Mobility vs. Portability

A CNET column, speculating on the future of Facebook and its theoretical successors, comments,

The company doesn't get mobile -- never has. Young as he is, Mark Zuckerberg was raised on the Web, on computers. Remember him saying in 2010 that the company didn't have an iPad app because the iPad "isn't mobile, it's a computer"? Facebook just plain missed it.

I think there's a language disconnect here. A notebook computer is "mobile" in the sense that you can take it with you and use it from remote locations. Zuckerberg wouldn't argue with that - he just might use a different word, like "portable". While it's fair to point out that an iPad uses iOS, an operating system designed for mobile devices, due to the much larger screen size the experience of using apps on an iPad can be quite different than the experience on an iPhone. Facebook's platform and profits come from the browser, not the app. If Facebook produces a half-hearted app, inspiring people to use their browser to get a full or even adequate experience, Facebook makes more money both through advertising and by the advancement of its platform. If it allows you to take full advantage of the social world of Facebook via an app, but cannot effectively monetize the app or support social gaming through the app, it's harming itself.

That is to say, Zuckerberg is correct to be concerned about Facebook's becoming "just another app", when he needs to to be a platform.

Recent rumors of Facebook's interest in acquiring Opera may relate to its difficulty gaining traction on tablets and mobile devices. Opera doesn't have much traction on the desktop, but it might be feasible to create a heavily Facebook-flavored browser that would take the place of a hobbled Facebook app on mobile devices, including tablets. If you get people to spend 20% of their online time in your proprietary browser looking at your own content, and get them used to accessing the rest of the Internet through your browser instead of the default browser that comes with the device, you are much better positioned to monetize mobile traffic than if you're "just another app".

Meanwhile, a generation of kids my son's age and older are living their lives solely on mobile devices -- tablets and phones and whatever iterations the future holds. For them, Facebook will be something their parents do, and it's still fundamentally a Web-based experience. It's likely to hold little appeal to them -- and somewhere out there, entrepreneurs thinking along the lines of, say, Dave Morin at Path (ironically, a former Facebooker) are working on products that are born mobile, that skip the Web entirely, that live in the world the next generation lives in.

It makes no more sense to pretend that the entire world is mobile than it does to pretend that the entire world is sitting at a desk in front of a traditional, desktop computer. A big part of Facebook's success has been its ability to be inclusive - getting people who barely even use a computer to sign up in order to see photos of distant friends and relatives. No doubt, being the next, big, hot idea among the younger generation or on the mobile platform can translate into profit and success. We've all heard about Instagram. But a future with a hundred "Instagrams" vying for your attention on mobile devices is one of fragmented social media, something quite different than what Facebook offers.

I expect that the actual business plan behind apps "that skip the Web entirely" is to go the way of Instagram, to get snapped up by one of the giant players for a quick, significant profit, not to reinvent the online social world as a mobile-only environment. My guess is that no small number of them will let you register and log in through your Facebook account - in no small part because they're apps and Facebook is a platform.

One last thing,

Simply put: the world is going mobile, it's hard to make money on mobile, and no one is feeling that more painfully than Facebook.

But someone will figure it out. Someone always does, and there's always money to be made where the people are. It just won't be Facebook.

Am I the only person who has a problem with the conceit that someone "always" figures out how to monetize online information? If an edition of a newspaper is worth $2 in print, 5 cents when read via a browser, and a cent when read via a mobile device, is the proper conclusion that the newspaper "figured out" how to monetize its online and mobile content, or would it be more accurate to say that some types of content cannot be monetized in the online world at a level that sustains their historic business model? The reality is this: when faced with new business realities some businesses and industries find ways to evolve and make money, others go the way of the stagecoach company and village blacksmith.

Actual Value vs. Potential Value and the Facebook IPO

The biggest thing Facebook had going for it, going into its IPO, was the perception that it not only has a wealth of data that similar companies lack, it has the potential to transform that data into a phenomenal money-making machine. Its current performance does not justify a $100 billion + valuation, or even half of that amount. The hope was that enough investors would gamble on its potential to produce and sustain a valuation that is not supported by the numbers or by any known business plan held by the company.

