Facebook And The Social Contract

| About: Facebook (FB)
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I have covered the Internet since before the Web was spun and it has always included an implied "social contract" that many, even within the industry, fail to appreciate.

Let's put it simply. You had better play us fair, and we define what is fair.

When Facebook (NASDAQ:FB) changed Instagram's terms of service, making them more like Facebook's own, its poor execution communicating this decision violated the social contract. It did not seem fair. It seemed that Facebook was saying they could sell that wonderful picture you created to some advertiser, take the money from the license, and that person could, in turn, do with it what they wanted. That picture of your happy dog leaping for an organic treat might be turned into a commercial for some artificial doggy chew, Facebook would profit the money, and you'd be left worse off.

That was not Facebook's intent, which is where we get to the second half of the social contract. Namely, we decide. When your success depends upon word of mouse, the views of the mouse holders are what matter. Thus, the press is filled today with stories about how users can switch away from Instagram or protect themselves from Instagram.

This isn't the first time this has happened with Facebook, which must find new ways to monetize its traffic to thrive as a public company. Users understand that, even if some cynics think they don't. They just expect that monetization to be done in a fair manner, with some benefit to them. They resent seeing their personal information misused, and they're ready to misunderstand any changes.

Google (NASDAQ:GOOG) faced this earlier in 2012, with Google Plus, but it was able to step away from the problem. My guess is that Facebook has a more fundamental problem on its hands, one that goes beyond whatever earnings it reports for the current quarter. Facebook has to be seen by its users as "not evil" or they will just walk away from it, without telling it they're doing so. To do this Facebook has to execute its communication with users much better than it's presently doing.

Until I see some progress on that front I'll consider Facebook overvalued regardless of the numbers it claims in January. An Internet company's public image is the only real asset it has, and if it fails to protect this asset, the rest doesn't matter much.

Disclosure: I am long GOOG. 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.