Social networking sites like Facebook, Twitter and Myspace have exploded to top tech stocks as perhaps the biggest trend among teenagers and venture capitalists alike. The Forbes 400 lists Mark Zuckerberg, founder of Facebook, as number 321 on the list of the 400 richest Americans with a net work of $1.5 billion thanks mostly to his ownership of Facebook. As many who lost fortunes during the bursting of the tech bubble in 2000 know, dot com companies can accrue hundreds of millions of dollars in net worth without actually making money or even a model to achieve profitability. Here a few reasons why investing in, or spending a lot of money to start a social networking site is a terrible investment idea.
Facebook gears towards a demographic with little spending money: College age kids have little money to spend on the items that advertisers want to sell. The average college student graduates with $12,000 in debt they attend a public school and $30,000 in debt if they attend a private university. Should you gear advertising to people with no real income and have yet to graduate college? The average college student does not look to buy expensive clothing and cars, the average student drinks Keystone Light and makes minimum wage at McDonals.
It really is not that innovative: Does Facebook really do anything all that useful other than list your picture and private information? Frankly, Facebook does not do anything all that unique which another enterprising company might simply just imitate and gain some of the social networking share. Facebook certainly has name recognition, but so did the Alta Vista search engine which ruled the searching world until Google came and spanked everyone.
Facebook has no monetization plan: Facebook predicates it’s $10 billion estimated value on the fact that Facebook will earn money in the future. Mark Zuckerberg himself stated that in 2008 Facebook expected a negative EBITDA (Earnings before interest, taxes, depreciation and amortization), which Wall Street uses to evaluate a companies performance, but countered that with a $300 million advertising deal with Microsoft. Does Facebook really expect that online advertising cash to never end much like the investors who assumed the tech bubble could sustain itself forever? Chances are online advertising will slow dramatically until the global recession ends in god knows how many years and it’s unlikely that Facebook can continue getting richer advertising contracts.
In the end, Facebook seems like the poster boy for the second version of the dot com bubble, a company with a huge user base but little in the way of revenue streams beyond charging for premium content and hoping that the stream of advertising dollars flows forever.