The Social Media Backlash Is Coming

Feb.28.12 | About: Facebook (FB)

I don't believe that social media -- Facebook (NASDAQ:FB) included -- is worth the hype. I don't have a Facebook account, and I won't be buying their stock. I'm 35 years old, I think there are many others who "don't get it," and that a generation of backlash against social media is on the horizon.

Facebook Profits

With 845 million users around the world they are starting with a great base of potential customers. But how many of these are real potential and active consumers? Facebook says they have 483 million "monthly active users." That sounds like a lot. Here are some considerations why I feel Facebook is over-hyped:

  • What is an "active user"? You might be interested in what this New York Times article by Andrew Ross Sorkin has to say. In essence, if you click the "Like" button on this Seeking Alpha (although you are not likely to after reading the title), you are an active user. How many Facebook generated advertisements did you just see? Zero. Every active user, by their definition, is not necessarily one they can flash an x number of ads to.
  • In addition to picking apart the word "active," let's consider the word "user." Some people have multiple accounts - even for their bottle-fed children and pets. This will reduce the amount of true consumers.
  • What about the demographic of users between the ages of 13 and 18? Do they have the same spending power or influence as someone who is 30 to 50? Maybe, maybe not. I'd like to know how many users fall in that category. You also can't convince me that many users are not under the age of 13. If they lie about their age, the advertisers will need to take this into consideration as ads for the new Ford (NYSE:F) Super Duty truck is liable to have little impact. How effective will advertising be to the true Facebook user? The advertisers ROI needs to be considered.
  • Facebook will have shareholders to answer to. Investors will be squeezing the company to achieve ridiculous growth numbers. Facebook will be under pressure to create more social media addicts. While the craze might continue for a while yet, Facebook might find themselves dancing a difficult line between glutting users with flashing ads to make money and a simple and friendly platform. If FB users start to feel that they are in a giant commercial, this will surely detract from new and engaged subscribers.
  • Then we have other companies, such as Yahoo (NASDAQ:YHOO), demanding licensing fees for using its technology.
  • While Facebook has a wealth of information on its users, there is an increasing concern on privacy - especially on its under-aged users. How this information can be used and leveraged for profit? Will governmental law severely restrict how this information is used thus harming profit potential?

Buy What You Know and Understand

I follow the adage to buy what I know and understand. I can see using social media periodically to share experiences with close friends and family. I get how businesses try to use it for exposure. I don't understand how this platform will translate into a sustainable and rapid growing profit. I see too many hurdles if they inundate users with ads and I question the real dollars that can be drummed out of the 'active users'. Real privacy concerns will affect how much profit FB can wring from its database of information.

My personal belief is that there will be a backlash to social media going forward. A new generation may even go retro by focusing on in-person contact. Even if social media does continue to dominate our world for the foreseeable future, the Facebook giant could get taken out by a new innovation as we have seen so many times before. Will the next big thing be found among these social networking websites? Friendster and MySpace, where art thou?

If you get Facebook and believe they can't be knocked off their perch - by all means invest. As for me, I would far rather recommend a company like Apple (NASDAQ:AAPL) where consumers are begging to open their wallets for new technology that profits from social media but is not dependent on it.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I may intra-day trade any mentioned ticker in the next 72 hours but currently have no plans to do so.