Mon, Mar 30, 2015 - Page 12 News List

Debunking the ‘Facebook Second Guessing Syndrome’

Despite the rise of several rivals and the technological fickleness of young people, Facebook continues to confound those who predict its demise

By Farhad Manjoo  /  NY TIMES NEWS SERVICE

Not an illusion.

Photo: Bloomberg

Every few years, a strange affliction breaks out in Silicon Valley. The disease, Facebook Second Guessing Syndrome, has as its worst symptom an embarrassing tendency to predict an early peak for the fortunes of the world’s largest social network.

To techies who laud Apple for its hardware and software design or Google for its data-crunching prowess, Facebook has long looked a little frivolous and more than a tad faddish. The company’s genius is in bringing people together and persuading them to stick around, an unusual skill in Silicon Valley, and something Mark Zuckerberg’s company has managed to do consistently for more than a decade.

That’s despite various potential threats to its dominance — the rise of alternative social networks, a shift from desktop computers to mobile phones and the perpetual technological fickleness of young people. Facebook has even managed to reap substantial profits from its operations, beating analysts’ expectations in every quarterly earnings report over the past two years. Its market valuation recently surpassed US$230 billion, passing JPMorgan Chase and within striking distance of General Electric.


Yet the skepticism persists.

Now, as the company holds a developer conference this week in San Francisco, another theory arguing that Facebook’s success may be illusory has been making the rounds. This theory concerns the rapid growth in Facebook’s business of selling ads in its smartphone app, which is the most used app on the planet.

The trouble, the theory goes, is that Facebook is increasingly depending on these ads, many of which are run by other startups hawking their own apps. For some industry observers and market analysts, Facebook’s reliance on money from other app companies looks like the making of an unsustainable monoculture — not a lasting business, but something spun up in the heady froth of a venture capital smoothie.

“There are now a number of revenue streams that are being driven by venture dollars,” Bill Gurley, a prominent venture capitalist who has been warning of a tech bubble, said recently in an onstage interview at the South by Southwest festival in Austin, Texas. “Facebook and a little bit of Twitter’s revenues are now coming heavily from mobile downloads. These are ads for, like, Game of War with Kate Upton. Those ads are now an increasing percentage of their revenue, and they’re being spent by these excessive venture dollars.”


The notion that Facebook and other social networks will suffer most deeply when the bubble bursts sounds plausible because it rehashes the last tech boom and bust, when advertising revenue run-ups at huge Web portals (remember those?) turned out to be funded mainly by venture capital investments. In 2001, revenue at Yahoo — the largest portal, and something like the Facebook of its time — plummeted almost US$400 million when startups stopped spending during the bust. Yahoo has never recovered its former glory. Could Facebook face the same fate?

Probably not — or not yet, at least. On closer inspection, the theory that Facebook’s growth depends on unsustainable venture capital is mostly overblown, another strain of Facebook Second Guessing Syndrome. It’s a story that misses important facts about Facebook’s advertising business. For one thing, as Facebook’s executives have repeatedly pointed out, ads from app companies make up a small percentage of the company’s overall business. Most of the social network’s revenue comes from video ads and ads for large brands.

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