If you wanted a sign that Facebook has no plan to generate the earnings necessary to support its proposed (or present) stock market valuation, you need look no further than its acquisition of Instagram. It makes sense for a company, seeing a threat on the horizon, to act quickly and proactively. But the amount paid, the promise to Instagram users to maintain it as a separate service, and the fact that Facebook was not able to mitigate the threat of Instagram by any means other than acquiring it, all serve to highlight its vulnerability. Not in terms of its mass of users, the extension of its platform and login system into third sites, and other such actions that do reflect commendable foresight and capability by the company's leadership. If you believed before that acquisition that Facebook's position is so dominant that it cannot be upset by a start-up, or that Facebook has clear focus on a single platform and won't end up fragmenting its platform and distributing its focus and resources on multiple properties, that acquisition should have made you reconsider.

And that's without mentioning the most obvious reason to believe Facebook lacks a plan to generate the revenues that would justify its valuation: The fact that no such plan has been implemented. I don't want to sell Facebook short (no pun intended) but I can't think of a better time for Facebook to have demonstrated its capacity to generate massive profits than over the past year. Instead it appears to be demonstrating that each additional user it acquires actually costs it money. To draw that conclusion on the available data would be premature, but it's not an impression I personally would have wanted to leave room for, going into an IPO. It reminds me of the comments I heard from an analyst, talking up Facebook's future, by suggesting that the company has enormous capacity to expand in China and India. Well, I'm sure it does, but how is that going to generate profits?

Reuters reports,

Facebook Inc's underwhelming debut on Wall Street increases the pressure on the social networking giant to deliver stellar growth - a novel situation for Chief Executive Mark Zuckerberg, who has been clear he is more interested in building products than making money.

If the lead-up to the IPO didn't pressure Facebook to deliver stellar growth, why would the present situation? Facebook is "only" worth $76.3 billion? Its key shareholders will "only" be able to spend their profits over sixteen to twenty lifetimes instead of thirty or so? Go ahead - put me under that kind of pressure. I dare you.

The second part of that statement, to me, is an echo of the hype we've been hearing ever since Facebook was worth fifteen... no, thirty... no, fifty... no, one hundred billion dollars. Zuckerberg is saying "Gamble on me, gamble on the future of this company, gamble on the idea that with phenomenal amounts of money available we'll build some jaw-dropping products." If you're buying Facebook stock with something else in mind, you simply haven't been paying attention. In a sense it's fair for the article to point out that Facebook is a profitable company and that many other multi-billion dollar companies of the current Internet bubble are gushing red ink, but that's simply a reflection of the hubris of the bubble. Facebook is "worth" $76 billion or so because of that profit - if it were gushing red ink, it might only be "worth" $40 or $50 billion to the same set of investors.

Can we at least be this honest? When, going into an IPO, a company expresses "that 'we don't build services to make money; we make money to build better services' and refer[s] to the company's 'social mission'", that company may well make the coolest stuff in the world but it has little to nothing in the pipeline that it expects to generate revenues that would justify its proposed valuation? I'm prepared to be surprised, even shocked, by an announcement that upsets my expectation and proves the genius of the speculators. But....

Don't Bet on Vaporware

Unless, of course, you have money to lose.

I keep seeing articles suggesting that ordinary investors should not try to purchase Facebook stock at the time of its IPO. You know, as if an ordinary investor will have the opportunity. Facebook is selling a small amount of stock, not because it needs the money but because it has too many shareholders to remain private. It is clearly hoping that by keeping the offering small the shares will be picked up by investors who see the company as worth a roll of the dice - in three years will they be Google or will they be MySpace?

The thing about Facebook is that for years now we've been told that their data will allow them to sell advertisers high-value advertisements, targeted based upon exceptionally granular demographic information, resulting in high conversions. CJR offers a reminder of what that presently means, in practice. Ads do not appear to be well-targeted, ad revenues are dropping, and any suggestion that it can grow its income to justify its present, ostensible valuation (as opposed to identifying and implementing new income streams - the type of revenue streams we've been promised will inevitably appear because of the amount of traffic and data that Facebook enjoys) is simply not credible. It's more credible, I suppose, than the similar valuation of Internet companies during the first Internet bubble, due to improved online advertising technologies, but not by a large margin.

