Both slow news day and bigger posts still being worked on? Well let’s get back into a longtime near-sport here at S3: Facebook bashing.
This company has thrown a goldmine of venting material at me as of late, going from messing with my work by showing how its algorithms work in scary outlines-that-are-still-too-detailed, to more or less ruining a cab ride as I ended up in an incredibly heated discussion about how, in the absence of loving the greatest company on Earth, I couldn’t at least settle for not going around and criticizing a company I neither work for nor invest in. You know where this is going…
In the absence of having either revenue, earnings or an actual business plan that can justify their valuations, Facebook has a massive online presence with the archetype tech management incarnate running the business. We’ve seen this 15 years ago, it ended in tears but the same “hail eyeball metrics”, financial fundamentals be damned, business plans be damned, and just believe in our prospects please! finance of that era are back in full force. More people should be crying about it than there are. Let’s start with a bunch of “back-to-reality” projections for this stock where you will never make a fraction of the company’s value from anything else than selling to the next sucker.
Facebook investors value every user at roughly US$200. Meaning, they provide US$200 of value in future prospects when accounted for in current-day dollars in earnings for Facebook, at least. You’re still with me, not laughing your head off? Well let’s say you have actual revenues of 5x that in the long term. That means US$1 000 in revenue to Facebook per user. Now, how does Facebook make money? Well they will never charge you or me for their product apparently, and assuming that their acquisitions are a better use of money than organic growth of one of the biggest growth bets ever, it’s probably better to estimate their acquisitions as equivalent in projected growth to Facebook so we ignore that part. So, Facebook has to essentially sell ads for other companies, either through paid/promoted pages, or through display ads.
How large a part of your marketing budget would you be willing to blow on Facebook overall? Ugh… let’s say for the sake of the argument that a normal, large scale company would be willing to blow 10% of their profits from last year on something like this, or 1% of their revenue assuming thus a 10% profit margin. You see where this is going? You need to buy US$100 000 worth of products off Facebook-related marketing to make Facebook viable! So unless you’re buying a house or a car, how big, honestly, is the chance of you getting through that in a lifetime if you’re not living in the US? Multiply by more than one billion users, and Facebook needs to advertise products with an aggregate value of US$100 trillion (1.5x global GDP) to justify the valuation according to this style of Fermi estimation.
No, no, no!
Now, if Facebook was a beloved, ad-friendly company that actually cared for both users and advertisers, could I buy into that style of valuation on a long horizon? Probably, but here comes my next problem: I wouldn’t dream of buying products advertised to me through Facebook, neither would I even dream of advertising for something on Facebook if I held the marketing budget. Why?
Because unless you’re using display ads or sponsored posts (number 2-3 in the user’s news feeds) you’re not getting seen. If you are buying that, trust me, the sponsored posts will be served up to potential targets for the flimsiest of excuses ever. I recently had the displeasure of going around and checking online content streams of major companies, particularly on social media (Twitter, Facebook, Instagram, a few others). After that, just by searching for these things in my browser, Facebook now serves me ads which I can only believe stems from profiling me as:
- A high-earner based in London
- Highly interested in spending that money on fashion, makeup and buying beauty products.
- Most probably working in marketing (two separate off-FB searches resulting in me clicking on the Cision website has now permanently put Cision as the company getting the top billing on my feed).
- Incredibly interested in Swedish hotels due to off-FB searches for “hotel review websites” resulting in my display ads being overtaken (and my sponsored posts before the mistake of searching for Cision) by TripAdvisor.
Come on! My profile has me listed on the places and educations I’ve gone through, none of this I have ever liked or even given more than a cursory glance on Facebook, and commercial websites I “like” are suppressed for this garbage off a search, where I spent all of 5 minutes per website max on a 1000 website search spree? The fact that I regularly search for anime, Japanese stuff overall, and masses upon masses of financial, trading and economics data at all times and on all platforms doesn’t reflect at all in my FB ads? Swedish news? Nope, my searches two weeks ago, once each for “beauty blogs”, “hotel reviews”, and “UK advertising” trump all that!
In the absence of the Facebook ad-serving algorithm being a complete idiot (I do believe this to an extent but you can never know just which monkey will write the FB code in the infinite typewriter example) I have to conclude that at least on my profile Facebook simply does not weight ad-servings by anything else than which company paid for the most bulk exposure. If companies are paying for bulk exposure when Facebook can supposedly know more about me than I know myself and should really hit it out the ballpark with ads for targeted, predictive ads, then Facebook’s ad business idea falls flat on its face!
Sell me forex trading platforms or economic data vendors like Google is trying to do at every turn? Props to you and thanks! It saves me an hour a week in searches! Go a little wilder and promote Asian games, Chinese and Japanese language learning apps like I see on Youtube? I’m all for it, they’re at least worth a click since someone actually did work on their add algorithms, maybe they know something that will fit me. Messages on LINE telling me which new entertainment shows are coming out in Japan next season and where to see them in my region? Shut up and take my clicks, those people have my money! if you serve me an ad on FB, I’m sorry but chances are I’ll not even look at your website unless I’m paid to do it.
So, at the end of the day, why even bother with something that doesn’t affect me personally? Why not let fools and their money be parted as financial Darwinism would prescribe?
Because tech analysts are herd animals, idiots and set the benchmarks according to the biggest success stories? (Facebook, Google, Apple, or whatever happens to be an American app company.) Because this literally sets the bar for which ideas get funded, and in a world where 2x revenue is not an uncommon cash burn rate for innovative ideas it means only funding those following in the folly of the ilk of Facebook get money through VC firms looking for a quick and easy exit next-sucker style? Because the IT bubble 1.0 put the lid on a lot of innovation in tech and allowed those who were actually having a business model then (no matter how poor) to plow money into controlling the web for the next few years? Because funding global innovative tech firms should now be the sole responsibility of the Chinese and Masayoshi Son who can actually add post-equity cash to fund operations? Or because big US banks aren’t making enough off their tech portfolios, acquired shotgun style after what I can only guess are a few drunken nights in San Francisco? No thank you!