Facebook's Fatal Flaw: Mobile Ad Revenue?

As the largest of the social-media companies, Facebook has gone into uncharted waters. Adding to Wall Street’s analytical headache, the company’s strategy at least since its IPO has been to be oriented more to the long term than is customary on Wall Street. Put another way, estimating Facebook’s long-term viability has been notoriously difficult, particularly for Wall Streeters who apply their traditional criteria nonetheless. Looking beyond Wall Street’s lenses, there is indeed reason to regard investments in the company as very risky.

 

                Social connections are notoriously fluid. The networks themselves are so as well. This puts Facebook in a highly uncertain place.       Washington Post.

 

With 2012 fourth-quarter mobile advertising revenue at $306 million instead of the $350 million sought by investors, BMO Capital Markets downgraded Facebook’s stock to “market perform” from “outperform.” To be sure, the $306 million was double the third-quarter figure. “While the trajectory of mobile growth may not be as steep as some investors were hoping, the theme of mobile as the future of Facebook remains intact,” writes Gene Munster of Piper Jaffray in a note to clients. In other words, the news was not so dire for Facebook, even though at the time of the fourth-quarter announcement the company’s stock had lost a quarter of its value since the IPO.

Besides the revenue not meeting expectations, the company’s “empire-building” strategy, such as in buying Instagram to arrest the diverting of traffic, worried analysts. In other words, not enough of the strategy was oriented to maximizing current profit. One can hardly blame Facebook’s management for being oriented to laying a solid foundation, and even for being satisfied with ad revenue increasing but not as steeply as demanded by Wall Street. The quarterly doubling of the mobile ad revenue should perhaps have received more respect from the analysts.

The reaction of the analysts to even the doubling may be the seed to Facebook’s demise, ironically by pushing the management to push ads even more. When I had an account on Facebook, I was stunned to find posts from advertisements being portrayed as my posts rather than as ads on the side. One such post was on a rock star. It occurred to me at the time that people might assume that I was promoting him, when in fact I was turned off by the post. Because the invasiveness undoubtedly came out of a concern to appease advertisers, I felt as though my place as a user or customer had been compromised or disregarded—even invaded.

 That Facebook might be allowing or even enabling advertisers to mislead in terms of who posted the ads strikes me as unethical. The affront to our natural sense of probity could give us a sentiment of disapprobation, which David Hume wrote is tantamount to the moral judgment of unethical conduct. In this negative stew, and given the role of opinion leaders and fads among the young users, Facebook would be vulnerable to the next fad in social media. Put another way, in attempting to live up to Wall Street’s expectations, Facebook’s managers may permit advertisers even greater misleading subterfuges at the expense of the users. While it could be argued that using Facebook is free so advertisements should be accepted, it is the misleading aspect that cannot be justified even by free use.

In short, Facebook could be expected to lean even more in the direction of its advertisers and this could come at the expense of users. If so, the company will be vulnerable to the next social media hit. This scenario, rather than whether mobile advertising revenue is increasing enough, is what I suspect will undo Facebook. The company could do worse than to diversity into related businesses, similar to Starbuck’s strategy of going into packaged foods in grocery stores. For the record, I discontinued my account on Facebook and haven’t looked back. That Facebook blocked my account for a month after I sent one of my essays to colleagues whom I know outside of Facebook did nothing to relieve my concerns concerning the distrustful mentality behind the misleading “wall” ad-posts. The thing to watch is whether the youth start to leave too, for unlike scholars they tend to fly in flocks. Ultimately, it is the length the company’s management may go to appease Wall Street by appeasing advertisers added to the salience of fads in social media (and the youth) that make investing in Facebook very risky. What goes up must come down. A face rise under uncertain circumstances may portend a swift fall.

Source:

“Facebook Ads Are Failing to Impress,” Reuters, January 31, 2013.