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Is Facebook’s Business Model Flawed?

As a busy middle-aged man with three children, I rarely go to Facebook (NASDAQ:FB), although I do have a Facebook account. I largely ignored the recent Facebook IPO fiasco due to my value investor instinct. But last week’s commentary by John Hussman on the flaw of the business model of Facebook got me thinking a little more about it.

John Hussman thinks that Facebook’s business model is flawed. This is what he said (source):

I really don't mean to pick on Facebook. It's a neat company, a neat platform, and I respect Mark Zuckerberg's charitable initiatives. But the example is too instructive to miss, so let's think about it as a business and as a major recipient of investment capital. If you go on Amazon (NASDAQ:AMZN) or Ebya (EBAY), you want to stay in order to buy something. That's a fine business model, and network effects work in your favor because there are a lot of sellers on the other side. If you go on Google (NASDAQ:GOOG), you want to find what you're looking for and then leave, which is a situation where advertising is welcome, and has also worked as a business model (though with a surprising lack of competition given that the business is based largely on a single eigenvector calculation). But consider Facebook. If you go on Facebook, your whole intention is to stay on Facebook for a while, but not to buy something. Here, network effects work against advertising because responding to the ad pulls you away from the network. On that platform, advertising is a nuisance, and if you're forced to tolerate advertising, you'll eventually migrate to a platform without it, so retention will be challenging. And yet, somehow the investment bankers were able to price the company at $100 billion on offering day. Perhaps the IPO proceeds will bring us more games, more photo apps, and more ways our kids can pass their time online, instead of developing some useful knowledge or skill. I'm all for down-time and social networks in moderation, but it's discouraging when this is the stuff that historic IPOs are made of - that this is where massive amounts of savings are allocated on the basis of a "wait and see" business model.

I have no intention of discussing whether Facebook’s advertisement model works. I want to focus on the social impact of Facebook. If you look at the companies that are traded with market value of tens of billions, they usually have a very positive effect on the society. They either save people money, make them live better, or make people more productive. What does Facebook do to people’s life?

1. Yes, Facebook is the largest social network. But does it really make people social? With Facebook people spend much more time “social” online, but ignore the people around them, who are supposed to be the most important people to their lives.

2. It is such a distraction to kids. My teenage son always has his Facebook page open when he is on computer. His chat box keeps popping up messages. He would type quickly type in the chat box while he was doing something else, or keep chatting in multiple chat boxes. As pointed by Mr. Hussman, he could have used this time to read and gain knowledge and skills. What a waste of time!

3. It is such a distraction for adults. Just as it is for kids, Facebook only lowers your productivity. I will not be surprised if businesses block Facebook from their intranet or someone gets fired because of their addict to Facebook.

Facebook is probably the single largest time waster humanity ever invented.

Yes, Facebook does make it easier for me to connect with my college friends who I haven’t seen for 20 years. It is nice that I can see the pictures of his beautiful wife. But I wouldn’t want to know what he is doing right now. I don’t have time for that and I don’t really care. I used to receive so many emails about friends requests and someone’s updates. I disabled all the emails. Why would I want to “friend” someone who I have no idea of, let alone what's going on with them. The only person I would really want to “friend” with is my teenage son. But he doesn’t want to “friend” me.

I cannot live without my computer, thanks to companies like Hewlett-Packard (NYSE:HPQ) and Intel (NASDAQ:INTC), Microsoft (NASDAQ:MSFT). I buy things at Wal-Mart (NYSE:WMT) and Amazon (NASDAQ:AMZN). Without them I will have to probably spend more money. I use mobile phone. Without it my life would be much harder. I use Google (NASDAQ:GOOG) all the time as it makes me much more productive.

I appreciate these companies and I am not surprised that they can grow to multinational, multibillion-dollar business. They have made a tremendous positive impact to people’s lives. I cannot say this to Facebook. Even for my teenage son, he would be more knowledgeable, skillful, healthier and probably more social without Facebook. Just as Hussman, “I'm all for down-time.”

This is not about valuation. Valuation has nothing to do here. This is about business. The impact of a business to society, especially when people are spending so much time there.

By the way, my teenage son never bought anything on Facebook. None of his “friends” did, either. People who have plenty of time to waste on Facebook usually don't have a lot of money to buy the stuff that is advertised there. Unfortunate for Facebook.

Rating: 4.1/5 (15 votes)


Sivaram - 5 years ago    Report SPAM

I really respect John Hussman but I disagree with his thinking on Facebook.

Facebook is kind of like television or radio (in this context; it's actually something else in the grand scheme of things). Both, in some sense, are a complete waste of time; but in another sense was revolutionary and altered human entertainment, communications, advertising, etc. I think both of you would have been against radio and television in the 1930's as well.

Hussman's point that people don't want to get "pulled away" from Facebook (hence advertising won't work well) could just as easily have been said for television. Yet, the television infrastructure (particularly before cable television) was built out using advertising on a platform where the consumers probably wanted to see ZERO minutes of advertising.
MrArbitrage - 5 years ago    Report SPAM

I like the nature of this column, focusing on the social and societel consequences. Ultimately they do have ramifications on our economy.

My points are the same as Hussman but articulated a few weeks prior to his:

The Facebook & US Treasury Bubble

Superguru - 5 years ago    Report SPAM
"Facebook is probably the single largest time waster humanity ever invented." - Value Radar

I would think that award will go to TV.

I agree with Hussman on

"But consider Facebook. If you go on Facebook, your whole intention is to stay on Facebook for a while, but not to buy something. Here, network effects work against advertising because responding to the ad pulls you away from the network. On that platform, advertising is a nuisance, and if you're forced to tolerate advertising, you'll eventually migrate to a platform without it, so retention will be challenging"
Aegeanboat - 5 years ago    Report SPAM
Following the author's thinking, then all video games are wasters of humanity.
Tokyowalker premium member - 5 years ago
Facebook's CTR (Click Through rate) is one of the worst in the business , so Hussman got a point there. Many advertisers are pulling out of Facebook to go back to Adwords.
Csubs - 5 years ago    Report SPAM
Facebook CANNOT be compared to radio or Television but it can be compared to "Yahoo! Chat", "AOL messenger", or any type of chat service with user profile defined. This concept has been in existence a-tleast 8 years before Facebook got started in 2004, another comparison is "MySpace" which again was bought for $800 million and that website went bust when FB came along.

Back to topic, FB is business model is 1000% Flawed considering the nature of history of the business. Also, the concept of advertising as a measure of a.) who is using it b.) how much time is spent looking at Ad c.) what percent (%) of a person 24hrs of time, they are on Facebook page ?

d.) And geographically location ? etc. Bear in mind, FB can hire bunch of Russians, Nigerians to login to Facebook everyday with thousands of profile per user to create a Bullshit metrics for the idiotic wall street investors.

Impact of FB: a.) Total waste of time b.) Loss of productivity c.) Increased Jealousy and Anger d.) Create Diversion in people's lives e.) And many more..

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