Random Thoughts on Facebook Post-IPO - Too Easy to Call?

Over the last few weeks there has been enough debate over the issues surrounding the Facebook IPO that it could give the masses a migraine, but for some reason I am compelled to continue posting on comments sections.  Here are my two best posts below; one on WSJ via commentary on Mark Cuban's blog and the other through SeekingAlpha - I hope this is as therapeutic to you in reading this as it is for me to get these thoughts dumped out of my brain!

Basically my summary thoughts on Facebook are thus... :)

1. The IPO dip on open was due to a massive oversupply of shares and the NASDAQ technical glitch only worsened confidence - what was considered oversubscribed turned very quickly to oversupplied
2. Facebook can't monetize mobile... yet
3. Facebook will most likely hit lumpy growth due to reliance on advertising revenues... don't think investors will have patience with this
4. Facebook's P/E (including other recent social IPOs) is WAY to speculative, they held private investors hostage to now face public investors that aren't buying that there are enough bullets in the gun... at this value
5. Facebook WILL NOT BE MYSPACE... it is not going any where, but it will ultimately sit at a comfy $50-100B Mkt Cap over the next 5-20 years (unless there is a massive shift in professional content to Facebook or Facebook somehow makes new software that revolutionizes an existing market and decides to CHARGE for use)
6. Facebook needs to focus on monetizing SERVICES and less on monetizing content through ads

Mobility Issues

http://blogmaverick.com/2012/05/23/facebook-ipo-post-mortem-killer-but-not-for-the-reasons-you-think/

I love that to Cuban $1M in facebook stock is equivalent to a Mickey Mantel card… Regardless – he is right about the video transition to mobile stall. It is drastically slowing compared to the previous growth rate due to data restrictions placed by Service Providers… the real question is whether your ISP is willing to shell out to Cisco the billions of dollars required to build the right infrastructure in a down economy to bolster your Mobile Data Usage (e.g. video usage) and compete to give you less-pricey unlimited data coverage OR that you dip into your own wallet and pay hostage-like unlimited data monthly prices to pay for and make a profit on those upgrades. Either way its a ‘Share of Wallet’ issue more than a ‘desire’ issue to use video and mobile devices. The even bigger issue is the competitive one – Service Providers ARE IN THE TV BUSINESS, so they are asking themselves “why would I give ad revenue to my COMPETITION in mobile and web apps (e.g. YouTube, Netflix, & Facebook) at cheap prices only to disrupt that big steady flow of income, while I pay for all the technology infrastructure” (search the issues between Comcast and Netflix). Also they are fighting to create comparable mobile apps while not losing their partnerships with the major content creators and distributors (e.g. Hulu, Xfinity, Uverse, licensing through Turner Web). Right now the tentacles of the Service Provider is the lynch pin.

Facebook Valuation Snafu and Future
http://seekingalpha.com/article/640801-why-you-should-not-like-facebook

To believe that Zuck, LinkedIn, and Zynga all can live up to their grossly speculative P/E ratios is impossible over the near term.  History 101 - average P/E for top tier technology companies post-2000 and 2005 is 13 at best.  Companies with P/E higher than 13 have drastically under-performed the market because the companies struggle to meet growth expectations over the long term as their products, operations, competition, and customers mature.  Case in point, Cisco - was at one point valued at $557B (an obscene number at the time) at a P/E of 120.  Fast forward to today, the street has figured out how to value Cisco and the euphoria has passed - $88.5B Market Cap.  But here is the kicker - 12.2 P/E - Right smack dab in the sweet spot for a large cap tech leader.  Not to mention that Facebook is more NBC than it is Google - Facebook is an entertainment distributor that monetizes through advertising - it doesn't sell software (cause it's free) and it doesn't do a good job of selling services (RIP facebook deals - cruddy places, and other bad apps).  Facebook's only major competitive advantage is Connect - a bet for Facebook is a bet for universal ID - this is the secret sauce, Connect provides a simple and elegant way for mobile and web sites/apps to include a user's social graph.  It is revolutionary because of the 900M user base.  However, IT IS FREE - they can't monetize it.  If Facebook were smart, they would sell Connect as a service for something like $12 /yr, $1 /mth - instant re-occuring revenue at a cheap cheap price and nearly all of it will fall to the bottom line.  Facebook will not beat the Disney's of the world, but they can beat any open ID or Yellowpages - their biggest value going forward is as a connection point, not an ad platform.

