revenues and almost 110 times its net income in 2013. In comparison, Google is valued at $394 billion, or 6.5 times its sales and 30 times its net income; Microsoft at $303 billion, or 3.6 times its cumulative sales and more than 13-fold its net income; and Apple at $464 billion, which is 2.7 times its turnover and 12.5 times its earnings, all with reference to their results of the 2013 fiscal year.

Is Facebook overvalued? It’s a possibility. Either there will be a correction in its valuation, or at least the stock price will stop rising even if revenues and profits continue to increase. However, given current figures, can one deduce that Facebook is already condemned? Facebook has exhibited unquestionable financial health, and it’s been given all the green lights.

The number of daily active users continues to increase from 718 million in the fourth quarter of 2012 to 757 million in the fourth quarter of 2013. Revenue increased from $5 billion to $7.9 billion between 2012 and 2013, profits went from $50 million to $1.5 billion in the same period of time, and more than $500 million in profit was made in just the last three months of 2013. Average revenue per user, another key indicator, also increased from $1.54 to $2.14 between the fourth quarters of 2012 and 2013.

If this were what one refers to as scraping the bottom of the barrel, a plethora of other companies wouldn’t mind doing the same.

Unless it happens to luck out by buying the right company, it seems to me, Facebook is doomed: This criticism was based on the belief that Facebook would not have been able to make a successful transition to mobile, that it was losing its “cool factor” among teenagers (three years ago, iStrategyLabs revealed that there had been a reduction of 3 million users between the ages of 13 and 17 over the past three years in the U.S. on Facebook), and that salvation would only come from the acquisition of new players that were “mobile-first” or “mobile only.” The discussions with Snapchat failing to bring the grist to the mill further reinforced this prediction.

However, Facebook had taken on the challenge and has proven the prediction wrong with its number of daily active mobile users increasing from 374 million in the fourth quarter of 2012 to 556 million in the fourth quarter of 2013. An average of one minute out of every five spent on the mobile Web is on Facebook, an absolute world record. In the fourth quarter of 2013, more than one-half of revenue came from mobile, whereas it was practically nothing a year earlier.

While teenagers got enamored of new applications of the “chat” type, Facebook was not left behind with the Facebook Messenger mobile application, with its number of users increasing by 70 percent over the past three months in the U.S. Messenger is one of the most-downloaded apps on the iTunes App Store and Google Play. Of course, all such users are not exclusive; we understand that mobile users have the tendency to juggle mobile apps.

Facebook is aware that it no longer possesses that “cool factor,” which is also a sign that the platform has blended into the overall Internet landscape. It is a utility people use without paying attention, much like email platforms. Despite the decrease in younger audiences, total usage in the U.S., for instance, is on the rise thanks to the Facebook population of ages 55 and above that rose by more than 12 million (iStrategyLabs) during the past three years. The return of youths once they reach adulthood to Facebook, where all of their elders are spending more and more time, is also a very likely possibility in virtue of critical mass principles.

It is difficult to tell what the future will bring, but these alleged rumors of Facebook’s inevitable doom are highly exaggerated.

Furthermore, Facebook is opportunistic as always and constantly endeavors to go further, as its purchases of Instagram in 2012 and WhatsApp last week show. With more than $7 billion still in the bank, Facebook can comfortably experiment with other acquisitions and afford to make mistakes on its way.

Its new strategy in no way jeopardizes the sustainability of Facebook.com as far as we can see; in fact, it’s rather complementary. Instagram is still autonomous from Facebook, as will remain WhatsApp, but synergies might arise (an “add contact to WhatsApp/Facebook” button, for instance).

But it won’t develop any earth-shattering technologies, because it doesn’t do Google-style “moonshots” — it just doesn’t have the culture and DNA. It is still the social network that the kid in the dorm room built: Of course, Facebook does not dream as Google does with its avant-garde projects, but surely that doesn’t condemn Facebook to failure. Why the need to entitle this article in such a catastrophic manner? To generate clicks, or perhaps for sensational effect?

Google’s initial project of helping users find what they want was not inherently more extravagant than Facebook’s “make the world more open and connected.” Google is six years older than Facebook and yet asks Facebook to function with the same maturity. Facebook is known to attract talented engineers and is definitely en route with its ventures despite its tender age, thus making his statement that Facebook doesn’t have the ability to one day create something of disruptive value rather presumptuous.

Let’s also not forget that despite all its forward-thinking projects, Google derives 95 percent of its revenue from advertising, the same business that Facebook is in. A little exercise in comparing their viabilities can prove this to us.

Google’s profits are predominantly “ad dollars,” focused at the bottom of the marketing funnel with a search engine that users could eventually replace without friction with a better substitute. Advances in artificial intelligence are exponential (IBM’s AI computer, Watson, was able to outdo champions of “Jeopardy!” despite being asked oral questions that were loaded with innuendo). By 2025, a few thousand dollars should be enough to buy a computer as powerful as the human brain, so we’re sure that even the great Google isn’t immune to a competitor tool that could undermine its principal business.

Facebook, on the other hand, targets all stages of the marketing funnel, including budgets of prestigious brands that are spent on TV advertising, as well as budgets for direct-response advertisers, for which the Facebook retargeting pixel, among other things, is a revolution.

Barriers that challenge market entry in the traditional social networking arena for competitors are very high. We observed with Google Plus that despite the firepower of its creator, it is still a distant laggard.

Frictions to quit Facebook are significant, as well. It is more than difficult for users to abandon a site where all their friends are strongly connected, along with years of archives of photos, a perfect example being the emotion invoked by the short “A Look Back” videos generated for each user to celebrate 10 years of Facebook.

