“Facebook isn't Google; it's Yahoo or AOL.” That line sums up this excellent and nuanced take on Facebook (FB) by Michael Wolff, and it finally made me understand why I've been uncomfortable with the company's valuation and the widespread belief that it will surpass Google (GOOG) as king of the Internet.
For the most part, investors continue to struggle with differentiating between all these new Internet IPOs. There's too much belief that you either have to ride the social train as the next big thing, or that they're all flash-in-the-pan frauds and the second coming of the dot-com bubble.
Why care about what I think? I'd humbly put my track record on these companies against anyone's. I've been bullish on LinkedIn (LNKD) since it IPOd. I've been very bearish on Groupon (GRPN). I've been one of the few people anywhere who cares about Zillow (Z), let alone been bullish on it. And I've been skeptical on Facebook. As of last week I'm now a fan of Zynga (ZNGA) as it has suffered unfairly from the Facebook IPO stumble. (See How the Botched Facebook IPO Has Created a Short-Term Opportunity in Other Social Names.)
When it comes to the big Internet platforms – Facebook, LinkedIn, Twitter, and Google – you have to understand why they're popular and how they monetize their users.
Google facilitates commerce between sellers looking for a market for their products and buyers searching for goods and services. Yes, it is an ad company, but it is much more like a retailer in that you go there looking for something and Google tells you where to find it. It's like the shelf-stocker at the grocery store who tells you the pickles are on aisle 7.
LinkedIn facilitates the exchange of professional goods and services. Users go there looking to find jobs, hire people, promote themselves, or find professional insight and information. People go to the site with a purpose in mind and are happy to pay LinkedIn to help them solve their professional problems.
Twitter is at the forefront of a brand-new form of Internet monetization that I first learned about through Leigh Drogen. Through selling promoted tweets and promoted followers, producers can buy an audience for whatever they're promoting. Now, some cringe at the thought of that because they envision online casinos and dating sites spamming us in our Twitter feeds. But because Twitter wisely decided that it would only get paid on such promotion if the promotion is acted on – new follow generation or content engagement (clicks, replies, retweets, favorites) – it incentivizes responsible behavior on the part of people who believe their audience will care about what they're promoting.
For instance, as a Minyanville contributor I might be willing to pay Twitter $5 for every 1,000 clicks I get when I promote my articles to my Twitter followers, sort of like how eBay (EBAY) does promoted auctions. As a producer I want to keep the respect of my audience and highlight to them content that I think they'll be interested in, and as consumers of my content, they trust me not to spam them too often with unwanted promoted tweets. If I go too far, they unfollow. This opens up advertising to hundreds of thousands or millions of “brands” who never thought of themselves as potential advertisers before. The potential of this model is really underappreciated by the market.
Facebook doesn't have any of this yet. It's a place people go to post about themselves to their friends and family and see an odd assortment of status messages, links, and pictures from their social network. Facebook really is the AOL or Yahoo of the social era in that we go there for the content and then we get ads we may or may not want shoved in our face. I just logged into Facebook, and the sponsored ads I got were “Huge Savings” from a telecom company, “Want a master's degree?,” “Pretty Waitress!,” and “Do you miss California?” All that was missing was “999 hours of Instagram FREE!”
Facebook could try the promoted content route, but just because you go to my church or went to my school with me doesn't mean I care about your Kardashian fetish. From that standpoint, the “interest graph” of Twitter or the “professional graph” of LinkedIn is superior to the “social graph” of Facebook.
The bottom line is Facebook is still searching for that monetization killer app, and until it finds one, it's possible that it's just AOL in 1994 or Yahoo in 2000, an adolescent business that will hit a wall in a few years as it's disrupted by a better model.
By Conor Sen
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