Lastly some dramatized fun...

Your Full Attention

The Social Network — MOVIECLIPS.com

Until Next time - K

Can't tech just get along! MSFT vs FB vs GOOG vs AAPL

VS  

In business there is often the need to analyze and over-analyze competition in the market place.  This need for comparison often creates the need to manufacture strategic battles between titanic foes like Microsoft and Apple or Coke and Pepsi.  Today's new digital age is no different, so the social media, browser, operating system, digital deals wars are now upon us.  A flood of social technologies have dominated market headlines and have become the darlings of both private and public investors.  However, these hyper-growth companies have huge questions to answer as they navigate through the infancy of a new digital media age and take aim at incumbent technology leaders and each other.  Unless you have been in a cave, you probably didn't miss the very public twitter, blog, and media battles between MSFT and Google legal councils over patent bullying.  Or how could you forget facebook's Mean Girls move of trying to sully Google's reputation by using slimy PR tactics.  And now Google fanboys and their constant complaining of Android this and Apple is that... Finally, does facebook really have to act like a crazed Ron Burgundy that is being threatened by the arrival of Veronica Corningstone because Google has finally put together a successful social product they didn't acquire.

Now in the immortal words of Rodney King, "Can't we all just get along!"

But while we all grab a bowl of popcorn and watch as the claws, brass knuckles, machetes, mace, and handguns continue to fly out maybe some common diplomacy should enter the discussions.  Yes, these massive conglomerates are competing for billions if not trillions in future profit, but does the land of software and the internets have to be a battlefield?  Software and purely web based products have a very unique property that no other good or service has in its arsenal.  Software is a good that once produced has the potential for near infinite returns... meaning that it has a nearly infinite thresh hold against diminishing returns otherwise known as "increasing returns to scale."  It is easy to store, has little maintenance cost when compared to physical goods, and allows for faster viral adoption because it is easily shared.  By those means shouldn't there be room for Oligopoly instead of Google having to grab a monocle, top hat, and cane and make like Mr. Monopoly?

The point is that in the brave new digital world new markets and new market opportunities are created almost every second.  Barriers to entry are falling and falling fast.  So Google, Groupon, facebook, Microsoft, Apple, Zynga, etc... don't be surprised when a newbie product comes knocking at your front door threatening to take your market share because maybe, just maybe you are counting your market share the wrong way.  With software, because it has the unique property of being a digital good, I can have 5 web browsers running on my machine or mobile device because it doesn't matter to me anymore.  Why can't I be a lover of Opera, Firefox, Chrome, Safari, and yes, even Internet Explorer?  It costs me nothing to download them, install them,  and managing between browsers has become easier than ever.  The same with social networks.  I have an account on just about everything I get my hands on.  LinkedIn meets my needs in one area, Google+ meets my needs in others, and I still post and check my facebook page.

Just like cable and satellite television, why can't we have thousands of unique options?  And that should be the point.  Companies like facebook and Google should strive to capture share of TIME not user share.  If they stop spending on resources to fight and bicker in court and the press, they would have more time and money to spend on creating useful features to capture my TIME.  That will be the battle of the future, so video game companies, cable providers, retailers, web companies and the like beware.  Share of wallet is what will pay for the web of the future, but share of time is where the real battle will take place.  The companies that ignore the hype and fight battles with innovation rather than lawyers will win the day.  So don't put out the competitive fire, just refocus it on what matters, engaging and powerful user experiences.

-K