In view of this era of “big data,” where information is power, Facebook is actually in an optimal position to innovate. Facebook has an unrivalled conversation history, which continues to grow every day. And despite the entire buzz around Twitter, Facebook is where most people comment directly on current events, such as the goings-on of television.

With necessary investments in artificial intelligence, this mountain of data will enable Facebook to understand how humans work, live, make choices, how diseases spread, etc. Facebook wants to make sense of all of these data, not only for monetary purposes, but scientific, as well.

In an exciting interview with Bloomberg Businessweek at the end of January, Facebook Co-Founder and CEO Mark Zuckerberg said that 5 percent to 10 percent of Facebook users’ posts are actually questions for friends, such as requests for suggestions for a good dentist, a good restaurant, etc. In five years, he intends to create a way to perfectly understand these questions and help respond with the right content, to the right people.

Graph Search is a step in that direction, even if Zuckerberg agrees that the technology is not yet ready (when it’s suggested that Graph Search works about one-half of the time, Zuckerberg says that’s being generous). Facebook also attempted to acquire Deepmind, a British AI company, which was later taken over by Google.

Facebook is aware that this daunting task will take several years, but the platform is a house with a solid foundation and is most definitely a long-term endeavor.

Customers, who, no doubt, will become more frustrated with the ads and privacy intrusions, will eventually abandon it for private social networks or the next big thing. Facebook could go the way of AOL and MySpace: Without beating around the bush, Facebook is a private network where you choose who your friends or acquaintances are and how much each one can see. It is true that the privacy settings page can be as overwhelming as a Boeing aircraft control panel for some and could be improved, but let’s not reach as far as to call Facebook a “public” social network when Twitter is around.

The “invasion of privacy” rhetoric has been repeated one time too many, but it rests on legitimate concerns. If we were to enter that context, then all of the Internet should be concerned, and not just Facebook. Facebook has too much to lose — such as user confidence, among other things — to play a game of Russian roulette with people’s lives. Where we see the death of Facebook will be where we see the end of an entire system.

Banks and telecommunication companies also know a lot about their customers — perhaps even more than Facebook in some respects. Would we go as far as to predict the death of banks or telco providers?

Facebook users have begun to internalize this compromise between the loss of confidentiality in favor of companies that can target them and the advantages of continuing to keep in touch with friends and keeping abreast of current affairs of their interest in a frictionless manner. It’s all about trust in Facebook, which, according to figures, is on the rise among Internet and mobile users. Facebook, of course, is grateful, as this is its main, if not only, asset, and rest assured that it would tread with caution and act with utmost consideration.

Finally the example of MySpace is not the best to support a hypothesis such as the decline of Facebook. MySpace logs on with nicknames and connects users with unknowns. MySpace bored users with too much clutter and glittering modules, while Facebook has always stuck to sober design. MySpace failed to raise levels of connectivity and intimacy as Facebook did, as illustrated by Facebook’s archive-like qualities with reference to photos and videos.

As well, it has not done much philanthropy or community outreach — just a few initiatives that it has hyped to get positive press: After questioning its sustainability, as well as predicting its probable demise, it’s almost bizarre that Wadhwa would wonder why Facebook hasn’t been more philanthropically active. A point to note would be that Facebook isn’t idle either, as seen with endeavors such as Internet.org and the Open Compute Project, among others.

TechCrunch compared Facebook’s Internet.org to Google’s Project Loon, which was mentioned by Wadhwa in his article as a project that was Google’s formidable way of exploring unchartered territory. Internet.org, a project that aims to bring affordable Internet access to everyone, is proof that Facebook mustn’t so hastily be deemed uncharitable. Who knows: With its altruistic efforts, Facebook might be the one paving the way for its competitors.

All of the above mentioned do not even take into account the large personal donations made by Zuckerberg to the Bill and Melinda Gates Foundation, making him one of the youngest and most generous philanthropists ever in human history.

Not to mention the fact that involvement in philanthropy and success aren’t necessarily correlated; Steve Jobs and Apple would be a prime example.

Zuckerberg never built Facebook for money. If that was case, he probably would have accepted Yahoo’s $1 billion offer back in 2006. For Zuckerberg, a company is just a good vehicle to get things done.

Microsoft was hated when it achieved big success, and its monopolistic, self-serving behavior and arrogance toward its own customers earned it the dubious nickname, “The Evil Empire.” Facebook users dislike Facebook for many of the same reasons: Microsoft is 39 years old, and in 2013, it earned $83 billion in revenues, $22 billion in profits, and a valuation of $303 billion. To put it simply, I truly wish that Facebook will meet a similar fate.

In conclusion, we can find solace in that our friend Wadhwa has relented a little since September 2013. In his last column about Facebook published on LinkedIn, coinciding with Facebook’s 10-year anniversary, he claims to no longer predict the death of Facebook, but just wonders timidly if we will celebrate 20 years of Facebook and if it will be the big winner in emerging markets:

Regardless of what social media people use and whether we celebrate Facebook’s next 10-year anniversary, it is likely that the majority of the rising billion will use social media. But the winner won’t necessarily be Facebook.

This change in tone is well appreciated.

Thomas Jestin is a co-founder of KRDS, a social media and mobile marketing agency and part of Facebook’s Preferred Marketing Developer program. At the 2013 PMD Innovation Competition, KRDS was the only non-American contestant to have won among the 260 agencies. Jestin is a digital strategist and has been helping brands leverage social media since 2008. He has spoken at many conferences throughout Europe, and he is currently based out of Singapore overseeing KRDS’ expansion in Asia.

Image courtesy of Shutterstock.

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