Over the past several years, I have been discussing the tech sector with my brother Michael Whalen who is currently the Head of Digital Rights Administration for TuneSat,LLC. TuneSat’s audio fingerprint technology monitors hundreds of TV channels in 14 countries and crawls millions of websites. Michael is a professor at NYU and The City College of NY, a two-time Emmy® Award-Winning composer as well as an internationally-known recording artist. Last month on Zero Hedge, we spoke about the outlook for Apple Inc (AAPL). This month we return to one of our favorite topics, namely Facebook (FB). By way of background, you can read the February 2012 discussion with Michael about FB onZero Hedge, “Facebook Jumps the Shark.” [8] Also, see my FB comment in Washington & Wall Street, “At Facebook it’s about Quality vs. Quantity.” [9] -- Chris
RCW: So Michael, we have spoken in the past about some of the business model issues at FB. They just went through an especially ugly annual shareholder meeting, inspiring me to write a comment on Breitbart.com from a valuation perspective. I'd like you to dig a little deeper and revisit the business model of FB in light of the results of the past year. Observers talk about how FB is changing the world but is this really a business or simply a web site that is still largely free?
MW: If I was an investor in FB - - I would be furious too. Mark Zuckerberg cashed in a chunk of his stock, he got married and most importantly - he has stopped listening. How do I know that? Look at what they've done since their IPO. They've put in a "Timeline" and some minor fixes to their basic interface. That's all.
RCW: That is a pretty tough indictment. How do you measure Zuckerberg’s failure?
MW: Their revenue is flat. Flat? How is it possible to NOT monetize 200 million eyeballs? When we talked about FB 18 months ago - - I was hoping that Wall Street and the responsibility of actually BEING A CEO would have to kick-in. Right? So many potential opportunities are passing him by. The young audience that set fire to FB prior to the IPO have abandoned it. My teenage children joke that FB is the "cool" platform for 40-somethings and their grandparents (aged 60+). In marketing terms, this is FB's death sentence. When the audience that validated the platform turns away from it - - it's long past time for the investors to move on. So, no, unless someone takes control of this ship FAST - - the potential markets and opportunities of 24 months ago will be a distant memory.
RCW: Talk a little about the “how” of monetizing the audience at FB. What has Zuckerberg done right or wrong in terms of building FB’s revenue model? The company trades at 500x earnings, so we can understand why investors are a little antsy.
MW: Zuckerberg has created an easy to use platform for sharing updates, pictures and videos. There is a simple interface for loading games and some basic "APPs". Their mobile product works well. That's what they've done "right." The rest is a long list of missed opportunities and ridiculous myopic decisions.
RCW: Can you be more specific?
MW: I think the BIG problem is that Mark thinks that FB is AAPL. FB doesn't have the R&D department to create the software, APPs or platforms that their customers want. My question would be "why try" to go up against tens of thousands of APP companies developing technology that can be purchased inexpensively? FB bought Instagram for $1 billion. That wasn’t cheap nor is there a clear picture of the ROI from integrating this APP into FB. What’s needed is a whole NEW vision of what this website can be. Mark Zuckerberg has created a shopping mall in FB that has been universally accepted by a huge percentage of people - - but he seems loathe to populate it. Why not "lease" the page space...? I don't mean for "Farmville" and all the insipid games... What about NetFlix (NFLX)? Why can’t FB be a container for other people's content? Frankly, the platform FB has made for their APPs and content looks cheap. If I were a content provider, I would not want my valuable material framed that way. Why not sell page space to Spotify or iTunes? The key component here is VALUE and convenience for the customer. During demos and shareholder meetings, Zuckerberg says he's "committed to the user experience." There's just not that much real evidence of it so far in the FB offering.
RCW: So is your criticism that FB is talking about "the experience," but basically mimicking other existing platforms? If Zuckerberg took your advice, how do you think Wall Street and the investor base would react? Has too much time gone by since the FB IPO to "think different" to borrow the AAPL metaphor.
MW: Yes, they are mimicking. But I also think Zuckerberg and the FB management team are playing it safe. Ironically, they are control freaks. This is antithetical to the notion of "social networks" that the company would be so protective of their spaces. Look at how Google (GOOG) has gotten their butts kicked on "Google +." Some of these huge Internet/media companies are living inside an ivory tower and they’re trying to be all things to all people. As you learn in any business school, this is a losing proposition. Pick your business and excel at it.
RCW: Yeah, I killed Google + a while back. And of course never been on FB. Twitter [10] is the choice. To your point, humans tend to repeat what works. The biggest challenge any CEO faces is to be critical of the current accepted business strategy and to seek out opposing opinions. Has FB failed at this task?
MW: It really comes down to one notion: "open source". Look at Tumblr, it's a "open source" social network that thrives on repurposing content from other places. I think Yahoo (YHOO) overpaid for them - - however, Tumblr is successful for being a content hub and a convenience. FB could learn a lot from their model. The next step for Tumblr will be creating content bridges between accounts where sharing content legally is encouraged or even requested by the rights holders (even edited or "tweaked" content). So, to answer your question, it's never "too late" to innovate. Actually, this would be a great time for FB to do a huge pivot and surprise people.
RCW: OK, so besides turning FB into a high-utility shopping mall, what else would you do if Mark Zuckerberg made you CEO of FB tomorrow?
MW: I'm the new CEO of FB! (laughs) I would look at two areas: I would go after the business audience of Linkedin (LNKD) and GoToMeeting by making FB the FREE communications hub for small business using advanced video chat, VOIP and file sharing. Because the FB platform is already ubiquitous, my job is to make the barrier to entry for these companies as close to zero as possible. This would be a fun marketing challenge.
RCW: What else?
MW: The second area I would get into is to enter into carriage license deals with television networks and production companies to host their current and NEW content versus going to YouTube, Vimeo, NFLX or having the networks do it themselves. As the CEO of FB, I have an invaluable currency - which is called "eyeballs." If I can deliver viewers to other people's content - - what is that worth? I don't have to make the content (ie: NFLX) I can just be there when it comes time to monetize it. If you are providing value, monetization works if you are willing to be transparent to the customer what they need to do, what the company gets and that they are valuable. You can’t grow anything by either being too careful or too arrogant. FB is still enormously valuable if the company is willing to sit in the seat of their customers and ask the right questions. The problem is that the clock is ticking for them and their untapped potential is spilling out all over the floor. It would be tragic if FB became the next MySpace.
RCW: Thanks Michael. Let us know if the FB board calls.