Why We Have Hit Peak Facebook

| About: Facebook (FB)

Summary

CEO Mark Zuckerberg is making his company an autocracy, just like Rupert Murdoch's Fox.

Paying media companies for content, then trapping their users is not a business model.

Facebook's money and power may look unlimited, but that can change.

Mark Zuckerberg is making the kind of moves at Facebook (NASDAQ:FB) that founders make when their stocks are about to roll over permanently.

The "stock split" is designed to maintain Zuckerberg's personal control over the company while he sells out his shares and gives them to charity. It's similar to a deal done recently by Kevin Plank at Under Armour (NYSE:UA) and represents part of a very worrying trend, corporate founders tossing corporate democracy out the window.

What happens if a bus runs over Mr. Zuckerberg? Is Priscilla Chan supposed to run the company? She's certainly in line to control it. Or what if Zuckerberg loses focus and gets more interested in the product of his philanthropy as Bill Gates (NASDAQ:MSFT) has? There is no assurance he won't. In either case Facebook can quickly become Viacom (NYSE:VIA) (NASDAQ:VIAB).

The idea of selling stock is to offer other people a chance at controlling the direction of the company, in exchange for their money. Making them merely passive bystanders in what could be a train wreck is not going to increase confidence. Zuckerberg can get away with it today because he's in his early 30s, because Facebook "delivers alpha" and because it has enormous power. But this is becoming ridiculous.

You can't take over Rupert Murdoch's Fox (NASDAQ:FOX) (NASDAQ:FOXA) and you can't take over Larry Page's Alphabet (NASDAQ:GOOG) (NASDAQ:GOOGL). Increasingly, corporations are becoming limited partnerships and there is nothing more limited than a limited partner. Even China has more corporate democracy, which is why Alibaba (NYSE:BABA) sells its "shares" here.

Then there's the $50 million "content fund" under which media companies and celebrities are being paid to load up Facebook Live with video content.

The idea is that these people will, by their fame, generate so many page views that the money will come back in advertising. Maybe. But there is no new business model here. It's still all about run-of-network ads and ad rates. It's a one-time pay-off rather than a continuing revenue stream. The celebrities will vanish when the money goes away, and the media companies will find they just gave away their best stuff for a pittance. My guess is that they won't give away their best stuff.

I have written many times about this problem. Without premium rates for defined audiences, you can't create such audiences and generate content for them. At best, Facebook is looking to define who or what is popular with its cash. Is it really ready to become a publisher, with a publisher's power and responsibility to the audience? It has never admitted to being a publisher before.

Finally, there's the walled-garden approach being taken to eliminate Call to Action links on video.

This is the stick to the "Fame Fund" carrot. Broadcasters will no longer be able to re-direct users to their own sites at the end of a video placed on Facebook. On the one hand, they're being offered cash to give their stuff to Facebook, on the other they're being told they can't get their audiences off it.

So Facebook gets the power of a publisher without accepting any of the responsibility, and Zuckerberg gets the power of a private company without the responsibility to maintain his investment. And they call Donald Trump a megalomaniac.

This is not going to end well. It won't hurt Facebook shareholders in the near term, but this is becoming a Citizen Kane story. That one looked happy in the second reel, too.

Disclosure: I am/we are long MSFT, GOOGL.

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.