Facebook: the next Google?

I was in San Francisco for CTIA this week and took advantage of the opportunity to catch up with my Internet friends. It’s incredible how much buzz Facebook is generating.

There is no denying that the site is growing extremely fast. I can attest by the ever growing number of friend requests I get. It’s also the first consumer facing social networking site that I find truly useful. Its news feed is brilliant – at a glance I can see what all my friends are up to and contact them if appropriate.

Even my traditionally contrarian friends are bullish on the site. I pointed out to one of them the rapidly changing nature of the Internet: only 5 of the top 50 sites of August 2001 had increased their market share by August 2007 (see: Internet: we are still at the beginning!). Many completely fell of the map. Not too long ago MySpace was the “new new thing” and now it is poised to be displaced by Facebook in the next 2 years.

As one of my friends said: “What you say was also true for search engines until Google came along. Google was good enough and no one has been able to replace it since. The same thinks looks like it’s true for Facebook. You can’t underestimate the value of the controlling the social graph.”

Many have become true believers – witness Microsoft’s $240 million investment on a $15 billion valuation. There are rumors that Facebook is about to raise another $260 million on the same valuation from private equity investors and/or hedge funds.

I truly love Facebook. I probably spend 30 minutes every day on the site, but the contrarian in me feels that something is amiss about the story. My concerns are on sustainability and potential value.

1. Sustainability:

I have no doubt that social networks are here to stay. Throughout history humans have wanted to communicate with each other, express themselves and socialize. Social networks are just one modern incantation of this age old need.

I also have no doubt that Facebook has plenty of growth ahead of it as it reaches to both older and younger demographics and expands internationally.

I also believe that Facebook is the best social networking site in the market today and that it will overtake MySpace within two years.

What worries me is the fickle nature of Internet audiences today. Even if the site dominated for the next 5-10 years, does the next generation really want to be on the same site their parents are on? Could the very attempt at going mass market threaten the very basis for the site?

I am sure that the site will introduce features that will allow you to segment your “friends” in buckets with smartly predefined options: “Close friends” “Family” “Colleagues” “Random people who friended me on Facebook” etc., but it might still eventually lose its “new new thing” element if the next generation moved on.

2. Value:

Even if Facebook is sustainable, I am having a hard time seeing it having as much potential value as an advertising platform as Google.

On Google, the ads are extremely targeted and valuable. The users are expressing intentions by typing their search queries and the ads are directly related to that query and thus valuable to viewer and advertiser alike.

On Facebook the targeting is based on information users entered in their profile and the ads displayed are not related to the activity of the user and hence mere annoyances to be ignored.

As such, I have a hard time believing that over the long run Facebook’s eCPMs could come close to Google’s eCPMs.

The Economist seems to agree: There’s less to Facebook and other social networks than meets the eye

Non-sequitur: What should Facebook do now?

My instinct is that Facebook thinks it can defeat all the other social networks on its own and therefore does not need to buy them. As a result it will use its war chest to buy complementary products and technologies either to provide a better user experience or better monetization.

I think it should do both. With its cash and inflated price, it could probably buy Hi5, Bebo, Friendster, Tagged and One for $1 billion. They could probably buy StudiVz from the company that acquired it for a few hundred million as well. Those six acquisitions would all but guarantee temporary global domination in the social networking landscape. Facebook might catch up on its own, but it might not and the small dilution required to make the acquisitions would be highly justified given the decrease in risk and increase in scale.

Similarly I recommended Google buy Yandex (Russia) and Baidu (China) when it had the chance. Google thought it could win on its own and now finds itself a distant player in both markets.

Conclusion:

Mark Zuckerberg and Facebook are going to be a case study at HBS no matter what. He is clearly extremely smart and was right to turn down Yahoo’s $1 billion offer when I am sure many were pressuring for a sale.

The question is how will it all end? It will either be the amazing success story of the people who had the foresight to see how big a company they were building and wisely turned down offers for billions of dollars or a cautionary tale of people who over extended themselves.

I don’t know the terms of the Facebook fund raising, but if there is any liquidation preference and if the growth in profitability is not as high as they expect and hence the valuation in a few years much lower than the current $15 billion, such a large raise on such a high valuation might come back to haunt them. If the bidding war meant it’s all common stock you can ignore this comment and I applaud the move 🙂

What do you think?

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  • All interesting stuff. I ask myself the question: what is the next new new thing after social networks?

    In terms of facebook, I think one very important point is not mentioned – the open platform. The ability for developers to create things and influence so many users. I think it’s still too early to see what this will produce. But this does open up doors that were previously unavailable. This can potentially, in my view, transform facebook into an application provider of all sorts and create tons of innovation. With that come new advertising models and monetization.

