It can’t have escaped your notice that Facebook are in the middle of an Initial Public Offering (IPO) of shares which will raise a very large amount of money. Indeed, just as I sat down to write this blog, the news came through that the shares will be valued at $38 (£24), valuing the company at over $100 billion!

That’s a lot of money for a very shaky product.

Runaway success?

Before this IPO process kicked off, Facebook was the golden child of social media. With far and away the largest user base (over 800 million accounts) how could they not wipe the floor with everyone else in the market. A steady stream of updates designed to entice us to open our wallets and purses seemed to back that up. Adverts, sponsored stories, games, and so on. Surely everyone was spending money as a result of their Facebook activity?

Instagram – how much?

Such was Facebook’s popularity that hardly anyone batted an eyelid when it was revealed that Mark Z himself negotiated the purchase of Instagram for a nice round $1 billion! If Mark has spent that much then it must surely be worth a lot more and he’s nabbed another bargain, the consensus seemed to be.

The Emperor’s New Clothes?

Personally, I viewed that purchase with some incredulity. OK, Instagram is one of the darling apps of the iPhone world, and purchasing it instantly gives Facebook access to a serious number of subscribers details, as well as some pretty cool photography expertise. But how many of those Instagram users were already on Facebook? A pretty high percentage I would venture. And how much expertise could you buy in for a few million, and have plenty of change left over to, I dunno, feed an African nation?


People don’t go to Facebook to buy

Here’s the big issue I have with Facebook’s valuation. If you watch the recent BBC programme on Facebook (UK only I’m afraid), then at one point it is asserted that, in order to justify a $100 billion valuation, Facebook needs to carry on growing by some insane amount each year (80% I believe). Admittedly it has done so over the last few years, but it’s almost unheard of for a company to grow at that rate for that long, maintaining it is unprecedented.

And the warning signs are already there.

GM cops out

With exquisite timing, General Motors announced recently that it is not going to spend any money of Facebook adverts in the future. Is this the beginning of an exodus by some big brand names? I’m not certain it’s that serious, but I do think this move is a reflection of a recognition by big businesses that Facebook ads are not as general purpose as they hoped.

Think about it, if you’re using Facebook, as most do, to catch up with what’s happening in the lives of your friends and family, then what sort of purchases will you be interested in? Maybe food and drink if you’re organising a meeting. Perhaps photography products if you’re envious of their pictures. Cars? Unlikely.

Is it really a Ponzi Scheme?

No, not really. But it seems to have similar characteristics. This articles in Forbes explains in some detail the thinking behind the assertion, but the argument can be quickly summarised. In essence, the problem is that companies come in, invest significant amounts of money in Facebook ads, find they don’t work well enough, so scale back or drop out completely. In order to keep the platform growing, Facebook thus need to entice other companies to purchase ads and go through the same cycle.

Whilst there are enough companies out there that haven’t yet tried Facebook ads, the cycle can continue and their revenue will grow. But at some point the feed of new companies will dry up, and that’s when Facebook could be in serious trouble.

Of course, in the interim I’m sure they will be working hard to move to an advertising setup that actually works. But it’s not guaranteed that will happen. In particular, the move towards mobile browsing is even more of a challenge for Facebook. Engagement with ads on the ‘full-fat’ website is poor, but mobile users are even less tolerant of adverts.

So I think I’ll pass on Facebook shares, thank you.

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