Facebook’s recent IPO has received lackluster reviews from the press. It is no wonder why it should. With such a disappointing stock performance on its first day and all of the hype leading up to that day, it is not surprising that the press and, more than likely, the investors are disappointed with the stock’s performance.
To me the question is not really about the stock’s fundamentals, but rather what role Facebook plays in the market. Facebook is in the unfortunate position of having moved first into the market, succeeded initially, and is beginning to suffer from a lost identity. When Facebook started it hardly had any competitors. With the market wide open and a clear need for friends to communicate, it is easy to understand why Facebook had such strong initial success.
Now the market is far broader. Companies such as LinkedIn and Pinterest are on the scene and are fragmenting the market. LinkedIn, for example, allows the business community to stay in touch regardless of where their careers take them. Pinterest has appeal to people who collect things and wish to share them with their friends. In essence, it’s the service that allows people to share the things that most interest them. If one can die from 1000 cuts, LinkedIn and Pinterest represent two of the largest cuts possible, with many more to follow. I would argue that there are many more to follow.
The Facebook dilemma is not that its stock is underperforming, but rather the core service it provides is being marginalized by competitors who have designed their solutions around solving specific problems. LinkedIn helps our careers. Pinterest helps us to collect things. Twitter keeps our friends up to date. Facebook provides a jack of all trades service that doesn’t target a number of specific needs.
There is another way to look at this problem. General Motors recently pulled all of their advertising dollars from Facebook a few days before the company went public because the ads weren’t effective on the Facebook platform. They feel their money is better spent elsewhere. Consider this: people respond to advertisements when they are relevant to them. An ad is irrelevant when it appears in a location or in a context where we are not prepared to respond. If you are selling cars you want your ads to be around a site that focuses on automobiles or other products that have synergy with automobiles. Pinterest will likely have more appeal to General Motors than Facebook will (assuming Pinterest attracts automobile collectors).
For Facebook to overcome this dilemma, it will have to find a way to target its audience and provide a differentiated experience for each of its major market segments. Careerists must be differentiated from collectors, just as collectors must be differentiated from students.