The Demise Of Social Networks

Includes: FB, LNKD, TWTR
by: Andrei Volgin

When Twitter (NYSE:TWTR) announced its first-ever decline in timeline views, many people volunteered their thoughts on which features the company should implement to reverse this decline. While their enthusiasm is sincere, unfortunately, it is misguided.

On the Internet, Less is More

WhatsApp has proven - in a spectacular fashion - that less functionality often means a better user experience. They are not the first, of course, to succeed because of the simplicity of their product. I am old enough to remember when Google's (NASDAQ:GOOG) blank page with a search box was a shock in comparison to Yahoo (NASDAQ:YHOO) and other search engines of that era. Where is Google now, and where is Yahoo?

There was a time when Twitter was also a very basic service, with its own, unique identity. Lately the company was very busy diluting it by trying to look more and more like Facebook. It may prove to be a fatal mistake - no one needs a smaller Facebook. By the way, WhatsApp may offer a basic Twitter-like service easily, if it chooses to do so. It already processes 50 billion messages per day - a whopping 100 times more than Twitter (at 500 million), so technically, it is not a big challenge.

Facebook (NASDAQ:FB) and LinkedIn (NYSE:LNKD) are falling for the same trap. Remember how many new Facebook features have failed? Credits, gifts, Home, search graph, email - these were solid ideas. Yes, they often lacked in the implementation department, but they were fundamentally sound products. Why did they fail? Because Facebook users do not need a more complex Facebook. If anything, they need a simpler Facebook, and this is why their latest effort - Paper - may actually succeed, if they resist the temptation to stuff more features into it. I believe that Instagram is successful in large part because it was not integrated into Facebook.

Now LinkedIn tries to become a publishing platform. Do we really need another place to blog? Moreover, blogging on LinkedIn may be perceived as a tell-tale sign that a person is looking for a new job, which greatly limits its appeal to many users.

I totally understand why these companies try to add more and more features - I made this mistake myself more than once. It feels unnatural not to do it. Besides, the management wants to move forward, investors demand "innovation", and thousands of engineers have to justify their paychecks. It takes a nut like Steve Jobs to push for one button where two dozen existed. The leaders of Facebook, Twitter and LinkedIn are good managers who listen to experts and to their customers. Unfortunately, the problems they face cannot be fixed by improvements in their existing products.

The Psychology of Social Networking

While mistakes in product strategy can be costly, they are not the main reason why the most popular social networks today may not even exist a decade from now. A much bigger threat is deeply rooted in human psychology, and there is very little that networking giants of today can do about it.

The key problem is that most people feel comfortable only among a small group of close friends. While it may be fun to connect with strangers, the excitement quickly wears off - once we learn more about our new acquaintances, they tend to become much less interesting.

As Facebook established itself as a clear leader in social space, many people felt a need to join it. Opening a Facebook account is a fascinating experience. It is fun to reconnect with people that you have not been in touch with recently, sometimes for years. This effect, however, does not last long - there are only so many puppy pictures you can take. More importantly, your list of friends grows quickly to include family members, former classmates, and co-workers. Suddenly, it feels awkward.

Teens are leaving Facebook not because someone offers a better user interface, or because Facebook lacks a particular button. Teens are leaving because parents and teachers are joining. There is also another reason that very few people talk about: some teens bully the rest - sometimes literally, but more often by simply being more "popular". If a high-school student cannot have as many friends as her classmates, she may be better off closing her account.

And where do these teens go? They go to places where they can communicate one on one or with a small group of close friends while staying hidden from everyone else - Snapchat and WhatsApp are two popular destinations. The latest survey shows that 77% (!) of college students in the U.S. use Snapchat every day.

This awkwardness of big social networks affects everyone, not just teenagers. Can you say no to a friend request from your boss or a very important customer? Your co-worker? Your mother-in-law? A son of your friend who just graduated from college? You can, of course, accept them and then carefully mark various checkboxes to make sure that only the right people see each one of your posts, but honestly, that is a lot of work that most users do not like, not to mention that it does not feel reliable. What if there is a glitch in their system, and your boss sees a picture of you that he was not supposed to see? The need to think through these scenarios easily kills all the joy. There is no harm, of course, in posting a picture of a snow-covered tree in your backyard, but how many people are really interested to see it?

Similarly, Twitter gets a lot of free publicity when celebrities embarrass themselves, but the same stories make other users think twice before tweeting something of any significance. Again, no harm to tweet about a figure-skating competition, and there are people who believe that the world must know their opinion on every possible subject, but such tweets only increase the noise on the platform.

Obviously, there are people who work in sales or marketing, and who constantly look to expand their circles, or who use social networks in their professional capacity. There are also people who have a special talent for social interactions - Malcolm Gladwell calls them connectors. They thrive on social networks, but they are a distinct minority.

I believe that the majority of users will slowly get tired of Facebook and Twitter. Not everyone is going to leave, but more and more people will become less engaged.

As a side note, the more targeted advertising becomes on social networks, the faster people will leave them. It feels creepy when you realize how much they know about you.

Investment Perspective

The valuations of Facebook, Twitter and LinkedIn imply that these companies will be around 50 years from now, and that they will continue to grow their revenues fast in the foreseeable future. These assumptions are strange, considering that history is littered with examples of former technology giants fading away. Excite, AOL (NYSE:AOL), and MySpace are just a few examples, and all of them looked formidable at one point. Facebook just turned 10, and Instagram, Pinterest, Snapchat and WhatsApp are even younger. It is hard to imagine that there will be no new companies over the next 10 years that would rise to similar prominence at the expense of today's leaders. All the arguments that investors use today to justify these valuations (first-mover advantage, network effect, economy of scale, vast user data, etc.) applied to BlackBerry (NASDAQ:BBRY), Nokia (NYSE:NOK) and Yahoo just a few years ago.

I can offer many solid arguments to demonstrate the absurdity of the current valuations that have long passed the bubble threshold. The point of this article, however, is that investors underestimate the effect that the networking fatigue will have on the growth of Facebook, Twitter, and LinkedIn. It was not very noticeable last year as a vast number of people joined the Internet for the first time. It will become more and more pronounced going forward.

I believe that these stocks will crash as soon as the data on user growth and engagement confirms my thesis. I think that we will see a decline in usage of all three networks over the next 2-4 quarters. Twitter and LinkedIn will most likely stumble first, but Facebook (ex-Instagram and WhatsApp) will not be far behind. And there is very little that these companies can do to prevent this from happening.

Disclosure: I am short TWTR. 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.

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