| Wednesday July 23rd 2014

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Facebook’s IPO will be the worst investment in tech history


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The social network has its fingers in a majority of websites in one way or another. Businesses promote their Facebook pages on the homepage of their websites. Blogs, bloggers, journalists, and mainstream publications often have several different Facebook widgets littered everywhere on every page. In less than a month, Facebook will have over 700 million users.

It sounds like a safe bet. In reality, it’s guaranteed to be an utter failure in the not-so-long run based upon a combination of history, reality, and mathematics.


The biggest challenge that innovative service sites such as Facebook must address is keeping the technology relevant. MySpace’s bling designs were hot in the beginning but proved to be part of their eventual downfall. Twitter addressed their situation early enough to escape the initial challenges, but their platform is on course to be outdated if they don’t continue to innovate.

Facebook has the unique challenges of bulk and polarization. While they must try to continue to innovate and keep their features up to par with smaller, more nimble and focused competitors, they are also trapped with the very thing that helps to keep them strong – a recognizable platform. Every tweak and turn they make is met with criticism because human nature prefers the familiar. Redesigns and UI changes have tanked social media sites in the past (MySpace, Digg, Propeller, to name a few). On the other hand, the technology is already fairly clunky and outdated.

To win, they must be able to transition their massive userbase to a platform that is better suited for the future. We’re a couple of months into the iPad 2 and there is still no app for it (though one is on its way). Integration with other websites has been their strength and the mass adoption there has been extremely positive, but on the site itself, most still have challenges with finding all of the features.

It’s okay today. We’re tolerant with it the way it is because there are no valid alternatives and everyone else is on it. Without a challenger, they don’t necessarily need to have the best UI. Eventually, they will. Can the make the move in a year or two when they have nearly a billion users? It’s possible, but it’s a factor that is rarely looked at (for some reason) by investors who are focused so heavily on today and the control they have over their users.

Eventually, there will be a glitch in the matrix. It’s inevitable. Some sites can handle it. The bigger you are, however, the harder it is to do right.

As a company, Facebook isn’t making many friends in high places. Sure, Microsoft still loves them, but they’ve been targeting or targeted by several larger and smaller companies, including Google, Apple, Twitter, and LinkedIn. When you have that kind of firepower amassed against you, there will be casualties.

So far, Facebook has been able to stay on top. They have the power of the people, and the people like them. Nobody other than Twitter (to a minor extent) has been able to challenge them at all on their own turf of social networking. If anything, Facebook has been the sleeping giant in the world of search – Google is likely more concerned about them jumping in the mix than anything that Bing is able to do.

The potential for disaster still exists. Despite their tremendous size and influence, they don’t have the deep pockets at this point to go head-to-head with Google. They don’t have the hardware or sheer business-fortitude to make an enemy out of Apple. Twitter is more nimble and has Google on its side. LinkedIn has already had a successful IPO and seems to be the darling of the higher-end social networkers today, which could pose the biggest problem for Facebook in the long term.

Establishing a value for a company is normally pretty simple. You take the yearly revenue and multiply it by anywhere from 3 to 6 depending on other factors such as growth potential, market share, and financial trends.

For Facebook to be worth $100 billion as many believe it will be valued at when the initial offering happens, they would need revenue close to $16 billion a year. Last year, estimates put their revenue at $2 billion. This year, it should double, but unless they are able to pull out some new major revenue generators in the next year, the estimates put their 2012 revenue around $5 billion.

It’s not enough despite the intangibles (userbase, mass adoption, potential revenue channels, etc). Google had revenue over $20 billion a year when they opened at $160 billion. They were a more established company with a deeply-embedded primary product. Facebook is a child in the world of internet businesses.

Even if you stretch the math and put their revenues at double what’s expected this year, they should be valued at most around $50 billion.

We love Facebook. It has been able to do things that no other company has accomplished in its short life. It has united families, helped change governments, raised awareness, and brought people together in a venue that puts everyone on equal ground. It is useful to many, fun for even more, and it has a bright future.

It just doesn’t have a $100 billion future. The IPO will come, possibly in less than a year. It will be successful. Early investors and employees will be rich. Unfortunately, it will not generate the returns that people will expect. It can’t. All of the chips are stacked against it in the background and not enough people will look behind the curtain to see the negatives.

We’ll end with this infographic by our friends at Namesake that takes a look at the road Facebook has traveled to reach this point of potential IPO. Are you going to be an investor?

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