Facebook Faces Reality

By Eileen Feretic  |  Posted Wednesday, May 23, 2012 15:05 PM

By Samuel Greengard

You may recall a late 1990s phenomenon dubbed the dot-com bubble. During this period, countless startups tossed out a steady stream of novel and crazy ideas--in a few cases, innovative and useful ones--with the hope of capturing the public's fancy.

Profit wasn't important. This trivial detail could be figured out somewhere down the line. Investors, enamored by the technology as well as this new form of anti-gravity, pushed the stock market into a speculative bubble.

Eventually, everyone realized that the emperor had no clothes and that the old, boring and seemingly decrepit rules of business physics still applied. The boom quickly morphed into a collapse, devouring companies like Pets.com, Webvan and eToys.

Of course, many of the dot-com executives walked away from the resulting debris filthy rich. That's the American way, after all.

Last week, prior to the Facebook's overhyped IPO, it seemed like déjà vu all over again. But a funny thing happened on the way to dot-com II. Investors avoided the stock, and Facebook found itself staring down the barrel of a major embarrassment. Not only did the stock close at nearly its IPO price the first day--reportedly because underwriters and key investors propped it up--but its price dropped by nearly 20 percent within three days.

There are huge questions about whether Facebook, even with upward of 900 million users, can build a sustainable business model and whether its online advertising approach can work. Facebook reportedly earns about $5 per customer per year. GM just pulled out of Facebook, and, let's face it, most users find Facebook's advertising somewhere between annoying and creepy.

Worse, Facebook usage is declining. Why? With 100 friends, it's possible to interact in a meaningful way. With 1,000 friends, you're subjected to an endless drivel fest of pokes, narcissistic status posts and semi-useless links from people you barely know.

Facebook is to computing what Jackass is to television. It's a way to crawl into the nooks and crannies of sheer escapism.

The takeaway here is that it's no longer possible to offer up an unsustainable business model (in this case, one based on decreasing per-user revenues) and expect to achieve financial success.

Facebook's days of reckoning will come. From both a business and consumer standpoint, it must morph into something bigger and better--or face irrelevance, if not extinction.

Ultimately, the physics of business never changes.