Facebook needs a new CEO

July 26, 2012

Facebook has now gone through its first trial by fire as a public company, slightly exceeding revenue expectations (with $1.18 billion) but showing a big loss in its first reported quarter ($157 million). Facebook shares were pummeled in after-hours trading; the company’s market cap has been slashed in half in just 10 weeks.

This is a bad, bad situation for Facebook’s early shareholders, 97% of whom are individual, retail investors – unlike those at the other big tech titans, which are majority-held by institutions: Google (68%) and Apple (67%). That Facebook’s percentage is so high suggests that Facebook is a stock for the masses. The masses need a hero.

That hero is not Mark Zuckerberg. He needs to get out of the way – not because we can judge him a disaster based on a single’s earnings period, but because he isn’t playing to his strength. He’s letting down the average folks who saw something shiny and new, but are now seeing shades of overhyped tech redux.

Facebook needs its spiritual leader and chief innovator in a hoodie. But it doesn’t need him as CEO, placating investors in a collared shirt. There are plenty of people who could manage the Facebook business. But there’s only one Mark, who needs to focus on product strategy, not investor relations.

I’ve made no secret that I’m wary of Facebook’s prospects, that I don’t think it can become as successful as a business as it has been as a social network. Zuckerberg himself confessed the obvious only days ago: Mobile is the challenge, especially when it comes to making money. And it’s a big one as members increasingly use Facebook on smartphones and tablets instead of a traditional computer.

But the meta-problem for Facebook is how we think of the company. Now we think of it first as a company – not a service. Felix Salmon summed up the dilemma in a post headlined: “Why going public sucks …”

Zuckerberg — or any other CEO — has very little control over his company’s share price, but once a company is public, that’s all the public really cares about … Facebook could change the world – Facebook has already changed the world, and did so as a private company – but at this point people don’t care about that anymore. All they care about is the first derivative of the share price. And maybe the second.

The challenge, thus, is for Facebook to satisfy the Street as best it can under intense scrutiny, while continuing to innovate so that it extends its reputation as a game-changer (whether or not you like what it does and how it does it). Some people can keep these two plates spinning, but that’s a rare combination. You do need an innovative spirit in the corner office, but more important, you need incredible business savvy, swagger and salesmanship.

One quarter – the first, mind you – does not a verdict make. But Zuckerberg might consider this: If he isn’t the CEO and chief executive, he can concentrate on what he does really well, still strongly influence strategy, and silence critics who quite reasonably suggest that he doesn’t – can’t – have what it takes to run a company that went from 0 to 60 – billion dollars, that is – in seven years. Zuckerberg is at least partly responsible for the pipe dream that Facebook was worth $100 billion when it went public. He either strongly believed this, or was convinced or cowed by the underwriters. Neither speaks well of his CEO stripes.

I don’t think the Street would see a change in Zuckerberg’s status as a knee-jerk negative; founders go sideways all the time, for a variety of reasons, none necessarily associated with failure.

Bill Gates, to whom Zuckerberg has been favorably compared, stepped aside after a long run as Microsoft CEO to take the title of chief research and strategy officer (all right, Steve Ballmer may not be my best argument).

Dick Costollo succeeded Evan Williams as Twitter’s CEO. Williams now focuses then went to work on product direction. (Correction: This post originally implied Evan Williams was still working on product direction. He is no longer with the company.)

Google’s Larry Page stepped aside for a while to let Eric Schmidt take the lead. He’s back in the corner office now, of course, but his biggest fiscal problem is how to make money on more than advertising alone (a problem Zuckerberg would kill for).

Even a case can be made for Apple: Jobs was fired, true, but his 11 years in exile arguably burnished him to return as perhaps one of the best CEOs in history, turning a floundering firm into the world’s largest public company.

Heck, even Craig Newmark’s realization that he wasn’t CEO material is informative. He demoted himself to customer support – and doesn’t even run that department – but is chairman of the board of Craigslist.

