Can Facebook Survive Changing Demographics?

Oct.27.13 | About: Facebook (FB)

There is growing concern over the aging of the demographic inhabiting Facebook (NASDAQ:FB), as younger users gravitate towards other social media platforms. The good news is many of them are interacting with Facebook's Instagram, the bad news is more of them are going to competitor Twitter (NYSE:TWTR), which is about to go public.

Now the question is whether or not this will have a significant impact on the revenue and earnings of Facebook going forward.

What's particularly concerning is how quickly teens are abandoning Facebook. According to the semi-annual "Taking Stock With Teens" project from Piper Jaffray, over the last year teens considering Facebook as the most important social media site has plummeted from 42 percent last year to 24 percent this year (the study was completed in September 2013).

Data show that Twitter is now the favorite among teens, with 26 percent of responders saying that's where they spend most of their social media time. Instagram is now tied with Facebook at 23 percent.

source: YahooClick to enlarge

Instagram

What is a concern about Instagram is how much it will cannibalize Facebook, as it's not nearly as effective on gathering the type of data that can be used to target specific individuals by marketers. Users of Instagram don't place the type of personal information out there that users of Facebook do. That means less advertising dollars for the company.

Facebook is about to launch ads on Instagram, and it is rolling them out slowly to get a feel for what users will tolerate. You can go here to look at what an ad will look like in the beginning of the process.

Initially Facebook will only allow 10 brands they selected to show ads. The criteria for the selection of the brands is based upon the "quality of their Instagram feeds."

So while it's good news that Instagram will start making money for the company, it will be largely at the expense of Facebook's namesake. This isn't a positive because it won't balance out because Instagram won't be the advertising revenue generator Facebook is.

Twitter

Twitter recently released it revenue figures for the first nine months of 2013, and it shows the company generating $422.2 million, although it doubled its loss year-over-year, with losses increasing each quarter over the last four quarters.

What Twitter has done better than Facebook is going public before it saturated the United States and other important Western countries. Facebook went public when it was mature in those areas, with most growth opportunities in poorer countries. In that regard Twitter is much better positioned to grow its base number of users.

As it affects Facebook, that growth is definitely at its expense, and that has the potential to be another disruptor when including the less lucrative Instagram in the mix.

Twitter has similar challenges as Facebook has with how to better monetize international users, but it is a challenge that includes a growing youth base, rather than the shrinking one Facebook has.

The other factor is young people tend to make a social media site popular before adults start to utilize it, so there will eventually be a change in the use of Facebook by more mature users as well.

Over the next couple of years though it's the youth demographic that matters, and Twitter is winning and will continue to win that battle with Facebook.

Don't get fooled about how many teens still have Facebook profiles, as that's irrelevant. Having a Facebook profile has zero to do with whether or not someone uses the service or not. That same is of course true with Twitter.

Why Changing Demographics Matter

The reason the changing teen demographic matters so much to Facebook is Teens have said the biggest influence in their lives concerning making decisions on buying something is the recommendations friends make.

Over 50 percent of teens say they use social media to make buying decisions. Of all of those, Twitter is the most important of all social media platforms to solicit an opinion or insight on a product or service for teens.

With more room for growth, this is a troubling scenario Facebook has little it can do to address. In the past, once a Internet destination is abandoned by teens, there is no hope of them being drawn back into the company fold. MySpace is one of the more obvious examples of that.

The impact on Facebook will be how many active teens it loses on the platform versus how many it gains on Instagram. In the best case scenario Facebook will lose because Instagram will never be the targeted advertising platform Facebook is.

If teens continue to abandon Facebook at the pace they have in the last year, teen users will probably drop to a little over 10 percent as far as popularity goes. And when it's no longer cool, teens will no longer use it. It's not a matter of only being less popular, but that the lack of popularity results in no longer using the service at all, or if they do, only very rarely.

Conclusion

I have found in my informal research on teen Facebook users, including those among my relatives, that they in fact rarely use Facebook any longer, even though they may retain their user profiles. So when those talking about Facebook point to a large percentage of teens still having Facebook profiles, it's a meaningless piece of information. All it means is they haven't deleted their profile, nothing else.

Facebook users will continue to age. We'll see an growing number of young people migrate to alternative social platforms, with Twitter, in the immediate future, being the main beneficiary of all that.

What we need to watch with Facebook is international growth and where it is, along with the disposal income of those living in specific countries it is growing its user base in. Also important is the demographic of the users in each country. We may see teen use in countries outside the U.S. grow, even while the teens in the U.S. abandon Facebook in droves.

The other important factor is the aforementioned pace teens abandon Facebook and go to Instagram and Twitter instead. That and how successfully and profitably Facebook can monetize Instagram will determine a lot as to how profitable the giant social networking site will be in the future.

It may seem Facebook has a lot of time to deal with this, but the enormous drop in popularity among teens in one year is very similar to how quickly MySpace fell out of favor. Facebook is still running on the fumes of its past popularity, and many people and institutions aren't aware the depth of the challenge the social media network faces in the relatively short term.

If another demographic abandons Facebook, it would be a hint that the company is in some serious trouble.

Finally, as investors we need to totally ignore the number of people with Facebook profiles and look to how often they use the network, if ever. All you have to do is look through your own friends or glance at some of the timelines of other Facebook users to see if they actually use the service. It's surprising the large percentage that can be found that rarely use the service to engage family and friends.

I think once advertisers see that teens are for the most part no longer using the site, and many adults rarely use it, the dynamics of pricing could radically change. If things keep on going as they are, it could be sooner rather than later. Again, the key is teens and overall usage as for profitability for Facebook. It appears both are starting to show wear, and if that's the case, Facebook will face an uphill battle to retain meaningful revenue growth and earnings.

It's not there yet, but it always happens first with the teens on these type of Internet sites. And if it spreads beyond teens, that's when the company will have to deal with some extremely serious issues.

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.