Some interesting news coming out of the social media side of the tech sector this week may signal that the once unstoppable force of Facebook may be on the downward trend. After a much hyped IPO offering of $38 a share offering price, the world's most popular company is now in its second quarter with share prices hovering around $23. With his company down by nearly 38%, founder Mark Zuckerberg is also taking a loss as the 28 year old is no longer listed in the top 40 of the Bloomberg Billionaires Index. Does Facebook's disappointing start as a public company signal that the socially networked public is unwilling to be monetized by social media?
For the last few years, it seems like many of us have been Facebook users almost by default. There didn't seem to be a choice if we wanted to keep up with friends and family. But now after a few years of witnessing the effects of a 24/7 socially connected world, some of us may be turning away from the Facebook app on our phones and with good reason. Anyone who has been a Facebook user even for a small amount of time has no doubt seen its dark side, the privacy risks inherent in a massive collection of personal data that over 900 million active users freely generated.
In its the most benign form, abuses of Facebook user data results in annoying invitations to games and questionnaires that can be easily ignored, but from there it is a slippery slope. Unscrupulous and irresponsible users can victimize each other with cyber bullying, phishing scams, and revealing sensitive private information to the public. Even worse, Facebook has become a favorite tool of law enforcement and lawyers searching for evidence of criminal behavior and personal misconduct that would have been hard to access before social media. With all the privacy risks, Facebook has issued several changes to its privacy settings over the last few years that users sometimes find even more confusing. It is enough to make some former Facebook addicts just deactivate their accounts.
In the technology sector, companies are used to constant change and perhaps Zuckerberg and his company will adapt. But recent history suggests that Zuckerberg's window for dominating the online user market is closing. Many other online communities in the past have reached high peaks, only to be quietly ushered out of the spotlight a few years later. At its apex, AOL the most popular internet service provider in the 1990s managed to build its walled online community to 30 million users. However with competition from giant cable companies like Comcast entering the ISP business and other online services like Yahoo and Google providing free email, AOL saw a precipitous drop in its market share after a failed merger with Time Warner in 2000. Since the split of AOL and Time Warner in 2009, AOL has had to reinvent itself as primarily a provider of online media content rather than a closed community of loyal users.
Could its recent financial troubles, signal that Facebook is heading down the same path as AOL? Reports coming out of the social media giant's first quarterly conference call lend some insight into the unique challenges that the company must overcome if it wants to placate investors displeased by the company's recent $157 million net loss. First Facebook must find a way to sell ads to larger consumer-product companies because as of right now relatively small social game makers represent the biggest buyers of Facebook ads.
Although Facebook ads have increased by 16% recently, the social network has to walk a fine line between delivering returns to its shareholders and maintaining user satisfaction. As more "Sponsored Stories" and other paid content mixes in people's news feeds, will Facebook users be turned off by advertisements trying to camouflage themselves in a sea of user generated content? As if generating new sources of ad revenue isn't a big enough challenge in itself, Facebook must also keep a close watch on its margins. Last year the company's operating costs went up 60% which makes it hard to be optimistic about Facebook's earning potential in the short term.
In the long run, loyal Facebook users will have a hard time imagining that their favorite online hangout will disappear any time soon. With Google's launch of its own social network Google + and rumors that Apple will soon invest in Twitter, social media continues to attract millions of new users and large sums of industry money. For a company like Facebook whose earning potential looked so promising just a few years ago, the question is all about how to monetize of its customer base. Even the historic giants of old media have been cut down to near extinction in a media environment where new competitors offering free or low cost, internet-based content can spring up any day. The days of newspapers and television networks making big profits from ad space and subscription fees are all but finished, and Facebook must be wary not to alienate users by inundating them with advertising.
Judging from the moves made by big players like Microsoft, Google, and Apple, the alternative social media business model is focused on gaining control of the market for hardware and software on mobile devices. So far Google has been building its own phones and expanding its Android operating system, while Apple has integrated support for Twitter directly into the iOS on its phones and tablets. Zuckerberg and company will most likely be pressured into following suit, which could lead to a rise in mobile devices, software applications, and content being exclusively hooked into the Facebook network.
Given recent financial reports, Facebook seems destined for some kind of transition in its business model, but the real test will undoubtedly go back to maintaining a satisfying user experience. Will the most popular social network struggle to not repeat the mistakes of AOL whose rapid attempts to change its business model ultimately drove people away? As long as access to Facebook and its content remains free, its users will most likely stick around, but the same can't be said of its investors. Although unthinkable now, a potential financial collapse for Facebook may have broader implications for social media as a whole, and leave us all wondering what we were thinking freely sharing so much of our personal information with for-profit corporations anyway.