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Facebook and google in rough waters in the era of mobile and interest networks

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  • 1. Rough Waters for Facebook in the Era of MobileFacebooks faltering stock price since the IPO shows clearly its has not yet the rightbusiness model. The social networks staff selling their stocks this week is the nextgreat threat to its stock price. The decline in market value shows a fundamentalstrategic problem for the social networkers that want to make the world a betterplace. The smartphone revolution threatens Facebooks advertising business.Facebook is on its way down. The value of its stock has decreased by around 45percent since it has gone public 90 days ago; it could still fall further. Thursday theholding period for 271 million employee shareswill expire. Selling partof theemployee stockswilldepress the price further.Its possible that Facebook gets away unscathed, because most employees who wantto sell, have done it in advance by warrant. In this case the end of the holding periodwould be already priced in. Nevertheless, the stock is likely to remain underpressure, because other holding periods are running out in the coming months.That fact that Facebook has to deal with such mundane things as expiration of theholding period is characteristic for the shift Facebook faces. As recent as May 18th,the date of their IPO, FB has been hailed as the new star. The stock has been soheavily overvalued that the companys value even after the crashis still more than
  • 2. 48-times its annual income of 2011. FB’s market cap is about the same asbehemoths like Colgate Palmolive, Monsanto, Sumitomo, DuPont, or Nike. A marketcap of 48 billion dollars seems super optimistic for a company with such anuncertain outlook even when considering that we talk about the touted digitalindustry.The share price reflects the hope that Facebook could somehow grow exponentiallyin the coming years. But the business model of the social network has been shakento the bones. The boom of Internet-enabled mobile phones is the responsible gamechanger. About 6 Billion people have had a mobile phone end of 2011. There aremore people with a mobile phone than are connected to the electrical grid. Not onlyFacebook is in trouble, even Google and other web giants who earn their moneymainly with online advertising.The Dawn of a New Web EraGartner estimates that in the coming year the worldwide Internet access via mobilephone and tablet will be larger than the traffic from the PC at home or the officeforthe first time. Facebook experiences the mobile revolution already; more than halfof its roughly 955 million users access the FB app from their phone. Many of us usemobile devices for our daily FB access. A recentsurvey of Google users shows similarresults for web search.This leads to the following issues.The page views on smartphones bring only afraction of the always-connected ad revenue.New business models that compensatefor these losses are still under development. I’m not sure that the usual suspects willbe able transfer their always-connected Internet market leadership to the mobileweb.We are at the beginning of a new era, the third Internet era of mobile Web andinterest networks. The first era was Web portals like Yahoo and Google searchengine. Facebook, LinkedIn and Zynga, have dominated the second era,the so-calledsocial Web. Each Web era had its special needs. Usually the rulers of one age haddifficulties adjusting to the dawn of a new era. Jay Jamison calls the mobile era theWeb 3.0 in hisIT blog at TechCrunch.The Web 1.0 pioneer AOL plays no role any more. Yahoo is a company that needssevere surgery. Google is still brilliant, but it earnsits billions almost exclusivelywith its Web 1.0 business model of Internet search. Its ad sense churn rate is about70% and its social network Google+ is a far cry from Facebooks success.Facebook has announced during its IPO to expand its mobile activities significantly.My friends at FB say that CEO Mark Zuckerberg testsall new features first on his
  • 3. phone. Implementing its mobile strategy Facebook faces similar problems as Googlewith its social network .The change requires nothing less than a cultural change.Context on the Mobile Induces A Culture Change for App DesignWhen surfing the Internet on the phone we expect a very different app behaviorthan on the laptop, though we use the same information from the Web. Mobileservices have tobe context rich. This means they have to include location (from theGPS of the phone), user preferences, friends nearby and integrated payment via e-wallet (in the very near future). Mobile apps have to display less information on thesmall display and have to be usable with fewer clicks. This means they must be verywell tailored to the task at hand – be it finding a nearby taxi, or a nearby fishrestaurant recommended by friends.Facebook’s approach seems very different. We are presented with more and moreinformation that pushes us to ever-greater screens with higher resolution in orderto display status messages, invitations to parties, games, advertising, chat and muchmore. Facebook has just transferred this app with its wealth of information from thestatic web to our mobile. The FB app seems overloaded, while the value of itslocation and context-aware services is very limited.Companies that have designed their apps from the beginningfor the mobile webdeliver much better user experience closer to the customer. A mobile food service isjust about spotting personal restaurant recommendations and about showing itsusers how it is cooked for example. One app per task is the credo of the mobile appleaders like Apple, Amazon (Kindle) and Twitter.Take the mobile photo community Instagramfor example. Yahoos photo serviceFlickr and Facebooks picture upload look shabby compared to Instagram.Instagramhas gathered more than 80 million users in roughly two years. Early April,Facebook bought the service for a billion dollars.The New World of Advertising and Interest NetworksThe mobile web changes the business models too. Companies who financethemselves mainly through advertising face a problem. User attention on the phoneis different from the PC at home. Banners have not been made for the small mobilephone screens.Advertising has to change from passive consumption to active participation. Takefor instance the Groupon++ startup LOCALsense and mutu,a music video aggregator.Both startups integrate the user. LOCALSense rewards the user when he or shepasses coupons on to friends; a cool way to learn about a person’s interest network.
