Tuesday, January 11, 2011

Is There a Facebook Bubble?

I was checking on some tech stocks recently and came across this article saying that Facebook is worth $50 billion in market cap. I just couldn't believe my eyes and started to think that this Facebook might just be a tech bubble slowly (or maybe quickly after Goldman is throwing money at them) inflating. I think I might be short Facebook and here are my reasons.

1. The "Facebook Movie" the Social Network seems to be everywhere. I didn't see it but I will probably check it out if it gets on Netflix. I really liked the main actor Jesse Eisenberg when he was in Zombieland so I figure his performance should be worth putting the movie in my queue. But the movie seems like it was everywhere even following me when I was watching the NFL Playoffs. Also it will probably win a raft of awards so it is probably just the beginning of its over-saturation. I always think the high water mark of a bubble is when they are making movies about the inflating bubble. Maybe a Facebook TV show (if there is such a thing) would be the actual "Shark Jump." I spoke to soon.  There seems to be something in the works at Comedy Central. Usually, when something jumps to "a different media" is when you know that there is a bubble starting.

2. Are people really on Facebook as much as the media will have you believe? I must be a neo-Luddite because I still don't understand how people can be on Facebook so damn much. I mean this article on "tech detox" mentions Facebook 3 times. It even tells you to use Facebook to let people know you are doing the "tech detox" in the first place. Are people really spending hours posting photos and playing Farmville? It says here that people are on Facebook 7 hours a month. I'm pretty sure I have never spent 7 hours all last year on Facebook. I guess I just haven't discovered the magic formula that compels you to be on it for that amount of time.

3. How can you monetize it for the long haul? I can see how Google makes money through advertising search hits. They get people pay to be first in line whenever someone does a search. With billions of searches a day it is worth it to be at the top of that search.  But I really don't know how Facebook makes money. I guess they do it through selling ad space. I just wonder how effective these ads are. Before I read this article I was not even aware that these ads existed. I guess someone is willing to shell out millions a year to reach the people that are supposed to be spending 7 hours a month on it. It  just seems that glorified banner ads accounts for nearly 3/4s of their revenue. I just immediately thought about the tech-bubble when someone is telling me that banner ad growth is actually worth $50 billion in market cap.

4. Does it seem like nothing more than a gaming platform to you? I'm sure there are people obsessively tagging photos of their friends or updating their status every few minutes somewhere out there but it seems that most of the meat of Facebook is just games like Farmville, Mafia Wars, and CityVille. I played some of these games to see what they were all about and I just couldn't get into them. It was fun to build a farm and harvest food or run a "SimCity For Dummies" city but I just grew tired of them pretty fast. I guess I am just too much of a hard-core gamer to really get into waiting a day to harvest some virtual Bell Peppers or for your city to accumulate enough coins to do anything. This idea of having to wait for days to get anything done just calls out for me to move onto something else.

Maybe that wait is the charm because it took you months to get where you are in the game so you a loathe to leave it behind. However, I know of several people that have spent the requisite weeks building huge farms and paid real money for virtual cash just abandon what they built because they moved on to other things. I wonder if the chores of a virtual farm got to be too much for a real life?

The problem I am seeing is that mobile gaming on IPhones and Android might do much of the same thing that Facebook is doing right now. I mean how hard would it be for people to play FarmVille on an IPhone? Does telling all of your friends that you have found a Lost Puppy on your farm really worth logging onto Facebook?

Also some of these games have privacy concerns as well. I'm pretty sure an IPhone game wouldn't transmit my name to advertisers or data firms that track my online activity. The idea of playing Angry Birds and having it send my name to some hacker or ad company that will sell it to spammers would be pretty damaging to Apple. Facebook seems to be surviving the bad press for the most part and I think it might have to do with it being a media darling.

5. These privacy concerns would seem pretty scary to a company that gets most of its revenue from people viewing ads and playing games on its site. There are lots of tips on "guarding your Facebook privacy" out there. Most of Facebook is now segregated into privacy fences so that they can keep the spammers and the hackers out. So if you search for your friend all you will see is their blank white page until you send them a friend request. The issue here is will a new user, who is not a gamer, stick around for very long if all they see are segregated white fences surrounding most of the so-called content?

The scenario I envision is a new user will search for their friends send out a few requests that won't be quickly answered and then give up on Facebook. They will not click through to the ads (or even see them for very long) and not play FarmVille because they only joined to see what everyone was talking about. This person isn't one of the 500 million users that Facebook says that they already have. These people are part of the next 500 million more users that will justify their continued revenue growth going forward. This idea of the white fences might be overblown but I still don't see what it is other than hype that will draw in new users several years from now.

In any case with Goldman inflating the bubble most of these points are moot. We will probably see a much-ballyhooed IPO and the stock will go through the roof. Then the real bean counters and short side analysts will get into the guts of their revenue model and hopefully find out what I am suspecting about Facebook. It seems to be nothing more than banner ads and a gaming platform that sells your vitals to spammers and not some long term sustainable model. Maybe I'm wrong but I just don't see $50 billion in value when it comes to Facebook.

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