Thursday, June 21, 2012

John Hussman (among others) "Is Facebook’s Business Model Flawed?" (FB)

From GuruFocus:
As a busy middle-aged man with three children, I rarely go to Facebook (FB), although I do have a Facebook account. I largely ignored the recent Facebook IPO fiasco due to my value investor instinct. But last week’s commentary by John Hussman on the flaw of the business model of Facebook got me thinking a little more about it.

John Hussman thinks that Facebook’s business model is flawed. This is what he said (source):
I really don't mean to pick on Facebook. It's a neat company, a neat platform, and I respect Mark Zuckerberg's charitable initiatives. But the example is too instructive to miss, so let's think about it as a business and as a major recipient of investment capital. If you go on Amazon (AMZN) or Ebya (EBAY), you want to stay in order to buy something. That's a fine business model, and network effects work in your favor because there are a lot of sellers on the other side. If you go on Google (GOOG), you want to find what you're looking for and then leave, which is a situation where advertising is welcome, and has also worked as a business model (though with a surprising lack of competition given that the business is based largely on a single eigenvector calculation). But consider Facebook. If you go on Facebook, your whole intention is to stay on Facebook for a while, but not to buy something. Here, network effects work against advertising because responding to the ad pulls you away from the network. On that platform, advertising is a nuisance, and if you're forced to tolerate advertising, you'll eventually migrate to a platform without it, so retention will be challenging. And yet, somehow the investment bankers were able to price the company at $100 billion on offering day. Perhaps the IPO proceeds will bring us more games, more photo apps, and more ways our kids can pass their time online, instead of developing some useful knowledge or skill. I'm all for down-time and social networks in moderation, but it's discouraging when this is the stuff that historic IPOs are made of - that this is where massive amounts of savings are allocated on the basis of a "wait and see" business model.