Books written by Ray Sullivan

Saturday, 4 February 2012

Would You Buy Into Facebook?

It's been touted as the stock floatation of the decade, the Facebook IPO.  Eight or so years ago it was Google and although I personally didn't buy any of their stock, I didn't doubt they would do well.

But is Facebook going to repeat Google's success?  Will it be an even bigger Goliath in eight years time?

I think the simple answer is no, although judging by the amount of pundits singing the social media's praises, perhaps it's easier to say the answer is yes.  Because the growth rate of FB has been so meteoric it's easy to assume it will continue, but apart from an inherent personal reaction against ever expanding growth, I'm not convinced FB is worth what the market seems to think right now, is unlikely to ever reach that value in real terms ever and is likely to face massive challenges to its position and model over the next few years.

Watching a news report today on the subject I noted they stated FB makes its money through advertising.  I had to load my FB page up this evening to look at the advertising as I struggled to remember how much there is, and to be fair, it isn't very intrusive especially when you compare it to other web pages.  So advertising is in there, and it has more reach than most media, but when you've got to load a page just to see if there is adverts my guess is that their effectiveness must be limited - not that that has ever stopped an advertiser.  I can't say the adverts I saw looked that relevant, which given the amount of data FB holds on its users looks like an opportunity missed (although, as I reported a few blogs ago, I restrict most of my data, so perhaps I'm forcing FB to fish a bit).

I suspect that most of Facebook's income comes from using the data about you and me to provide companies with data that would be impossible to garner cost effectively any other way.  We all know that our credit card companies know a tremendous amount about our personal spending habits, but powerful though that knowledge is, it is still on an island that is your name and address.  Store card and supermarket loyalty cards gather similar types of information and if your main credit card is with the same supermarket you hold a loyalty card with, say from Tesco, then there's an added dimension to that data.  Add to that the data they may have extracted at the time of application - your marital status, your occupation, your other debts such as a mortgage - and the picture is getting a bit frightening. 

But it falls down over time; you can change your job, move in different social circles, get divorced and remarried, start a family, have your family fly the nest.  It doesn't take a genius to see that I'm describing a number of social groups who may buy similar stuff, but have quite different needs and aspirations - a marketer's toybox.  Or put another way, two individuals could have identical shopping lists but belong to quite different aspirational groups - so when it comes to targeting both persons to try and get them to buy things they don't normally buy it's difficult to know which one to pitch with what.

So that's where Facebook comes in: its users provide a load of information that can be cross referenced to other non FB data, then provide a rolling account of their wants and desires, forming associations with like minded or otherwise related individuals.  Now you're getting a data web that's three dimensional and capable of being drilled a thousand and one ways.

So, why don't I think Facebook is a good buy?  Two reasons.  First, I think there will be a lot of people who will start to get a little edgy about the amount of data being harvested, and not just by FB - if it can be seen, it can be taken.  They will object either to the data being mined full stop or they will object to it being taken without payment - our data may actually be the only valuable thing we have left!  The second reason is that I expect legislation worldwide will make it increasingly difficult to gather data in this way, at least as it currently is.  Consequently in a number of years the Facebook paradigm will be severly challenged, by users and Governments.

But there's a third dimension to this one - unless Facebook branches out into related and unrelated fields, in the way that Google has, then it will inevitably decline, along with its stock price.  Perhaps the IPO is aimed at funding such a break into non social networking activities.  But all empires fall in time and I think the Facebook empire is not only near its peak, but the rating for the IPO is placing it higher than it will ever be.

So, if you feel lucky, then bet your hard earned dollars on Facebook, but my guess is that the winners, apart from Mark Zuckenberg, will be those who buy and sell quickly.  If you Friend the smart ones, you can read about their gains on their walls.


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