Has FaceBook Topped?

Written by on May 28, 2012 in Investing, Stock Talk with 4 Comments

Facebook has been trading publicly for a week and I’m already calling a top.  I can see the eyes rolling. Whether it has topped or not, I’m putting FaceBook in a bucket with companies like Google, Research in Motion and Nokia.  These companies were all dominat in their day, but haven’t been able to continue their reign as the world transitioned to the  next “big thing”.   Google ruled search and Web 1.0, but haven’t been as successful in Social.  RIM & Nokia were kings of cell phones, but have struggled in the move to mobile computing.

This phenomena is not new – tech companies have struggled with transitioning since the beginning of time.  I saw this first hand as companies like Digital Equipment Corporation, Prime Computers and Wang Labs, all dominant mini-computers companies in the 80s, failed to make the transition to PCs.  Ken Olson, CEO of Digital Equipment, arguably the Mark Zuckerburg of his day turned a $70,000 startup into a 120,000 employee computer giant.  However, he will always be remembered as the guy who said  “There is no reason for an individual to have a computer in his home.”

The entrepreneurs of today aren’t quite as dismissive of new technology as Ken Olson was, but they are struggling with the transition just the same. The problem is that there are only two tech companies to date that have successfully manged the transitions from one era to the next – IBM and Apple.  Each have many bruises to show for it and neither are willing to share their secrets with the competition.

Personally, I believe it is as simple as cannibalizing your cash cow before the competition does it for you.  IBM sold off its PC division years before HP and DELL began whining about their unprofitable PC business units.  On DELL’s latest earnings call, it admitted that notebook sales were being pressured by “alternative mobile computing devices”  i.e. iPads.  Apple has openly admitted on its last two earnings calls that iPads were cannibalizing MAC sales.  The difference between the two is that Apple has no problem eating its own where as DELL is simply a victim.

I say the solution to transitioning is simple, but obviously it is far from that. RIMM had built a multi-billion dollar business selling cell phones.  People were known as Crackberry addicts.  Can you really blame them for laughing at the first iPhone? Five years later who’s laughing?

What’s this have to do you Facebook? According to Eric Jackson in a recent article he stated that we are entering the third generation of internet computing:

  1. Web 1.0 ( from 1994 – 2001, including Netscape, Yahoo! (YHOO), AOL (AOL), Google (GOOG), Amazon (AMZN) and eBay (EBAY))
  2. Web 2.0 or Social (companies founded from 2002 – 2009, including Facebook (FB), LinkedIn (LNKD), and Groupon (GRPN))
  3. Web 3.0 or Mobile (from 2010 – present, including Instagram)

As Facebook was preparing to IPO, it admitted that mobile may be its Achilles heel.  The company said,

We are actively seeking to grow mobile usage, although such usage does not currently directly generate any meaningful revenue.  Although the substantial majority of our mobile users also access and engage with Facebook on personal computers where we display advertising, our users could decide to increasingly access our products primarily through mobile devices.  We currently do not show ads or directly generate any meaningful revenue from users accessing Facebook through our mobile products, but we believe that we may have potential future monetization opportunities such as the inclusion of sponsored stories in users’ mobile News Feeds.

As the IPO pressure began to build, Zuckerberg went out and bought Instagram for $1billion.  Then this past week they released a home grown Instagram-like app.  Why spend a billion if you have something brewing?  IMO, Instagram was his second stumble in mobile.  The first was delaying and then releasing a sub-standard iPad app.  At least Zuckerburg is not burying his head in the sand like Ken Olson, but the odds are stacked against him figuring out how to transition from Web 2.0 to 3.0.

Has Facebook topped?  Stay tuned.

Disclosure: Long Apple.

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  • http://twitter.com/LDrogen Leigh Drogen

    Dead on Michael, it’s so incredibly hard to make that transition, especially as the innovation cycle is increasing in speed. IBM is such an amazing company because they are so willing to transition, wholesale, it’s definitely a DNA thing. They are now a big data company, who would have even thought 3-4 years ago besides them, it’s amazing. Facebook is definitely the AOL of the social web, definitely a little stickier because of Facebook Connect, but their fate will be one and the same.

  • http://michaelkdawson.com/ TrendRida

    Thanks Leigh. IBM is an amazing company. IMO, their ability to transisition from one era to the next is more impressive than AAPLs since they have done it with multiple leaders the helm. There is definitely something built-in (DNA) that has enabled the company to maintain their relevance.

  • http://twitter.com/STRIPBLUNTS ANDRE SALAZAR

    Zuckerberg does come off like Olsen since he dismissed the effect the iPad would have on mobile, social & tech. He missed the boat & looked like a total “douche” when he had to back pedal only a few months after his initial statements. Then he failed to deliver a native-app for iPhone/iPad/iOS, then wasted $1B just to stop a company (Instagram) from gaining popularity, while releasing a “low-level” alternative. Then, to finally make matters worse & tie-in all of the “bungling” into one, FaceBook allowed Wall-Street to force them into an untimely IPO, based on a “TERRIBLE” valuation. Now they’ll have to make a product, that could take them years to develop & market. I don’t see FaceBook surviving this! I expect them to either die-off or get bought by Apple in a year or two! That’s the only way I see this ending well.

  • http://michaelkdawson.com/ TrendRida

    Agree, but Apple won’t buy ‘em. At least I hope not. Hopefully AAPL will stick to their small tuck-in type acquisitions.  Can’t think of too many large acquisitions that have worked. Cisco looked like it had the secret sauce 10 years ago, but at least from a stock perspective it hasn’t paid off.

    In the overall scheme of things, Facebook is nothing more than an app.  It will be hard to ever prove it’s worth its valuation…

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