Zuckerberg is Facebook’s controlling shareholder and the chairman of the board, so nothing significant can be done without his acquiescence anyway. He’s a mere 28 – lots of time to invent and reinvent.

Get out of the line of fire and retreat to the lab. It’s the perfect time to get wired in again.

PHOTO: Facebook Chief Executive Officer Mark Zuckerberg attends the Allen & Co Media Conference in Sun Valley, Idaho, July 12, 2012. REUTERS/Jim Urquhart

23 comments

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Facebook, LinkedIn, MySpace, MyFace & MyArse are all social addictions as bad as nicotine & cocaine.
So Mark, get your arse more creative in enlisting many more future addicts so your stockholders profit expectations could materialize.

Posted by GMavros | Report as abusive

Zuckerbergs problem is there is no one to copy.

Posted by williambanazi7 | Report as abusive

No one, and nothing can save facebook, simply because there’s nothing to save in the biggest bubble the world has ever seen.

Posted by reality-again | Report as abusive

What a horrible argument. FB needs a new CEO because FB had a dismal quarter?
Well, FB is a growing company. Growth is expensive. Growth eats up cash flow. What did investors expect?
If shareholders are upset, then they are not sophisticated to understand what they are doing.

Posted by capitalistic | Report as abusive

In what measure is this clown comparable to Bill Gates – other than a lot of fools gave him more money than his company is worth. Bill Gates, Steve Jobs made their companies great because of brilliance. Zuckerturd made his company from investors thinking it will be another Microsoft or Apple. Not going to happen and hopefully the investors lose every overpaid dime.

Posted by mutt3003 | Report as abusive

What today’s Q2 earnings report from Facebook confirms is that Facebook as a company has material risks that are not reflected in the valuation being asked for.

Per valuation analysis from IPO research site PrivCo.com on May 15 pre-Facebook’s IPO, Facebook is highly overvalued at any price above $25/share:
http://www.privco.com/financial-projecti ons-valuation-analysis-share-price-fair- value-facebook-inc

PrivCo places fair equity value for Facebook at just $24.60/share, a level hit now – and even breached below – in after-hours trading.

PrivCo valuation methodology and Facebook financial forecasts (slideshow):
http://www.privco.com/research/facebook- valuation-may-2012
http://www.privco.com/private-company/fa cebook-inc (PrivCo Private Company Financial Report: Facebook, Inc.: May 17, 2012)

While early private investors in Facebook made out well, the risk-reward on Facebook probably isn’t there for new investors entering above that point.

And quick PrivCo math: mobile advertising comprised only 4.5% of total Facebook ad revenue in the quarter, despite making up now 57% of Facebook’s usage in the quarter.

Posted by ExWallStreeter | Report as abusive

I hope the FTC/SEC blocks Facebook from buying one of its strongest competitors — Instagram. Instagram is a photo based social network that now has 80,000,000 users. its one of the strongest competitors facebook has seen to date. Facebook has network effects. Without network effects Mark and Co. would have had strong competition a long time ago. Instagram is one of the few companies that found a hole in Facebook’s armour through its early jump on mobile platforms. It would be a shame to simply watch Facebook buy away the competition. Do the right thing FTC/SEC and block the buyout. Make Facebook compete.

Posted by billrichards | Report as abusive

May be a bit premature to make this call. Focusing on generating revenue should be the first step and skillful acquisition.

GLIIF, LLC is a Hot Silicon Valley Startup designed to disrupt QR Code usage in advertising. This is a emerging industry and GLIIF is poised to capture a large market share in a very short period of time. GLIIF’s initial offering includes a brand-able and blend-able custom encrypted image at a low cost of entry, pre re-direction marketing services and full analytics.

Posted by SVSTARTUP | Report as abusive

I believe that new faces is always important within a business but honestly cannot uphold loss responsibility to the chief executive for running a complete successful business requires teamwork.

Posted by redztk | Report as abusive

John is spot on here. Does anyone remember the name of the former CTO at Facebook, who left a few weeks ago? Does anyone care?

