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Is the Facebook Fad Over?

by Glen Emerson Morris
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With its stock down 38% just weeks after one of the most highly publicized IPOs in history, Facebook investors may be wondering if the company was really that good an investment. It wouldn't hurt for advertisers to wonder that, too. In retrospect there were a couple of issues that should have been considered more, like how many people really use Facebook daily, and how many actually go on to buy products based on ads they see on Facebook.

Facebook has never really been able to answer those questions with a high degree of accuracy. There's no question Facebook has an amazing amount of users, but exactly how useful that is to advertisers is not so clear. Facebook has made millions more on faith than on numbers.

One of the problems in evaluating the long-term use of any new technology is remembering that large numbers of users in the present don't necessarily mean long-term users in the future. Whether something is a fundamentally new and better way to do something or just a fad is not easy to tell. The truth is, most of the time, it's a fad. Cases in point, Friendster, Myspace and most recently Zynga.

A year ago Zynga had a major hit with its social game Farmville. Millions of people played the game daily and shelled out millions to buy additional farm tools (in effect buying tweaks to overcome the inefficiencies Zynga has engineered into the game). Zynga has a marketing department that has become expert in creating in-game addons that people can't resist buying. The problem is that people are getting tired of social games like Farmville. Especially games specifically designed to suck their bank account dry.

To counter the decline in Farmville users Zynga has developed games to replace Farmville, but each successive game has generated fewer users. This particularly bad for Zynga because those are the only type of products the company knows how to develop and market. To make matters worse, unlike many Internet based companies, Zynga owns its own servers so it can't downsize easily.

Internet companies usually rent rather than own their own servers. This allows a company the flexibility to easily downsize as needed, but is also means the company owns fewer assets. Internet wonders also tend to rent rather than won office space for the same reasons.

Comparatively speaking, Facebook is in a much better position than Zynga, but it has a similar vulnerability. Its real asset is its traffic and there's nothing more fickle than the American public. We're a nation of fads. Some just last longer than others. In the 1950's most parents dismissed rock and roll as a passing fad, and firmly believed crew cuts were here to stay.

Facebook faces two major challenges to maintain its value. People have to continue to be willing to freely share large amounts of personal data, and Facebook has to be a leader in its market. Neither one is assured.

Long term it’s unlikely that the general public will continue to be as free with personal data as it is now. In the future, Facebook will likely be seen in the same category as body tattoos and neon colored hair. They look great during youth, but they do not age well at all. Historically speaking, privacy is necessary for personal security as well as for democracy. God only knows what Hitler would have done with the data Facebook or Twitter could have provided him.

Facebook is already facing a certain amount of negative publicity over some companies demanding employees’ Facebook IDs and passwords as a condition of employment. Some states have begun to address this issue, but in most states now there's nothing to keep employers from doing this. If this practice were to become widespread, millions of people would have to reconsider the wisdom of having a Facebook account at all.

It will only take one or two major disasters to convince people that they need 9/11 level security for their personal information. When that happens, Facebook could find their traffic largely gone in just a few days. However, they may not even last long enough to face that problem.

Facebook is facing a very difficult advertising situation. Increasingly its users are logging in from mobile phones, but Facebook's mobile device advertising revenues are growing at a much slower rate. The reason for this revenue disparity is just built into the architecture. A desktop system displaying a Facebook page leaves plenty of room for advertising. The same data displayed on an iPhone leaves little room for any advertising at all. The result is the more Facebook users use mobile devices the less profit Facebook makes. It is possible that if 90% of Facebook's traffic were to always login with mobile devices Facebook wouldn't be able to make enough money to keep the servers turned on.

At least part of Facebook's stock price decline is due to a lack of investor's faith in Facebook's management being unable to present a credible plan to increase revenues from the mobile market. Fortunately, the outlook for the industry long term is better.

Advertisers may face a rocky road until the social network market matures, but once it does, advertisers will probably find it's significantly more cost effective than today's market. In the meantime, advertisers should remember that marketing hype is no substitute for solid numbers. Facebook's valuation of itself was not shared by its investors. A more objective look at Facebook's performance may reveal its ad rates are overvalued as well.

There's no doubt social network marketing will be around for years, but the leaders in the field will come and go. Like in the era of TV before cable, only a few companies dominate the market, but in a few years the market will likely be as fragmented as cable is today. There will be dozens of narrowly focused social networks, based on profession, religion, politics, etc., and they will offer a wide variety of privacy policies.

The many successors to Facebook will succeed because they avoided the biggest mistake Facebook has made, demanding information without any accepting any accountability for what they did with it. Increasingly, Americans are finding their online profile, correct or not, is determining what jobs they can hold, what apartments they can rent, what their insurance rates are, what their interest rates are, and much much more.

Zuckerman and other social network entrepreneurs have done their best to convince the masses that we live in a post-privacy age. Possibly so, but there are many people who disagree. Some even make the case that the Age of Privacy has just begun. Even if privacy isn't a right, shouldn't it be at least offered as a service?

Glen Emerson Morris was a senior QA Consultant for SAP working on a new product to help automate compliance with the Sarbanes-Oxley law, an attempt to make large corporations at least somewhat accountable to stockholders and the law. He has worked as a technology consultant for Yahoo!, Ariba, WebMD, Inktomi, Adobe, Apple and Radius.

Copyright 1994 - 2011 by Glen Emerson Morris All Rights Reserved ' keywords: Internet advertising, Internet marketing, business, advertising, Internet, marketing. For more advertising and marketing help, news, resources and information visit our Home Page.

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