Are We Certain Facebook Is Doomed, Vivek Wadhwa?

Vivek Wadhwa, a research professor at Stanford University, published a diatribe on LinkedIn a few months ago titled, "Facebook Is Doomed.” Contributing to the debate on the medium- and long-term sustainability of one of the biggest social networks is undoubtedly a healthy endeavor. However, this excessive public statement distinguishes itself with rather frivolous arguments on Wadhwa’s part.

VampireWomanOutOfCoffin650Vivek Wadhwa, a research professor at Stanford University, published a diatribe on LinkedIn a few months ago titled, “Facebook Is Doomed.” Contributing to the debate on the medium- and long-term sustainability of one of the biggest social networks is undoubtedly a healthy endeavor. However, this excessive public statement distinguishes itself with rather frivolous arguments on Wadhwa’s part.

Wadhwa took a strong stance by concluding, in a much-learned fashion, with the statement, “You can look at Facebook as a classic example of what not to do when you achieve success.”

First and foremost, it is to be noted that this paper I stumbled on recently was originally written in September 2013, and since then, Facebook has continued to expand its hold on our usage and advertising budgets.

However, given the credibility of the author, it is necessary — or, at the very least, interesting — to examine his analysis and hypothetical theorization of a future without Facebook, a colossus with feet of clay whose adverse fate is apparently inevitable.

Let us take a closer and more detailed look at each of his points.

Facebook is squeezing every penny it can out of its customers to justify its inflated stock price: Facebook, in recent times, has been valued at $164 billion — a value that is 20-fold its revenues and almost 110 times its net income in 2013. In comparison, Google is valued at $394 billion, or 6.5 times its sales and 30 times its net income; Microsoft at $303 billion, or 3.6 times its cumulative sales and more than 13-fold its net income; and Apple at $464 billion, which is 2.7 times its turnover and 12.5 times its earnings, all with reference to their results of the 2013 fiscal year.

Is Facebook overvalued? It’s a possibility. Either there will be a correction in its valuation, or at least the stock price will stop rising even if revenues and profits continue to increase. However, given current figures, can one deduce that Facebook is already condemned? Facebook has exhibited unquestionable financial health, and it’s been given all the green lights.

The number of daily active users continues to increase from 718 million in the fourth quarter of 2012 to 757 million in the fourth quarter of 2013. Revenue increased from $5 billion to $7.9 billion between 2012 and 2013, profits went from $50 million to $1.5 billion in the same period of time, and more than $500 million in profit was made in just the last three months of 2013. Average revenue per user, another key indicator, also increased from $1.54 to $2.14 between the fourth quarters of 2012 and 2013.

If this were what one refers to as scraping the bottom of the barrel, a plethora of other companies wouldn’t mind doing the same.

Unless it happens to luck out by buying the right company, it seems to me, Facebook is doomed: This criticism was based on the belief that Facebook would not have been able to make a successful transition to mobile, that it was losing its “cool factor” among teenagers (three years ago, iStrategyLabs revealed that there had been a reduction of 3 million users between the ages of 13 and 17 over the past three years in the U.S. on Facebook), and that salvation would only come from the acquisition of new players that were “mobile-first” or “mobile only.” The discussions with Snapchat failing to bring the grist to the mill further reinforced this prediction.

However, Facebook had taken on the challenge and has proven the prediction wrong with its number of daily active mobile users increasing from 374 million in the fourth quarter of 2012 to 556 million in the fourth quarter of 2013. An average of one minute out of every five spent on the mobile Web is on Facebook, an absolute world record. In the fourth quarter of 2013, more than one-half of revenue came from mobile, whereas it was practically nothing a year earlier.

While teenagers got enamored of new applications of the “chat” type, Facebook was not left behind with the Facebook Messenger mobile application, with its number of users increasing by 70 percent over the past three months in the U.S. Messenger is one of the most-downloaded apps on the iTunes App Store and Google Play. Of course, all such users are not exclusive; we understand that mobile users have the tendency to juggle mobile apps.

Facebook is aware that it no longer possesses that “cool factor,” which is also a sign that the platform has blended into the overall Internet landscape. It is a utility people use without paying attention, much like email platforms. Despite the decrease in younger audiences, total usage in the U.S., for instance, is on the rise thanks to the Facebook population of ages 55 and above that rose by more than 12 million (iStrategyLabs) during the past three years. The return of youths once they reach adulthood to Facebook, where all of their elders are spending more and more time, is also a very likely possibility in virtue of critical mass principles.

It is difficult to tell what the future will bring, but these alleged rumors of Facebook’s inevitable doom are highly exaggerated.

Furthermore, Facebook is opportunistic as always and constantly endeavors to go further, as its purchases of Instagram in 2012 and WhatsApp last week show. With more than $7 billion still in the bank, Facebook can comfortably experiment with other acquisitions and afford to make mistakes on its way.

Its new strategy in no way jeopardizes the sustainability of as far as we can see; in fact, it’s rather complementary. Instagram is still autonomous from Facebook, as will remain WhatsApp, but synergies might arise (an “add contact to WhatsApp/Facebook” button, for instance).

But it won’t develop any earth-shattering technologies, because it doesn’t do Google-style “moonshots” — it just doesn’t have the culture and DNA. It is still the social network that the kid in the dorm room built: Of course, Facebook does not dream as Google does with its avant-garde projects, but surely that doesn’t condemn Facebook to failure. Why the need to entitle this article in such a catastrophic manner? To generate clicks, or perhaps for sensational effect?

Google’s initial project of helping users find what they want was not inherently more extravagant than Facebook’s “make the world more open and connected.” Google is six years older than Facebook and yet asks Facebook to function with the same maturity. Facebook is known to attract talented engineers and is definitely en route with its ventures despite its tender age, thus making his statement that Facebook doesn’t have the ability to one day create something of disruptive value rather presumptuous.

Let’s also not forget that despite all its forward-thinking projects, Google derives 95 percent of its revenue from advertising, the same business that Facebook is in. A little exercise in comparing their viabilities can prove this to us.

Google’s profits are predominantly “ad dollars,” focused at the bottom of the marketing funnel with a search engine that users could eventually replace without friction with a better substitute. Advances in artificial intelligence are exponential (IBM’s AI computer, Watson, was able to outdo champions of “Jeopardy!” despite being asked oral questions that were loaded with innuendo). By 2025, a few thousand dollars should be enough to buy a computer as powerful as the human brain, so we’re sure that even the great Google isn’t immune to a competitor tool that could undermine its principal business.

Facebook, on the other hand, targets all stages of the marketing funnel, including budgets of prestigious brands that are spent on TV advertising, as well as budgets for direct-response advertisers, for which the Facebook retargeting pixel, among other things, is a revolution.