  • 4. Who of my friends likes coffee, sailing, or go to the movies?All this informationabout the interests of my friends is freely available for LOCALsense but very hard toget for FB. How does FB even know what types of friends I have? How do theyknowwho of my roughly 1000 friends is family, close friend, co-worker or businessfriend? They ask me to categorize. Well, this is the reason why Google+ fails withcircles. Who on earth is going to keep all these relationships up to date manually?Interest networks go much further by understanding that a friend is multifacetedwith regards to how we interact. We may sail together and be close friends or weshare a passion for movies and be co-workers.LOCALSense analyzes theconnections, interactions and buying behavior at local stores with the advancedanalytics platform Saffron Technology in real time and automatically.Mutuaggregates music videos and predicts customer taste in order to offer aPandora like service to its listeners. Mutu starts out with an innovative businessmodel. Besides ad revenue it earns money by selling back to the producers of musicvideos what videos people like, how long they watch them and what they share withtheir friends.I think there will be two big revenue streams on mobile, gaming and interestnetworks. End of last year I have been on a panel with Bill Chang, Chief Scientist ofBaidu in Shanghai, organized by Erik Brynjolfsson from MIT Sloan School. Billpredicted that gaming would be the most popular mobile apps in China. Gammingapps need context, interest networks and location too.The successful companies of the information age will generate value by creatinginformation from the ever growing sea of Big Data. Think about GE opening a centerfor Big Data analytics in the Silicon Valley for 1 billion dollars. GE intends to sellservices and the value add it will generate from operations data – railroad trafficand congestions, or usage data of its medical equipment in hospitals.Marketers know all that intuitively therefore they pay less for mobile ads. 1000clicks on a mobile ad banner cost 35-40 cents according to the venture capitalcompany Kleiner Perkins. Ads on Web pages sell up to 20 times more expensive.The lowerad prices are reflected in the balance sheets of web companies like Googleand Facebook. Google whose revenuedepends more than 90 percent onadvertisinghas shown steadilydeclining per click sales in the past three quarters; in the lastquarter sales have dropped by as much as 16 percent. Google’s countermeasure isit’s free mobile operating system Android. This ensures that the Google has at leastaccess to the handset market, and thus potentially to millions of advertisers. Whereis the business model here? So far I see only Samsung making money with Androidsmart phones.Facebooks revenue depends to 85 percent on advertising too. Revenue has sloweddown because ad sales and user numbers grow less than some month ago. The
  • 5. increase in ad revenue in 2011 was still 88 percent while it slowed to 45 percent inthe first quarter and 32 percent in the second quarter of 2012.This ailing growth is incompatible with the high expectations for the Facebookstocks. They need a new growth strategy for the mobile web. Transferringoverloaded web apps on the mobile Web has shown very modest returns. Recently,Facebook has started to mingle ads with status messages when the user or theirfriends are befriended with the respective company. This seems the right direction,user interaction using context and the wealth of data FB has gathered about us.According to FB, its making half a million dollars in sales per day with these mingledadds.Customers rather than clicksOther companieshave been off to a better start when monetizing mobile ads. ThoseWeb 3.0 companies understand marketers asking, why pay for clicks when one cansteer customers via mobile ads to a shop, restaurant or service?Another location based social app I would like to mention is Waze, an app thatcombines GPS with asocial network. Motorists transfer their speed whilecommuting to work. Waze calculates road conditions from the speed taking intoaccount reports from fellow drivers and delivers turn by turn navigation thatautomatically re-routes you when road conditions change.This is a great example ofhow dynamic interest networks are unlike the static social networks. I don’t evenknow the people who are in my interest network when driving to work. Still thecommuters’ community helps each other to get faster to work.Actually, Facebook, Google and the other incumbents arein the best staring positionto deliver mobile services around interest networks. They have more users than anynew Web 3.0 mobile community and therefore command the reach needed to getsuch services off the ground. However, the incumbents are currently not the onesdriving the mobile revolution. I’m having a déjà vu from the Web portals era whenthe Web 2.0 newcomers ate the lunch of the Web 1.0 crowed.