    And I’m surprised you didn’t mention Facebook to buy LinkedIn. But I’m guessing LinkedIn is valued quite high – with rumors of an IPO.

    BTW, was it me, or did you find a lack of innovation at the CTIA? I didn’t see anything there that wowed me.

    Cheers

  • One of the interesting angles for Facebook to take would be to merge with a Netvibes-type platform. I see FB becoming the new way to communicate, providing a host of different ways to communicate… ultimately replacing hotmail/gmail for example. And if it could aggregate other sites, then it could be the one place/portal you go for everything…

    To Khanan: apparently at the CMA Digital Marketing Conference, Mark Murphy, VP Media Sales of Facebook, made some interesting comments:

    The company is looking to find a work around to allow it to administer the applications, not the person…

    He also said that FB adherents expect FB to remain free because it is surrounded by advertising.

    FB is averaging 350,000 new users every day; it just crossed 50 million.

  • I am a huge fan of facebook but i think their achilles heel may be what i am seeing in Turkey right now. facebok has grown in turkey like no site’s ever grown – it is now the 3rd hightest traffic site in the country. however, it lacks one of its most critical traits that has made it what it is: networks. everyone in turkey is pretty much a member of the same huge “turkey” network. this may have an impact on the trust factor that has distinguished fb from the other SNs.

  • I think Facebook is massively overhyped. I’m sure that I am like many others who only signed because they received an invitation from someone, and then discovered that they needed to become a member to see what the invitation was about. I wonder how many of their new users hang around for very long.

    Having read your post I spent some more time looking at what Facebook has to offer … and are still unimpressed. The interface is not attractive and I found most of the postings in the groups I checked out to be useless. And as for seeing what my friends are doing via the news feed – I don’t really need to know that XXX is now a friend of XXX or how someone is feeling today.

    Give me LinkedIn for business social networking any day, and I’ll stay in touch with my friends through email, phone and catching up.

    Like Microsoft before and Google today, Facebook will have its moment in the sun and then people will move onto the next thing. It may retain a certain audience and make money, but it just won’t be sexy anymore.

  • I’d like to add the tangential thought that google ads can be viewed as annoyances also. I get the impression from some users that most of the clickage has precious little value at best and at worst is out and out fraud. They’ve all shut down their usage of AdWords. My supposition is that google ad rates for AdWords at some point will fall due to this. However it might be tough to separate from the obvious dilution thats likely to occur due to the simple demand function google has created for websites. Really…after all I get what I want as a result of the google searches. Their page rating system does a pretty good job. The relevancy of the AdWords ads are in the vast majority of cases less than the search results. Ergo optimize your search result positioning. Sound familiar?

  • I could not agree more with David. Facebook is over hyped.

    But what “scares” me the most is how “open” is this plateform and how many widgets and api (along with people looking forward to “feed” from facebook data under the name of “HYPE & AJAX fake cooliness…”

    People don’t often realize how much information is fed on Facebook by third parties (there is so much layers of preferences and settings of who can acess what and on Facebook) that it’s a bit tricky for some users to understand the reality of what they think is their “secured privacy”. The next thing you know you are listed on Rapleaf, Zoominfos etc. but there is more to it.

    However I believe that what classmates.com never achieved, Facebook did : finding long lost schools friends.

    I think of Facebook as an Adult Pannini Stickers Book.
    http://www.csmonitor.com/2007/1010/p09s01-coop.htm

  • Fabrice, just getting caught up on my blog reading and noticed you were in SF recently. I’m going to be up there from Nov 9th-Dec 9th. If you’re around we should grab coffee.

    As far as your assessment of Facebook – i noticed you posted this before they announced OpenSocial. How has that announcement altered your take? I agree FB has the best user experience right now for any social network. They could potentially buy one of the OpenSocial participants like Hi5 and essentially get inside recon by proxy to make an informed decision about participation since it sounds like they’re being intentionally left out of the loop on some stuff. My gut is that if the OpenSocial initiative truly delivers we should expect to see the same trajectory that took place with IM clients – there used to be pockets of friends on each but eventually products like Trillian and Adium became the IM interface that allowed you to forget which service you were using and communicate with your friends regardless of which they use. The social networking fabric will become irrelevant at some point and the interesting real estate will be the dashboard that unifies things and gives you one place to manage your digital identity and connections across your blog / sn’s / forums / lists/ etc. more here-> http://www.scrollinondubs.com/2007/11/04/opensocial-facebook-orbitz-swa/

    sean

  • Fabrice
    I think that the whole facebook team (p.thiel, vcs, zuckerberg,etc) have the vision of facebook as a complete website that includes social networking, search engine, classifieds, and many other things. Everything combined.
    Maybe they want to become the Microsoft of the Internet or something similar.
    Social Networking could be only the start of something really big…