This question has popped up a lot since their recent $50 Billion valuation (albeit, speculators on secondmarket.com are trading Facebook ‘shares’ at a Market Cap of $70+ Billion). For those who lived through the .com bubble, alarm bells are no doubt ringing.
Does the massive growth they have experienced mean they will go the way of so many .com companies in the 90s?
Lessons from history
Facebook has avoided acquisitions, and is being advised by Sillicon Valley’s experienced heads. Peter Theil (PayPal founder), Reid Hoffman (LinkedIn founder), Sean Parker (Napster co-founder) have all been there.
Mark Zuckerberg is benefiting from their experience, and picks the brains of Steve Jobs, Tim O’Reilly and his trusted leuitennant Sheryl Sandberg (who build the Google Revenue model) regularly.
Yahoo, Google & Microsoft have all tried to buy Facebook, as has Time Warner and News Corp. If anything Facebook appears to have learned the lessons of what not to do from the .com bubble, very well.
Workable Revenue Model
The major difference is Sheryl Sandberg’s ability to build revenue from advertising. Facebook have figured out how to drive demand with advertising, as opposed to fulfilling a need like Google does. A young father with very few pictures will get an advert for a digital camera. In Google you have to know what’s missing, and Sandberg did a pretty good job with revenue there.
Facebook has nearly 600 million users, and they haven’t really focussed on anything other than growth yet. What happen’s when their core focus shifts from growth in terms of users, to growth in terms of revenue?
Challenges
In order to reach that point they will have to successfully
- Break China
- Complete an IPO
- Become a part of internet infrastructure
Those are some big challenges, and I await with baited breath to see how Facebook tackle them. Facebook can still gradually fail, but it would likely be a steady decline rather than the rapid nose dive Myspace experienced.
NewsCorp’s takeover of Myspace was a revenue buy. Buying revenue so early in a company’s life before it has matured stunts it’s growth.
If building such a massive service didn’t make or cost money, I’m pretty certain Mark Zuckerberg would still be building it. He’s not in it for the money, and in a strange way, that commitment to quality is what drives their continued success.
Economic Impact
Facebook grew in size, and took on massive investments throughout the worst financial crisis since the great depression. To me that suggests we’re dealing with a very different type of organisation.
Expecting Facebook to become a sustainable business while it is still growing is missing the point. For now revenue isn’t their key goal, they want to change the internet, make it more open and useful. I doubt they will IPO until they get much closer to that goal.
Success Factors
If something far better than Facebook comes along then sure it could go the way of the old AOL, but it would have to:
- Compete on products quality (Photos, News Feed, Events)
- Compete on ease of use (Parents can use it)
- Compete on network size (Network effect)
- Build a successful revenue model
- Gain massive investment from VCs and existing tech companies
In short, the competition has a mountain to climb. The one remaining huge hole in facebook is the differentiation between relationships. It assumes everyone is a ‘friend’. If a service could plug that gap, and grow at a similar ‘Moore’s law like’ pace they’d be set.
Google tried and failed. Myspace tried and failed. Twitter serves a different purpose. Facebook’s main competition is geographic (Russia and China). It’s going to take something very special indeed to dislodge Facebook. Building a successful social network isn’t easy!
How do you compete with Facebook?
In my view you don’t compete. You work with. Facebook has the social graph, and likely will for some years to come in the western world.
- Do you think Facebook is overvalued?
- Do you think it will fail?
- How can Facebook sustain their growth?
- What big challenges does it face?







