Facebook’s passive-aggressive friendship

May 16, 2012

We are witnessing a fascinating changing-of-the-guard moment in tech. The old Internet, represented this week by once-mighty Yahoo, is fumbling with another leadership crisis it must solve before it can even think about restoring some semblance of relevance. The new Internet, Facebook, is ruled by a young man in a hoodie who is on the verge of creating a massive public company that, as was the nascent Yahoo back in the early ’90s, will be an Internet darling longer on potential than track record, but running hard on an open field.

The common thread might seem to be the “If it’s big, it’s gotta be BIG” illusion that got us all in trouble at the turn of the millennium, when Internet investment hysteria equated today’s eyeballs with tomorrow’s profits. But it’s always about the profits, and the people who promise them. This time that person is Mark Zuckerberg, who as the books on the Facebook IPO closed Tuesday, well in advance of Friday’s first trade, seems to have convinced Wall Street that his seven-year-old company could be worth more than $100 billion — the richest-ever launch in Silicon Valley.

When you value your company at 100 times revenues, investors are banking on the belief that Zuckerberg has perfected the unstable compound that is social abandon and advertiser hunger.

Search remains pretty much the top use of the Web (as opposed to the Internet) – the gateway to everything else. The other big use is now social, which was invented on the Web but whose chops will be tested in the app schoolyard that is the mobile Internet.

But thus far, advertising works better on search than social. Google makes about $40 billion a year, almost 100 percent on ads. Facebook is reporting last year’s revenues at just north of $1 billion $3.7 billion. Google has a market cap of roughly $200 billion – so it’s twice as big as Facebook’s IPO valution and makes 40 times the money more than 10 times the money.

While Facebook is very successful, the question is: at what? It’s great at creating a community of time-wasting freeloaders, but it needs to be good as an advertising medium to be worth anything to the institutions falling all over themselves to get in on the ground floor of its stock.

To compare the new and the old way of tech, let’s just say, for the sake of argument, that there are two kinds of Internet companies – Googles and Facebooks.

Google’s business model is based entirely on search, and its ability – strengthened by a streamlined privacy policy this year – to compile an ever-improving catalog of intentions. By interpreting choices, Google can serve up relatively relevant and non-intrusive ads. It’s easy to ignore what Google is doing and just go about your business.

Facebook’s model is decidedly different. It requires immersion. Facebook wants you to live in a glass house and to always be on display. With that pact comes scale, it has enlisted the support of countless other sites to enable and expedite sharing, first with Facebook Connect and now with passive updates to your social biography through frictionless sharing.

Facebook speaks of the goodness of always sharing with your friends, but it’s really about sharing with people who aren’t your friends, so that marketers can build profiles and buy targeted ads. They’re not bashful about it – it’s in their roadshow video.

In both search and social, revealing yourself is key. But Google’s and Facebook’s approaches to exposure are very different. It’s one thing to live on a stage, the footlights illuminating for a vast audience every move you make, and another to let someone read over your shoulder. Both are invasions of privacy, but they are in different leagues of intrusion.

Facebook wowed with its roadshow, but it has a tough sell that it can make an efficient market in ad sales in a way Google does. Add to this that its members are migrating to mobile in droves and that advertising on smartphones also hardly has a proven track record (even when you control … everything), and you can begin to see some fundamental challenges. (From the Department of Worst Possible Timing, GM said it would stop advertising on Facebook, though it would continue to use product pages to market directly – and for free).

We tolerate ads – we don’t love them. We might like some ads (and Don Draper), but ads are what we wade through to get what we want. Like the sermon at a soup kitchen, or the nag that precedes a night out with the boys, ads are the noise around the signal.

On television, ads get in the way, but they also give us an opportunity to step away (physically or metaphorically). The more intrusive the ad, the more we rebel. Even “perfectly” curated TV ads are a nuisance if not served up properly.

Smartphones and tablets have boundaries, much like TV, that are much different from the Web. It’s a matter of real estate – since there is so little, any intrusion is magnified – and the burden of immersion (too much and we drift away).

There has never been anything like Facebook, and there is no serious competition on the horizon. Apart from people losing interest in the whole social networking thing, it is difficult to imagine a startup becoming a threat. The barrier to entry is enormous. Given the scale of pre-IPO interest, many savvy professionals see Facebook as not only the only game in town but also a once-in-a-lifetime opportunity.

Investors are shrugging off the question of long-term viability: On Wednesday Facebook boosted its IPO by almost 25 percent, increasing the float to about 421 million shares. According to a Tuesday filing Facebook raised the target price range to $34-$38 per share, valuing the company at up to $104 billion.

But Facebook, dependent on oversharing ennui, doesn’t have Google’s advantage. Google gets its advertising hints through the searches you do without much thought. Facebook requires proactivity and a perpetual acceptance by Facebook members that their lives should be an open book. Google’s relationship with you is passive. Facebook’s is passive-aggressive.

