How Unassailable is Facebook?

How Unassailable is Facebook?

2012 is scheduled as the year Facebook goes public. It has been well advertised that Facebook does not need the money and the Inland Revenue is also pretty indifferent as to whether the taxes are paid by a private individual and his company or by a publicly-owned company. What does stand out is that like Apple, IBM and many other IT companies, Facebook is sitting on a humungous mountain of cash. Social networking is now the equal of all other IT service provision.

It also reflects the power of the fashionable. IT products, like mobile devices, have a shelf-life which is amazingly short, in some cases several months only.  Services associated with them, such as apps, have an equally precarious existence and have to be reinvented regularly. How many restaurant or travel guides can there be? But communications is a perennial, so does that mean social networking escapes the fashion borders? The communications part may, although whether the mode of social networking will change as users age is an unknown; but the revenues of Facebook and others is essentially advertising-driven based in part upon the mode of communications – the famous “like” button and the invitation to identify user location – but in larger part upon what apps attract social media users. And the crucial thing there is that Facebook has no obvious long-run competitive advantage.

Of course it currently has the advantage of economies of scale and scope. Facebook moved faster and more adeptly than its competitors to spawn new services or, more accurately, to absorb and integrate a wider range of stand-alone services such as photo galleries and access to online media into the core functionality of Facebook. But these most likely are subject to fashion, and fashionable consumers are fickle consumers. Loyalty is to a “life style” not to a particular purveyor of that life style.

Take Apple as an example. It is a betting certainty that in a decade the unique lure of current Apple products will be over. But what Apple has going for it is a very well marketed integrated Apps Store platform for apps that can be downloaded and paid for through any Apple product. No other company currently can match Apple in its R&D in both products and its services platform, although Samsung is trying hard and Google is preparing for battle. Apple has competitive advantage in depth. Similarly with Google. At its core is a search algorithm difficult to replicate, for if it were not then others would have long ago matched Google search in the marketplace. What Facebook has is scale, and as Nokia found out last year, that is relatively easy to replicate: it can happen almost overnight in the IT consumer goods market. That is called fashion.

Facebook are clearly aware of the danger, which is why they are spending a large part of their fortune to develop a search engine of their own under the leadership of former Google engineer Lars Rasmussen. And that may also be a reason why they are going public now. Grab the cash while you can and fund the search for a more sustainable model.

*Appendum*: Within 48 hours of this Just a Thought being written John Grapper  (“Facebook is scared of the internet” Financial Times p. 9, 12 April 2012) remarked on FB’s purchase of the photo-sharing app company Instagram for $1billion. After 18 months Instagram has 13 staff, 30 million users and no revenues. (Richard Waters “Facebook shows its gets the message with Instagram deal” Financial Times, p. 14, 12 April 2012). John Grapper comments “Mr Zuckerberg overpaid for a single app that became more fashionable than Facebook.” He notes that like other consumer internet companies, Facebook “can suddenly gain millions of users and huge valuations – and just as abruptly lose appeal and implode.” Exactly so.

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