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Six Reasons Why the Facebook IPO is the Beginning of the End

February 13, 2012 Leave a comment Go to comments

Facebook's IPO Will Monetize the Goose That Laid the Golden Egg

By now everyone with access to the Internet (and even a lot of people who don’t) are aware that Facebook filed for an Initial Public Offering.

If every other social networking platform in the history of the web is a guide, this signals the beginning of the end for Facebook.  Private corporations are freer from the pressure to drum up wads of cash in the short term than publicly-traded companies.  They are also more resilient in the face of economic challenges than private companies because they can absorb a period of shrinking profits instead of scrambling to implement drastic measure (like mass layoffs) to quickly cook the books for a pennywise short term jump in profits.

Here’s why Facebook will suffer from the rush to monetize the gigantic community of users it has amassed:

1. Muted Voices of the Creators and a Lack of Responsiveness

For all of the negativity directed at Mark Zuckerberg and his team, they’ve done a spectacular job at resisting a headlong rush into cashing in on Facebook for years.  I can think of few other enterprises that have resisted the pressure of investors to capitalize on every single asset for so long.  They’ve also sheltered and nurtured a mission and vision that has been highly user-focused (which is also what is responsible for their popularity).

Over the years, Facebook has made a variety of gaffes that have upset users to the point of open rebellion using the social network’s own resources against it.  From Beacon to the newsfeed, they’ve been accountable to the users and have rolled back or reversed some of their decisions.  It will now be much more difficult to resist the pressure from users to undo unpopular changes because there’s a lot of money riding on upcoming decisions that is in the hands of people who could care less about the user experience.

2. Decline in Community Management / Customer Service

Every single social networking platform I’ve ever been a part of succeeds primarily because of the careful attention paid to the needs of users.  When a company goes public and the focus shifts to making From blocking spammers to silencing trolls, there is no algorithm (yet) that can fill the task of a human being in weighing complex amounts of data and reaching a judicious decision.

As soon as Facebook’s ad revenues start to dip, there’s going to be a call to pull a lever and lay off as many employees as possible to cut costs.  These inevitable staffing cuts will also affect innovation at the company (something any large organization is challenged with already).  Even as a private corporation, Facebook was unable to resist the pressure to open itself to the general public (much to the disdain of the elite group of college-educated or corporate-sponsored who used to be its sole inhabitants).  Nor was it able to resist the pressure to open its vast trove of data to the prying bots of search engines like Google.

The rush to cash in on Facebook’s users may also come at the cost of democracy – will Facebook be able to resist the fiscal pressure to give “more democracy” to those who can pay for it?  Right now, ordinary citizens and small business exert equal power over the platform as any multinational conglomerate.  That may not be the way in the future.  What I mean is, we all have an equal voice: if I want to criticize a company for poor customer service I can do so within view of my friends and connections.  What do you think it would be worth to an Apple, Coca-Cola or McDonald’s to be able to pay for the ability to globally mute (or at least reduce the EdgeRank score of) all negative references on Facebook?  (Consider: most people likely wouldn’t even notice this happening).

3. The Evisceration of Privacy

If you were worried about Facebook’s standards for privacy before, you can basically now assume every marketer, government agency, and data miner has access to everything you’ve ever done on the platform (and many things you do away from Facebook, as the Electronic Frontier Foundation has documented).  With or without cookies, with or without agreeing to the terms of Facebook’s apps, your activity is being cached and it’s only a matter of time before the pressure to monetize that data crushes any internal opposition.

You don’t need a tinfoil hat to be worried about the prospect of monetizing Facebook’s data; consider if you’re an activist in a foreign country operating under a pseudonym – how long do you think a publicly-traded Facebook will be able to resist dumptruck loads of money to hand over that information to cough up the data that readily identifies who you are and where you’re accessing the Internet from?

For a long time, the strikingly-relevant ads we see on Facebook have been a minor annoyance.  That will change as more advertisers shift from traditional media to social media.  How long before people get creeped out by drug manufacturers pitching them on the pills they’re taking?  How long before pitches tailored at parents that reference their children by name start to raise hackles?  How about insurance claims investigators buying access to social streams of policyholders to sniff out potential fraud (or worse, deny coverage for mentions of telltale serious illnesses).  All of this isn’t just possible – it’s inevitable.

Facebook is already large enough that it has been able to withstand the strident outcry about its privacy measures, which means that the only entity that will be able to hold it accountable to the demands of citizens is the US government.  They know this, which is why they dropped more than a million dollars on lobbying last year – likely a first step toward buying themselves legislative immunity as so many Wall Street banks have done.

4. Woe Unto the UI

When Facebook first went live, its appeal over MySpace was two-fold.  First, it had a much cleaner and more attractive User Interface (UI) than MySpace (which somehow manages to continue the uglification process long after it’s bled tens of millions of users).  Second, it was a gated community only for the college-educated.