The recent action that should have investors scratching their heads about Facebook is the acquisition of Instagram. Not in the sense of "CEO's Gone Wild". To some degree you have to credit Facebook for seeing a potential competitor on the horizon and buying it before it became much more costly - recognizing that such acquisitions are a gamble. It was Facebook's promise to own and manage Instagram without folding it into Facebook that was telling. If Facebook can only maintain its dominant position by acquiring upstart social networks, it's going to be buying a lot of small companies for a lot of money.

If Facebook can only keep the users of acquired social networks happy by maintaining them separately from Facebook, even if it offers a level of integration by allowing people to log in to all of its services through their Facebook account, it's headed toward an expensive form of fragmentation, having to support and maintain a lot of marginal or obsolete properties - or at times cut their losses and make users angry. Facebook's strength is in being Facebook, singular, not in being an agglomeration of sites. And let's not forget we're actually talking about a platform war - you don't want to reduce your operations to an app on somebody else's platform, and you certainly don't want to reduce it to a panoply of apps. You want to be the platform.

A year ago Facebook released numbers that, although not justifying its pie-in-the-sky valuation, were impressive. More recently they have reported that they have more users than ever - and that their profits have declined. Neither that nor the potential fragmentation of their platform is the type of thing that I would be looking for in an investment. But heck - if I were getting an annual fee and a percentage of the profits to invest your money (or your pension's money) I can see why I might roll the dice.

So Sayeth the Winklevii

Skip this post if you haven't yet seen The Social Network.

The Social Network, with a rather unsympathetic depiction of Mark Zuckerberg, helps carry itself by presenting a series of characters who are even less sympethetic. In the early part of the film that role was filled by Cameron and Tyler Winklevoss. In the later part of the film, by Sean Parker. Which isn't to say there aren't elements of humanity to those characters, or by the same token somebody whose arrogant disdain helps humanize the Winklevoss brothers (enter Larry Summers), but the elements of caricature and exaggeration (along with Jesse Eisenberg's impressive portrayal of 'Zuckerberg') help carry the film forward.

The film doesn't quite answer the question of why Zuckerberg played the Winklevoss brothers for suckers. One interpretation is that they treated him with arrogant disdain, as somebody who was capable of scripting their vision of a social website but not worthy of getting past the bike room of their social club. The other is more mercenary: that Zuckerberg didn't believe in the brothers or their vision of a social network, but he recognized the importance of primacy. He strung them along because had he done otherwise they might have sought out a different programmer and become the first to market. One way or another, it was Zuckerberg's failure to simply tell them, "No, I'm not going to work with you," (along with, if accurately depicted, his behavior during depositions) that breathed life into a lawsuit that would otherwise have had no legs.

David Brooks recently lectured us that the Harvard that is depicted in the movie doesn't actually exist. That there is no longer an elite Harvard with "the old WASP Harvard of Mayflower families, regatta blazers and Anglo-Saxon cheekbones" squared off against "the largely Jewish and Asian Harvard of brilliant but geeky young strivers". The Winklevoss brothers, celluloid personifications of the "old WASP Harvard" who were depicted in the film as wearing regatta blazers at the time of their decision to sue Zuckerberg, appear to disagree:

The 29-year-old identical twins, who are suing the Internet site on claims they came up with the idea for Facebook while students at Harvard University, said on Saturday they were pleased with the way they were portrayed in the Hollywood film.

“It does a great job of capturing the factual events of the 18 months of the founding of Facebook. It is a true story,” Cameron said in an interview.

Whatever reticence the brothers once had about suing has apparently evaporated, as "the twins have taken up legal action again, saying they were given misinformation about Facebook’s value and that relevant documents were withheld." A few 'Zuckerberg' quotes, then, from the "true story":

If you guys were the inventors of Facebook, you'd have invented Facebook.

The "Winklevii" aren't suing me for intellectual property theft. They're suing me because for the first time in their lives, things didn't go exactly the way they were supposed to for them.

A guy who makes a nice chair doesn't owe money to everyone who has ever built a chair.

