Have we hit "Peak Facebook" as fellow SA contributor Dana Blankenhorn argues? I'm not sure we're at the exact peak yet, but the signs are becoming clear that the top is coming soon.
Plenty has been said about Facebook's valuation, I won't rehash those well-known arguments. The topic for discussion today is Facebook's troubling evolution into a publisher/content firm that forces its ambitions onto users against their wishes.
For whatever reason, tech companies seem prone to take on media ambitions. Despite obvious shortcomings, it keeps happening. Engineers don't have the social skills that New York media world executives do, nor do algorithms work well in the cozy networking-driven creative industries world.
This brings us to Facebook (NASDAQ:FB), which is for whatever reason punting on its proven business model in an effort to become an all-encompassing professional media platform. In other words, it wants to be AOL again, circa 2001. For investors, expect similar results.
AOL: A Refresher
AOL rose to become one of the kings of the first internet boom. It had complete dominion over its territory which encompassed the dial-up internet world. While its CDs that it sent to everyone with AOL software are now the butt of jokes, it was a very effective approach back in the day.
The company had off-the-charts recognition and presence. Getting grandma onto AOL was the same rite of passage for grandkids that getting her Facebook account set up today now represents. A key part of AOL's strategy was its fortress closed internet - creating safe and sanitized versions of the wild untamed internet on the other side of the wall.
It'd take a book (several were written) to explain what all went wrong with AOL's strategy. To summarize, they ignored broadband, thinking users would stay loyal to their dial-up service since it had more associated bells and whistles. They also figured people wouldn't want to move their e-mail addresses - true in some cases.
But beyond that, they had a host of ancillary services, such as their sometimes disturbing, always interesting private chat rooms about a broad range of topics. Over time, it evolved into what could be reasonably described as the first social network. Digital Trends explains:
But if there is a true precursor to today's social networking sites, it was likely spawned under the AOL (America Online) umbrella. In many ways, and for many people, AOL was the Internet before the Internet, and its member-created communities (complete with searchable "Member Profiles," in which users would list pertinent details about themselves), were arguably the service's most fascinating, forward-thinking feature.
As the threat from the "real" internet continued to rise, AOL increasingly moved into content. It contracted more and more journalists and celebrities to create exclusive content to make AOL stand out. What they failed to realize was that this sort of content is available anywhere on the internet - people weren't loyal to AOL because it had better generic media content; they were there for the human connection.
AOL tripled down on this approach with the Time Warner merger, widely considered the worst merger of all time. The rest is history.
Facebook: AOL 2.0
Facebook hasn't learned the lesson from AOL's fall. Facebook rose to prominence on a similar strength to AOL - its intensely human connection. Yes, Facebook had a bit of a first-mover advantage. Aside from Myspace, which looked horrible and became overly distracted with the music industry, Facebook really had the field to itself.
However, competition quickly arose from the zillions of me-too social networks that arose, and some of them, for a time became quite prominent. (AOL subsequently paid $850 million in 2008 for the US' then #3-social network Bebo in another spectacularly bad deal).
Facebook, with its clean interface, excellent developer API and continued focus on its core mission - connecting friends - soared above the competition.
However, much of Facebook's model has been built on building its own private web, just as AOL did. They don't want you to leave their castle - things like Facebook events, causes, places, messages, etc., are all done elsewhere on the web and usually with better functionality.
Why did users put up with doing so much of their business inside Facebook's walled castle rather than out on the open web? Simple. They got to see what their friends were doing and enjoyed the instant feedback and affirmation that it provided.
Facebook's ongoing pivot away from its old core mission - doing things with friends - toward professional paid-for content will destroy the site's ethos and drive users back out into the open internet. More on that in a second. More generally, the company's naked ambitions toward power and growth are getting through to users. Facebook doesn't even pretend to like us anymore, it's bluntly wielding its force to change user behavior.
The ongoing move to displace messages off of Facebook and into Facebook Messenger is one such example. Take this discussion of the move:
The real reason that Facebook is pushing chat into its Messenger is to create another platform or silo from which Facebook can access you as a user. This might seem an odd decision on the surface, but viewed through the lens of a company that wants to spread its tendrils as far and wide as possible, it makes sense. It's the same reason Facebook bought WhatsApp.
On the one hand the dedicated chat app competes directly with Facebook Messenger, and potentially the low-level Facebook social network experience. However, it also targets users who are not interested in Facebook.
At this point, Facebook's decisions are about creating more silos with which to access its users. How charming! That's great - for them - if it works (though competing with its own WhatsApp is still odd business strategy regardless). But this move to unbundle Messenger from Facebook is horrendous for the user experience. Now Facebook wants us to have two dedicated messenger apps - both owned by them - in addition to email, texts, and whatever else we may use. Messaging has network effects, forcing people to subdivide their attention like this is profoundly user-unfriendly and is generating major backlash.
