naked capitalism

By Philip Pilkington, a writer and journalist based in Dublin, Ireland

Over the past few days Facebook has once again been getting an awful lot of attention. The Facebook company, of course, loves the attention. After all, Facebook’s business model is almost entirely built upon the amount of attention they can garner for themselves.

But the attention Facebook are now getting seems less positive than usual. Where there was nothing but praise before, mild scepticism now lurks.

The shift in media opinion came at a pivotal moment in the company’s history: its announcement of its plan to launch its Initial Public Offering (IPO). Up until now Facebook has been a private company and the media have been more than happy to sing its praises – after all, those journalists and commentators don’t hold any stock. But when this Wunderkind of New Media technology asks the public to put their money where their collective mouth is what sort of response do they get? Well, let’s take a look at some of the headline quotes.

From Reuters:

At Granite Investment Advisors in New Hampshire, Chief Investment Officer Scott Schermerhorn has already been fielding queries from clients eager to get in on the action.”We had some clients call and once we step them through the numbers, they sober up,” he said. “The valuation is 100 times earnings in a stock market that is trading at 12.”

From Xfinity:

For all the huge numbers in Facebook’s IPO papers, a surprisingly small figure stands out: $4.39, the amount the site generated per user last year. It’s one of the company’s major challenges because the total is paltry compared with competing Internet companies. Google makes more than $30 a year from each registered user. Even struggling Yahoo and AOL make $7 and $10, respectively.

An interested reader can track down some positive comments, but they are few and far between. Indeed, some media outlets have used the ominous words ‘internet bubble’ and raised comparison to certain infamous dot com era blow-ups.

Facebook could well be running out of steam. As The Guardian points out:

But one problem Facebook faces is how to expand that already enormous user base. What started out as a networking site for Harvard students now encompasses almost one in eight people on the planet. Thus the sort of massive exponential growth that has marked Facebook’s astonishing rise is simply not going to be possible for much longer.

Facebook seems to have been generating most of its revenues from expanding its user base as fast as possible. This is why, as the Xfinity article above points out, they can continue to tick over while making only $4.39 per user per annum while companies like Google make upwards of $30 per registered user over the same time period.

Simply put, with its frontiers all but expanded to their limits, if Facebook wants to keep going it must try to dig deeper into its existing user base in search of profit. To do this it will have to become ever more intrusive in its advertising and marketing methods. Yet this will turn people off the platform and diminish its popularity. So, Facebook finds itself caught between a rock and a hard place.

In fact, if anything the media are downplaying this catch 22. I spent a small amount of time working with a company that was actively engaged in the new social media marketing ‘revolution’. I got a strong impression that the industry was about as reputable and innovative as the market for snake oil.

Marketing on Facebook and on any social media is extremely difficult. Marketers know enough to realise that in order to tap this market they must do it through the users themselves – pop-up and banner ads can only go so far. But this brings problems of its own. People who use Facebook will be familiar with friends of theirs making the occasional post where they draw attention to a new website or product. Usually this is done at gunpoint. The user who posts this often only does so because the company they work for has put pressure on them to do so. It only works once and the user’s friends usually ignore the post.

Again, marketers know this. And so they try to devise ways to get users to consensually ‘interact’ with the products or services in question. One trick is to try to form an online community centred around the product. Another is to try to generate ‘interesting’ content centred on the product in the hope that it will go viral.

These manoeuvres occasionally work to an extent, but they generally only work for a certain type of product. Skiing holidays are a good example of a product that these tactics might succeed. If the holiday provider can successfully form a community of skiers who can chat about the product they will likely use the community to get information on all the hottest ski spots – and, in the process, return to the same holiday provider every year as they become ever more familiar with the brand.

But even this raises problems of its own. People can and do log into such communities and start complaining about the product for some reason or another. Many companies actively monitor their Facebook communities to eliminate such negative responses; others try to deal with them by appeasing the customer in front of the public gaze. Both tactics have their drawbacks.

In my experience though, the types of companies that can form effective Facebook communities as a means to build rather than reinforce their brand are the exception and not the rule. If you have the wrong type of product – say, a certain brand of hot drink or an insurance company – and you try to use the above outlined tactics to increase sales, you will almost certainly fail. These types of products generally have to fall back on classical methods of advertising such as running competitions and then hope that these competitions will go viral. Not much innovation there, rather just classic tactics applied to a new medium.

The products that do work to some extent – barring certain unique exceptions such as holiday companies – are often those that already have a brand firmly established. This makes perfect sense, really. Think about why you generally add a friend on Facebook: it’s because you already know them. Ditto for product brands. You’ll generally engage with a product on Facebook because you’re already very familiar with it. This makes it very difficult for advertisers to reach new markets, even when they can generate interest on their Facebook pages and within their communities. Often it is people that already firmly identify with the brand that engage. Unfortunately for advertisers, such is the nature of advertising on an interactive medium rather than one whose participants are passive.

Put frankly, a great deal of the ‘exciting’ new social media marketing buzz is extremely dubious and probably not nearly as important or ‘revolutionary’ as it is puffed up to be. So, even if Facebook do figure out a way to cash in on this side of the industry, it may be worth less than many think.

Moving back to Facebook itself, to say that it is a junk company would be massively unfair. But to say that its upcoming IPO issue aligns with reality would be a blatant lie. Facebook may well turn out to be a fad or it may continue in its popularity and remain a household brand like Google. But it will never be able to overcome the problems we have just described, not unless it integrates some wholly new component that allows it to move far beyond what it currently does.

The Facebook company would be better off finding this new component prior to any public stock issuance, otherwise they’re sure to be met by investors with scepticism. And as the climate remains tepid and they issue more and more stock they may find themselves in the midst of an inflating bubble that will undoubtedly, at some point, burst.