Facebook’s problem is in the little things – the updates, the likes, the ads. Investors are making as big a future bet as we’ve seen this side of the dot-com bust. It seems as if it’s built on little more than the kindness of strangers.


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Agree that Facebook is overvalued in terms of its ability to make money. Also agree that Facebook has no serious competition. Unless they seriously fumble, the sheer size of the network ensures the relevance of the network.

The question I have is what will be the effect of becoming a public company on the management? I realize that Zuck will retain a controlling share. Yet the requirements of running a public enterprise may make the decision making process less nimble.

It’s all about the fumble. If Facebook does things to offend users in the name of making enough profit to prevent the stock value from correcting, it could lose its assured dominance of social media. If it allows a competitor (Google + can afford to wait patiently for such an opportunity) to gain market share, it will lose it’s only real advantage. In such a situation it could decline with AOL-like speed.

Posted by BajaArizona | Report as abusive

We agree the thing is overvalued and a pump-and-dump royale, but you’ve got to get the numbers right if you’re going to shout them.

Facebook’s revenues last year were $3.7 billion, not the billion you link to. The billion was for the past quarter. Their last year’s net was $1 billion on the dot, per their S-1.

Posted by WeWereWallSt | Report as abusive

I’m basically blind to internet advertising — I know it exists, and I know that (akin to Free-to-air TV) when I use a free service I become the product, but I just visually tune the ads out.
I have a Facebook account, but have never used it — I just acquired it years ago to ensure that no-one else got one with my name. The number of actual individual persons who hold FB accounts is much lower than the 750-800 billion range that lazy journalists continually repeat.
When I search, I use either Google or Bing so that my personal digital crumbs are not wholly known to one or the other.
There are tens or hundreds of millions of other folks online who are also wary and weary of mega-corporations having undeserved and unwarranted access to the melange of attitudes, behaviours, emotions, ideas, knowledges, and thoughts that constitute a person.

Posted by tangogo68 | Report as abusive

The problem is perhaps that Facebook is a platform for community activity (grass roots, bottom-up collective organisation/ product referrals), but the advertising model is presently oriented toward top-down, product-pushing, predictable, boring “LOOK AT ME!” banner ads targeted according to legalised spyware. PEOPLE DON’T LIKE THIS.

If Facebook could somehow catch onto the potential of their system to more effectively analyse and publicise GENUINE personal product recommendations, this could make for a step-change in their effectiveness here.

Instead, their whole technical ecosystem is currently being polluted by “apps” that generate fake personal product recommendations (like, pretending that my best friend read some dodgy article in The Washington Post). Nobody knows what they can trust on Facebook any more… It’s devaluing their entire product.

Posted by matthewslyman | Report as abusive

I suspect that even the Wall Street analysts realize that the company has very little real value. They are hoping that this isn’t noticed in between the time of the IPO and the time they time they bail out.

Posted by PAndrews | Report as abusive

All said on Google and Facebook takes the world to a ‘new digital have and have not community’. Reminds me of the news I read on the other day about a young boy who ordered on ebay a gaming console but was shocked to find he was delivered a bundle of unaccounted cash. That made me sit straight and ask; if the boy had approached the retailer with a more traditional way of asking for a product and checking it before buying, the catastrophe of a sale would have been averted.

Posted by maGiK | Report as abusive

@WeWereWallSt Correct! Fix coming.

Posted by John C Abell | Report as abusive

@WeWereWallSt: Correct! And fixed.

Posted by John C Abell | Report as abusive

John, no need to post this comment, but you missed the big one, ie, the link to the other Reuters article that says “100 times revenues” (paragraph 3). Changing that to 25 times revs or 100 times earnings works and is still a big #. Thanks for the note in any event!

Posted by WeWereWallSt | Report as abusive

Built on the knindness of strangers…… Love it! But that’s being way to trustworthy for a co. Of this magnitude if you ask me. But hey he got us hooked and somehow we’ve been playing nice, or not this far. but does that say anything about ad rev….. And banking on strangers, when everybody is coddled together sharing tip bits about their day to day? FB has a 99% vision, while Google has a 1% insight…… So the approaches are different, so the set up will be different. zuck never wanted ads and banners in the first place, so why would he worry about it now? He’s basically did his job, and did it very well……. Now the smartest guys and gals in the room at FB should have seen this along time ago. So depending on strangers to build your stockpile of cash for shareholders will be a tuff sell……. 900mil users are under the impression we can share photos and videos with friends and family for free, we buy goods online at Amazon and eBay and searching and getting ideas to buy from google, So what this is saying…… Facebook has to take the time out….. To change the culture of it’s social network

Posted by Freshp | Report as abusive