As we’ve seen, the UI has increasingly been cluttered up with ads, pitches for apps and other commercial products, and other components the average user isn’t interested in.  As with all other forms of advertising, we roaches (ie consumers) eventually become resistant to whatever roach spray (ie advertising) we’re presented with – so there’s a perpetual arms race for more obtrusive measures of capturing our eyeballs (check out these fascinating heat maps of what the average user looks at on a Facebook profile, courtesy of Mashable).

5. Wolves at the Gate

There are no shortage of competitors to Facebook, with more being coded every hour of every day around the world.  Google+ appears to be the heir apparent and continues to grow in size (it now has 90 million users) despite the hilariously-frequent doomsaying about the platform.

As I’ve written before, this is much more of a problem to a digital service provider like Facebook because it can’t use the traditional measures to bind customers to its product (the way cell phone companies lock people in to 2-year contracts with discounted phones).  If I want out of a social network, it’s easy to leave – there are automated applications online (like Backupify) that will even do the job for me (and the more people who want to leave, the easier it will get).

6. The Bubble Will Burst

Right now there’s an irrational frenzy of interest in buying Facebook stock – just like the frothing demand for dot coms in the late 90s.  Market analysts like the Wall Street Journal’s Steven Russolillo are crunching the numbers and they’re sobering (“Facebook IPO: Should you Invest in it?”).  As he notes, even a more banal IPO like Linkedin built up unrealistic expectations and hasn’t yet returned to the $122.70 it commanded on its opening day.

Those unrealistic expectations will magnify the damage done to Facebook’s quality of service as investors press the company to adopt unwise strategies to boost short-term profits at the expense of long-term viability.

Epilogue

When I talk about “the end” for Facebook, I don’t mean that the company will fold.  Even MySpace is still a viable platform for human expression despite being bought for $580 million by News Corp and sold off six years later at the fire sale price of $35 million.

What I do mean is that the golden age at Facebook is over.  Perhaps it’s even been over for a while – for the past couple of years I’ve seen telltale signs of malaise from early adopters about the platform.  I think I’ll head over to Google+ and see what they think about this post…

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  1. IdRatherNotSay
    February 13, 2012 at 7:39 pm

    While the rein of FaceBook may be coming to a close with the IPO and their creepy tailored ads (which are the reason for my absence from the site), the real question is “how” will people move on? FaceBook, as the main social media platform, has brought in users who would not normally interact on the internet (for example, my elderly grandparents) thus trapping those of us users who wish to leave. I guess that part of being an adult is knowing when to move on, but I can’t explain to my meezly 200 “friends” that FB is not for me anymore and expect to stay connected to them all somewhere else. Besides, just my luck the moment I deactivate (with the hope of deleting) my account someone will want to meet for coffee to offer me that CFO job I’ve been waiting for. Maybe that’s it, the fear of missing “something” the moment you disconnect… Then again, I don’t think I’ve used my FB account for about 4 months now and I am not the least bit curious what’s been going on; I am however still hesitant to delete my account if for no other reason then to be able to look at what other users post. Maybe that’s the future use of FaceBook…

    Like

    • February 14, 2012 at 3:10 pm

      An interesting point; another of my friends just announced he was leaving Facebook for Twitter for some of the same reasons. I think the crowd of people that Facebook brought in (who were non-techies) are probably the most susceptible to concerns about privacy so it will be interesting to see how any upcoming changes affect them.

      Like

  2. Darren
    February 13, 2012 at 7:46 pm

    Another big risk factor is that the core technology that drives Facebook is not Zuckerberg’s. It has been already proven in court that the engine that drives Facebook belongs to another company, Leader Technologies Inc., Facebook v. Leader, Case No.2011-1366 (Fed. Cir.). Facebook has kept that fact from the SEC by not disclosing the one and only lawsuit that has gone to the Federal Circuit Court of Appeal. They dedicate a paragraph in their S-1 filing to the Ceglia v. Facebook which is only in discovery and just gloss over the Lawsuit that is about the core technology of Facebook. Zuckerberg seems to be wanting his future investors to be on the hook if the appeal goes against Facebook. Why aren’t the news media asking questions about this?
    You can read more about the case here, http://www.donnaklinenow.com

    Like

    • February 14, 2012 at 3:15 pm

      Whoa – that’s pretty amazing – thanks for the insight. I wasn’t following the Leader Technologies case very closely but you’re totally right – it’s on appeal now; the battle isn’t over. Perhaps they’re figuring with a massive injection of cash they’ll be able to buy their way out of trouble (by acquiring Leader Technologies, lobbying, or a settlement).

      Like

  3. rowdy
    February 21, 2012 at 7:18 pm

    I left because FB posts are typically childish and self centered. I felt I honestly had better ways to spend my time online. It was tough to walk away from the connections I’d made there, but now I realize they were either tenuous or only on FB.

    And why should FB make money off me when I get no money from them?

    Like

  1. June 29, 2012 at 11:04 am
  2. August 1, 2012 at 11:02 am

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