As for the supposed upside, that it targets people not interested in Facebook - who is going to sign up for Facebook messenger in 2016 after ignoring the company for the past decade? The rationale is on its face absurd.
Facebook's Move To Become A Media Company: A Disaster In Waiting
Web tech companies seem to always want to become media companies; it's a recurring blunder. AOL famously popularized the trend by merging with Time Warner. The content integration with AOL led to fewer synergies than anticipated, let's just say.
More recently, Amazon (NASDAQ:AMZN), for whatever reason, decided it should set up its own publishing imprint. This had the natural effect of irritating the rest of the publishing industry to no end, which was terrible for their overall business of selling media produced by their now-enraged partners.
And the publishing arm itself hasn't accomplished much notable. See this scathing report. The high-profile publisher brought in to run the unit was canned after it failed to produce best-sellers. Turns out publishing books is a different game than using algorithms to turn readers onto already published and marketable books.
In an example especially instructive to Facebook, Google (NASDAQ:GOOG) spent $300 million on its YouTube Original Channels in an initiative that was soon forgotten (Google soon removed all references to it from its site). The idea was to invite celebrities, athletes and other such leading lights to create TV-like content for YouTube. One participant described the fiasco that resulted as follows:
[W]e are extremely grateful to be a part of this program. It was a great thing for us…but it might have been a bit of a dopey idea.
There were a lot of recipients of this money, and many of them were major media companies trying their hand at online video that received some fat checks, up to $5M a piece, to launch TV-like channels. What we all found out is that, no matter how hard you push them and how much money you spend on them, YouTube doesn't work like TV…and funding it that way is daft.
Of the 114 channels that YouTube funded as part of this initiative, my educated guess is that exactly one earned back its advance.
113 out of 114 fail rate on this "dopey" idea; less than 1% succeeded. That's not so hot. Turns out people weren't using YouTube as if it were a TV substitute. With its 2015 reincarnation of Original Channels, YouTube appears to have learned its lesson; it's only dishing out money to already prominent YouTube creators, rather than raining big money on random media personalities with no platform presence.
Which brings us full circle back to Facebook and their asinine latest announcement. Facebook will be showering money on a bunch of celebrities and media companies to make videos for Facebook. According to reports, this is supposedly necessary to keep users engaged.
But here's the thing, people have been using Facebook for a decade now to connect with people they know. Who signed up with Facebook because they wanted to see what Jay-Z or Brad Pitt is doing at the moment in a live video? I didn't, my parents didn't, my grandma didn't. Which generational part of their user base do they think they're targeting? There's no shortage of chances to see celebrities on the internet. What makes Facebook think their users want that in their streams instead of the relatable personal content they've gotten for years?
Facebook already had a challenge managing the line mixing ads and impersonal content such as news and trending stuff into the interesting personal stuff that drew us there in the first place. This article summary I saw recently should scare any Facebook stockholder to the bones:
Facebook wants to get rid of text content, and replace it with videos. Note the second bullet point - Facebook doesn't notice the pernicious effects of this trend on its website, however they're still ready to destroy their own platform due to this supposed threat. Cue echoes of Nokia's foolish CEO Stephan Elop who set fire to his own company with the infamous burning platform memo.
In place of the personal text and image content that site users have enjoyed for years, now the plan is for videos. Because grandma is really eager to get into virtual reality, I guess. Sprinkle in a mix of failing Facebook Instant Articles from impersonal click-bait sites such as Buzzfeed, and you've completely replaced the human connection that built Facebook with generic corporate rubbish.
Here's the dirty secret with this all-video push. Amateurs can't compete with professional video-makers. The barriers to entry are too great. This wasn't the case with text. Even a poorly written entry describing an important life event is emotionally compelling coming from someone close to you; a poorly made video, by contrast, is closed within a few seconds regardless of the author. Only big media producers will "win" in the new Facebook world - and judging by the finances of Gawker and other such clickbait sites - this isn't a model Facebook investors should yearn for.
If Facebook doesn't deviate from this flawed course, they'll end up with a platform full of professional but uninteresting content that doesn't motivate people to come back. Already the warning signs are here. Users are sharing less; much less. Teenagers are already going to newer, more exciting and user-friendly alternatives such as Snapchat (Private:CHAT).
It's clear from how Facebook is remaking the site that they don't value mere text from us non-celebrities anymore. And users are responding. Give it two or three years and people will reject Facebook's professional videos and biased curated news and return to the open internet. What happened to Myspace once they got fixated on music and stopped tending to the user-side of the website?
Facebook, meet AOL. You'll make great side-by-side case studies for future MBA students on how to lose your friends and trivialize people.
Disclosure: I/we 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.