Facebook (NASDAQ:FB) remains the dominant social network, but many are now questioning whether it will be able to maintain its member numbers as new services such as Instagram (owned by FB) and Path (a mobile-phone based social network) gain traction. A recent story in The Guardian entitled Facebook loses millions of users as biggest markets peak states that, according to "independent data" from SocialBakers (an analysis firm), FB has lost millions of users per month in its biggest markets, though later SocialBakers states that their figures are rough estimates only. The Guardian also cites analysts at Jefferies bank, whose algorithm that interacts with Facebook "suggests user levels in [the first quarter] may have declined from peak", and comScore, which apparently has found that the number of minutes the average American spends on Facebook has declined slightly.
While it has generated substantial attention, the fact is that The Guardian's article is very unconvincing as far as arguing that Facebook is "losing millions of users", because it lacks any concrete data. All we have are estimates. The only reputable source for Facebook's user numbers is Facebook itself, and we will have a better idea of how Facebook is performing very shortly, when Facebook releases its numbers for the March quarter. It is expected that advertising revenue will be up substantially from last year (expected revenues are about $1.44 billion), driven partly from an increase in mobile numbers. But if the numbers disappoint and it transpires that Facebook really is declining, there are a number of reasons that could be contributing.
What Would Cause Facebook To Lose Users?
Facebook was initially able to overtake MySpace largely due to its simplicity and ease of use, but as the company grew, numerous changes occurred that were not well received. Some criticisms for Facebook are the following:
- Intrusive Advertisements - Facebook has added more and more advertisements since 2005 (initially it was completely clean), and many users have become frustrated with advertisements for unwanted products taking space on the news feed. It looks like there are no plans to make advertising on Facebook less intrusive, as we also now know that Facebook plans new video ads that would be played automatically. It is understandable, of course, that Facebook is attempting to maximize revenue to the highest extent (in 2012 it was still barely profitable), but that comes at the cost of user satisfaction.
- Questionable Products Advertised - To add to the problem of intrusive advertising, many websites that have been advertised through Facebook have ranged from unethical to outright scams, as numerous recurring-billing products that trick the consumer into having their credit card repeatedly charged for a product or service have emerged. Facebook faces the dilemma of allowing advertisers pushing substandard products and upsetting users, or accepting only reputable advertisers and earning less revenue.
- Spam - As the popularity of Facebook increased, more websites began to use it for malicious purposes. Many Facebook users have encountered pages that ask for "likes" in return for being able to access some piece of content (often nothing is actually delivered), or pages that are built around some popular topic that are aggressively marketed to gain thousands of likes and then are sold to marketers to push products. Pages will often make outright lies to make users like the page, solely for the purpose of making money by advertising in the future. It is also possible for marketers to buy likes or user accounts in order to artificially boost the popularity of a Facebook page.
- Privacy Controls - Privacy has been one of the main criticisms of Facebook, as the website has constantly changed privacy settings and made some users uncomfortable with what is displayed. It can also be frustrating when a user likes a piece of content or plays some online game on Facebook, and then it is displayed on their wall without the users consent.
Facebook is still the dominant social network, and attempts by others to dethrone it (notably Google+) have not yet posed a serious threat. But that doesn't mean Facebook is unassailable. Just as how it was previously thought that Facebook would be unnecessary due to the dominance of MySpace, or how Google would be unnecessary due to Yahoo and AltaVista, there is no reason to think that Facebook won't eventually decline in popularity as a newer and cleaner social network with fewer problems is developed. But I still anticipate that Facebook's user base will remain strong for at least the next couple of years.
Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.