I can see no one at the helm of Facebook, no vision, no direction

Posted by mayo0615 | Report as abusive

“This is a bad, bad situation for Facebook’s early shareholders, 97% of whom are individual, retail investors”

Sure, but most of them are very rich, and they knew about the risks, so we shouldn’t cry for them. I was close to buying, but didn’t, speculating that it would fall.

There are other reasons for switching out Mark:

Facebook needs a CEO that only focuses on the business side.

Mark can then take an R&D role and that way get more time for the things he’s good at.

Also, it’s very important for Facebook to not become controlled by stock prices, but by new business and related revenue and margin. That requires very experienced management that is cold as ice to external pressure.

Posted by papasmurph | Report as abusive

Sheryl Sandberg is more than capable for the job, she has the business know-how and experience from her days at Google. Mark should step aside, but not completely, for a few years…they could trade role, he becomes COO (or chairman to avoid what happened to Steve Jobs) and she CEO.

Posted by jmswncomanzi | Report as abusive

Maybe he need people who can really advise him what to do in the next moves he is doing.

Posted by Gusbok | Report as abusive

Facebook needed a better IPO

Posted by REMant | Report as abusive

Dear Mr.Abell

I would like to suggest that if your article would have commented on the reasons and expenses details that caused for Facebook to report their disappointing margins, the reader would be in the position to arrive to a conclusion as to the ability of Mr. Zuckerberg to lead the company.

To assert that Mr. Zuckerberg like Mr. Gates are most effective in the vision/strategy as if his and other examples should apply broadly to every other person who is attempting to do both, I find it extreme.

Bottom line, I would imagine this company incurred in tremendous expenses in the effort to become a public traded company, are those expenses recognized as a one time only expenses and what % of those expenses contributed to the losses in the first quarter.

By such scandalous headline you provoked a reaction of at least one reader. Furthermore, to suggest that CEO’s are just lining up in Silicon Valley to take a giant like Facebook to the right orbit is naive at best. Did you write anything about Yahoo and their success on bringing their “HERO”?

Hope that Mr. Zuckerberg, retain the passion and focus that has created this incredible company ……….. he is what? less than 30 years old? he has accomplished in his short existence significant more than critics are so quick to give unrequested advice. If you have Facebook stock and you are not happy, sell your stock and roll your dice with your favorite “hero”

Posted by PlayaGG | Report as abusive

Dear Mr.Abell

I would like to suggest that if your article would have commented on the reasons and expenses details that caused for Facebook to report their disappointing margins, the reader would be in the position to arrive to a conclusion as to the ability of Mr. Zuckerberg to lead the company.

To assert that Mr. Zuckerberg like Mr. Gates are most effective in the vision/strategy as if his and other examples should apply broadly to every other person who is attempting to do both, I find it extreme.

Bottom line, I would imagine this company incurred in tremendous expenses in the effort to become a public traded company, are those expenses recognized as a one time only expenses and what % of those expenses contributed to the losses in the first quarter.

By such scandalous headline you provoked a reaction of at least one reader. Furthermore, to suggest that CEO’s are just lining up in Silicon Valley to take a giant like Facebook to the right orbit is naive at best. Did you write anything about Yahoo and their success on bringing their “HERO”?

Hope that Mr. Zuckerberg, retain the passion and focus that has created this incredible company ……….. he is what? less than 30 years old? he has accomplished in his short existence significant more than critics are so quick to give unrequested advice. If you have Facebook stock and you are not happy, sell your stock and roll your dice with your favorite “hero”

