Facebook against Itself

So Mark Zuckenberg is Time’s 2010 Person of the Year and Goldman Sachs in valuing Facebook at $50bn. While we believe the former is well-deserved, we are not so sure about the latter. This is because although we praise Zuckenberg for creating Facebook, we are uncertain about the company’s future.

By many measures, Facebook is one of the most successful internet ventures. While the idea is not particularly ground-breaking, Facebook has been one of the most important disruptive forces on the internet in the last few years.

Facebook has been able to become one of the largest network – we still believe that all email users make for the largest one – of interconnected people. It has created an environment where people are able to interact with friends and share their social experiences, travel photos, tastes and preferences. The large amount of people connected and share of time spent by users in the website has attracted the interest of companies taking advantage of this vast potential audience. For this reason, valuations of the company have sky-rocketed and even at the Goldman’s $50bn valuation, investors are eager to own their stocks.

However, Facebook’s business model faces at least two important challenges. The first is derived from the very own proprietary environment that it creates. In the end, Facebook is a gated environment for which it decides who and how to enter. In some respects, this is not very different from the initial online services - mainly AOL’s - that were at the core of the beginning of the internet.

As history shows, these online gated services quickly became too limited.  Gatekeepers seemed unable to cope with the development of internet sites, services and the willingness of users to freely compare and choose without the intervention of a network manager.

The second challenge is technology-related. For much of its user-friendly interface and different built-in applications, Facebook is so far not based on revolutionary technology, something at the core of Google’s and Apple’s successes. Google offers the best internet search-engine product; Facebook offers one of the largest networks of users in a nice website with good functionality.

This means Facebook is exposed to competition from alternative websites. For this reason, Facebook needs to ensure that locks-in users and encourages companies to develop Facebook applications. Facebook’s main protection against competitors is enlarging the size of the network it has been able to create.

Current investors are betting on the sustainability of the low-technology closed online environment business model. As described above, this model is based on the creation of a vast network on which companies and application providers sell their products and services in which Facebook acts as the network manager.

The question is how the existence of a network administrator impacts the credibility and long-term sustainability of Facebook. Would a user seek products or services on a Facebook rather than on the open, larger, content-richer and less-biased internet?

Moreover, how Facebook will handle its exceptional monopolistic position against the very same companies that it needs to generate the revenue – not to speak about regulators?

We believe it is reasonable to envision a future in which Facebook may not be able to manage the tension with content providers and therefore, to stay alive, it may be required to drop charges for content providers, killing its main revenue source.

Under this scenario, Facebook may end up resembling an internet platform rather than a business or, to put it somewhat differently, it might look very similar to the email service.

Email has arguably been the most disruptive technology to be developed in recent decades. However, although an exceptional platform for human communications, it has not proved to be a money-making machine.

While an email-like service would be something bad for Facebook investors, it would be something good for internet users, as Facebook would have become the a sort of open – or quasi-open – standard for social interaction.  

No matter how the story ends, Facebook has created something very valuable. While it is to be seen whether the revenue expectations of the company become true in the near and long-term, no one can claim that it is not here to stay. Marck Zuckenberg deserves all the credit for this.