Character Flaws of the Rich and Powerful

In an odd column about The Social Network, simultaneously emphasizing that it is a fictionalized account of Mark Zuckerberg's rise and treating it as if it's fact, David Brooks laments,

The Zuckerberg character is without social and moral skills. It’s not that he’s a bad person. He’s just never been house-trained. He’s been raised in a culture reticent to talk about social and moral conduct. The character becomes a global business star without getting a first-grade education in interaction.

and concludes,

Many critics have compared this picture to “Citizen Kane.” But I was reminded of the famous last scene in “The Searchers,” in which the John Wayne character is unable to join the social bliss he has created. The character gaps that propel some people to do something remarkable can’t be overcome simply because they have managed to change the world.

It seems worth noting that the psychological factors that Brooks ascribes to not being "house trained" as a result of being "raised in a culture reticent to talk about social and moral conduct" should evoke in his mind something a bit more contemporary than a John Wayne movie. It's interesting that he rejects, without any real analysis, the comparison to Citizen Kane, a fictionalized account of William Randolph Hearst. Who was more ruthless, "Caine" or Zuckerman as depicted in the movie? Who was more vengeful, less moral, more selfish? Were "Caine's" character flaws a manifestation of his being "raised in a culture reticent to talk about social and moral conduct"?

The fact is, darn few people claw their way to the top of the economic pyramid while playing the part of the socially conscious gentleman. The novelty in the rise of somebody like (movie) Zuckerberg is not so much that he's ruthless with his friends and enemies alike, but that (as Brooks points out) he's a "nerd" - somebody who wouldn't have been able to penetrate the class system that Brooks assures us no longer exists at Harvard. Yes, the information age has allowed a huge number of "nerds", including many with weak social skills", to become wealthy and lead companies. Historically many of those same people would have been stuck working for somebody else. But let's not pretend that the history of capitalism stands as a monument to moral, ethical, well-socialized businessmen.

I sometimes come across platitudinous assertions about the wealthy and powerful, such as "Great men have great appetites" or "Great men have great faults." The fact is, every human being has faults, and most of us have pretty significant faults. Appetites? The same thing - I doubt that there's a person on the planet who hasn't, at some point in time, wanted or felt driven to do something that was wrong or immoral - but when you're wealthy you can either find "legal" ways to exercise your desires, or use your wealth to insulate yourself from consequence. Think of Rupert Murdoch and the way he looted his companies for personal gain - he is indignant at his prosecution because, in effect, he "stole the money, fair and square". He and his lawyers found a way to loot the companies that they believed to be legal. Take a look at Elliot Spitzer and his prostitutes, or Tiger Woods and his affairs. Their wealth brought them opportunities (or is it temptations) that most people don't get, and they made choices based upon their own character. On one level, most certainly, it's easier to avoid crossing a moral line if you don't face temptation. But on another level there's nothing special about them that compelled them to surrender to temptation. It's still a matter of personal choice - what type of person do you want to be?

I think you will find that, among people who manage to climb to the top of the economic pyramid, there's a tendency to put concerns about others - their wishes, feelings, needs, whatever - to the background. There is often a single-mindedness to their push to the top. In some cases that's highly contextual, with the driven individual simply not allowing others to stand between him and his goal. With others it branches out into all areas of his life. That has a lot less to do with being "raised in a culture reticent to talk about social and moral conduct" and a lot more to do with their childhood experiences and their personality. How many generations of wealthy people would have told you that their station was a manifestation of the will of God, and would happily explain why their actions were morally proper if not dictated by their faith?

I don't want to sound like Brooks, and oversimplify the wealthy into two classes of individual. But I do think it's fair to observe that the tendency to run roughshod over others within the context of business does roughly break down into two varieties: those who simply don't care, and those who recognize what they are doing and seek forgiveness after-the-fact - adherents to the principle that it's easier to get forgiveness than to get permission. (If you succeed, odds are you'll get that permission. And if you successes significantly outweigh your failures, you'll probably still get forgiven.) Forging ahead when others around you are urging caution can be reasonably described as leadership. But, as one would hope that movie Zuckerman learned by the end of the screenplay, you don't have to be an ass to be a leader.