The Mobile Economy And The Fate Of Facebook

When the first tech bubble burst at the turn of the 20th century, it more or less took Yahoo with it. In 1999, Yahoo had hundreds of millions of unique views per month and a market cap of $128 billion. Flash forward to the beginning of 2015, Yahoo has less that 100 million uniques a month, and a market cap that, at $10 billion, is about one tenth of that. That big fall off? Brought on by a huge drop in ad revenue after VC-backed new companies disappeared when their funding dried up, leaving Yahoo without an advertising base.

Yahoo is still capable of generating headlines, though. Recently flush with cash thanks to the Alibaba IPO  – the once mighty search giant recent has been linked to potential big ticket acquisitions like AOL and, gasp, CNN, but it simply seems to no longer have the juice to compete with the big, top line tech firms like Apple, Google and Facebook.

CEO Marisa Mayer would like to change that by pivoting the company’s core business to mobile services, but that strategy is still playing out and has so far been far from a slam dunk.

And if the CEO of Snapchat, Evan Spiegel, is correct, Facebook runs the distinct risk of joining Yahoo on the list of “once greats” if and when the next tech bubble bursts.

The ordinarily tight-lipped Spiegel – who appears rarely in public and generally demands pretty tight non-disclosures from his business partners – saw his veil slip a little in late December 2014 when a batch of emails he wrote to Sony executive and Snapchat director Michael Lynton were released during the Sony breach.

In those emails, Speigel noted Facebook’s suspiciously good performance.

“Facebook has continued to perform in the market despite declining user engagement and pullback of brand advertising dollars — largely due to mobile advertising performance, especially app install advertisements,” he writes.

And those mobile app installs represent a problem because it overly ties Facebook’s revenue to venture-capital backed startups that are purchasing install apps. Yahoo was once similarly dependent on startups (who were buying advertising and links off the Yahoo main page) and thus was devastated when funding dried up and those startups disappeared and left Yahoo in the lurch. Facebook’s similar revenue model, says Speigel, leaves them at risk of following the same path.

“This [startup dependent] ad revenue props up Facebook’s share price and continues to justify VC investment in technology products based on abnormally large market cap companies (i.e., “If this company attracts just 5 percent of users that FB has, it will be HUGE” — fuels spend on user acquisition as user growth is tied to values). When the market for tech stocks cools, Facebook market cap will plummet, access to capital for unproven businesses will become inaccessible, and ad spend on user acquisition will rapidly decrease — compounding problems for Facebook and driving stock even lower.”

Spiegel did not seem to note a reckoning in the tech market as inevitable, but did note that the signs in the marketplace are at least troubling.

“VC dollars are being spent on user acquisition despite unknown [lifetime value] of users — a recipe for disaster.”

Before anyone rushes to dump their Facebook stock, it does bear noting that in late 2013, Snapchat rebuffed a $3 billion acquisition from Facebook, and at least some of Spiegel’s extreme bearishness on Facebook can be seen as at least partially a justification of his decision to turn down Zuckerberg and Co.

And Facebook is notably different from Yahoo circa 1999, particularly when it comes to their advertiser base. Large, traditional national brands are also part of Facebook’s advertiser stable, and increasingly those brands are moving money from other channels to invest more fully in Facebook. A Target executive at an industry event noted that they would cut every advertising channel but television to preserve their Facebook-based campaigns.

And there are those who remain strongly bullish on Facebook.  A hedge fund manager writing for Seeking Alpha noted in his New Year’s predictions that Facebook remains what he considers the best investment in the social media network space. Of course it is one of the only players in that space but let’s ignore that detail for now.

“Despite achieving 1.35b MAUs and higher y/y comps on operating metrics in 2015, FB remains the best idea within the universe as its robust ad platform, rich user data and unrivaled network effect continues to lay the runway for its multi-year growth story,” the analyst reported.

The analyst did offer a note of caution however,  highlighting that Facebook’s Messenger and What’sApp chat applications have a long way to go, especially when stacked against China’s WeChat or Korea’s KaKao.

“With a solid mobile messenger app in place, Facebook will be instantly open to mobile payment, commerce, gaming, O2O (online-to-offline) and P2P opportunities. While the core business may carry the company in the medium term, it is important for Facebook not to overlook the importance of Messenger.”

At present it seems premature to say that Facebook is the next Yahoo. However, it does seem worth watching to see how Facebook manages the transition to mobile, particularly with its chat applications.  If it can hold its user base and move with them as they transition their online usage from computers to “anywhere,” they could avoid the fate that Spiegel predicts.