Posted by PlayaGG | Report as abusive

Scott McNealy,Would be my choice here is why: “Biography-
Sun Microsystems, along with companies such as Apple Inc., Silicon Graphics, 3Com, and Oracle Corporation, was part of a wave of successful startup companies in California’s Silicon Valley during the early and mid-1980s. In 1982, McNealy, who was then manufacturing director at Onyx Systems,[2][3] a vendor of microprocessor-based Unix systems, was approached by fellow Stanford alumnus Khosla to help provide the necessary organizational and business leadership for the fledgling company. The name “Sun” was derived from Bechtolsheim’s original SUN (Stanford University Network) computer project, the SUN workstation.[3]
In 1984, McNealy took over the CEO role from Khosla, who would ultimately leave the company in 1985. On April 24, 2006, McNealy stepped down as CEO after serving in that position for 22 years, and turned the job over to Jonathan Schwartz. McNealy is one of the few CEOs of a major corporation to have had a tenure of over twenty years.Unlike most people who become involved in high technology industries, Scott McNealy did not come from the world of amateur programmers, hackers, and computer scientists. Instead, his background was in business, having earned a Bachelor of Arts in Economics from Harvard and an MBA from the Stanford Graduate School of Business. Prior to college, he graduated from Cranbrook School in Bloomfield Hills, Michigan, where his father was in the automotive industry; most of his work experience prior to joining Sun was in automotive manufacturing” http://en.wikipedia.org/wiki/Scott_McNea ly

Posted by TheSpecialist | Report as abusive

Zuckerberg almost certainly has to be in over his head. The $1B Instagram acquisition is a sure sign of it. $1B for a photo filter with a dozen employees? Completely absurd and he usurped the FB board to do it when he should have spent $50-$75M maybe, even in today’s overheated market. It doesn’t matter how smart he is; in fact, his intelligence might be his biggest impediment as managing a large company is a significant skillset that typically has to be cultivated over several years and usually decades. Another familiar Harvard super-genius drop-out – Bill Gates – had at least 15 years until Microsoft got really, really big and there was such a monumental management task before him. Even then Microsoft’s product lines and reach were not that big and diverse. While DOS was big it was Windows 3.1 that really represented its major taking off point. It still took years before billions of Windows and Office licenses were out there. By then Bill had been CEO for well over a decade and was comfortable and had a lot of skill in that position already.

Zuckerberg was thrown into the deep end of the pool almost from the beginning. He would be smartest to step into a CTO-type role and let the adults run the store for the next 5-10 years. He may feel like he has something to prove but no one would slight him for stepping down. Sandberg seems like the logical choice but there are probably several Valley veterans that could slide into that role.

Posted by boethius70 | Report as abusive

well, the good this is ..just because investors are actual users, facebook will never go bankrupt :)

Posted by editorsynergy | Report as abusive

Facebook needs its spiritual leader and chief innovator in a hoodie.
But: Who needs Facebook?

Posted by guentmorgartner | Report as abusive

I can not aggree any more. as he is 28 he has plenty of time to get on the business side. what facebook needs is the wall street fat cats to see the money rolling in. and at the moment Zuckerberg is not the right person for this. several years back in the kitchen andthen back to the top spot will help facebook be a winning company again.

Posted by AceofAnkara | Report as abusive

The FB business model relies on the sales of statistics of its’ hundreds of millions of users.

This model won’t last in the long term. It is complete insanity to invest in FB.

FB is a “no buy” for my clients!

I quote, from the Oprah show, when Zuck was asked how do you make your money he said,”We can’t tell you”

but us in the know, Zuck sells the statistics of FB users to secret advertisers who pay the millions.

Posted by hottung | Report as abusive

Will Motley Fool ever stop pimping for Facebook? FB is a loser because of…get this…the IPO was fundamentally unsound. Facebook could be a minimally profitable business but it will not be because any profit it could have generated it has already distributed. Subtract the value of the shares given away from revenue Facebook can expect to earn and you have a business running in the red for the foreseeable future. Changin players will only make matters worse as FB will have to bribe someone to trade their reputation for stock and options that continue to slide downwards. The water has already been poisoned for anyone greedy enough to come in and try to turn things around.

http://www.surveytool.com/facebook-socia l-media-surveys/

Posted by JackPeteson | Report as abusive