Zuckerberg falls on his Facebook

06 August 2012 - 02:40 By Toby Shapshak
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Toby Shapshak. Stuff editor. File photo.
Toby Shapshak. Stuff editor. File photo.
Image: Times LIVE

There is something rotten in the state of Facebook.

You don’t have to have studied Hamlet to know there is something intrinsically wrong with the kingdom Zuckerberg built. There has been a string of bad news in the past week about the recently Nasdaq-listed company, not least of which is that nearly 10% of its users might be fake.

This has added further fuel to a smoldering fire that is Facebook's abortive listing earlier this year – which has resulted in lawsuits and nasty fallout that it knew its future earnings would be compromised. The problem is only some preferred buyers were informed, it is alleged. This might be blamed on the advising banks but it's just the latest in a long string of actions that shows Facebook's fundamental disregard for its 955-million users, who would be the third largest country in the world if Facebook were one.

There is an entirely different argument to be made about the nature of interaction on Facebook and how superficial it is…. how it isn’t true friendship but a listing of activities and liked pictures or articles. But let's just look at the business and ethical issues today.

Facebook's share price is less than half of the $38 it listed at. It's the market's way of saying they don't value Facebook, nor believe the hype. The price-to-earnings ratio of over 100 on the day of listing was fanciful and unsustainable. Moreover, staff who were issued shares at that $38 rate find their share value "under water" – while Facebook will struggle to attract good engineers and the other talented staff needed by tech powerhouses.

For all the talk of empowering people and giving them a communication platform, it must be remembered that Facebook is a business and its primary aim has been to make money. This is sometimes at the expense of its users about whom it must know as much as possible, to be able to sell highly targeted advertising.

The major proof point for such a view is the arrogant, uncaring way Facebook pushes the privacy of its users. Each time it changes its policies, there is a user outcry and it scales back; only to edge some of these forward again.

But here's the problem, a recent study showed that only one in 2 000 people clicked on an ad. General Motors very publically pulled a $10-million ad campaign on the eve of Facebook's initial public offering (IPO).

The public-listing and strict disclosure rules has forced Facebook to tell the truth: its growth has slowed and it has no idea how to make money from mobile. This is the biggest business problem.

Mobile is where all the growth is projected to come from, both in users and revenue, and the outrageous $1-billion it paid for photo-sharing app Instagram is just sticky tape on a major concern. Instagram itself had never made money – in that strange way Silicon Valley startups avoid creating revenue so they can boost their ultimate sale price.

Mobile revenue is a major challenge to everyone, except perhaps Google and Twitter. With smaller screens, display advertising is under even more pressure than on desktop computers. Facebook says half its users access it via mobile, and this will grow – as the opportunity to show them advertising, they are already not interested in, diminishes.

There are major misgivings about Zuckerberg himself and the unusual share structure that sees him still controlling an estimated 57% of the voting shares.

His former founders, however unlikable, still mumble about how he allegedly fiddle them for their shares. A rash of top executives has left since the listing, happy, it appears, to cash in their wealth.

Its pilot fish  Zynga, which makes social games, has seen its share price hammered, taking the 12% it adds to Facebook's income down with it.

Way back in the mists of time, Zuckerberg called his thefacebook.com users "dumb fucks" in an instant message. It appears his attitude hasn’t changed.

He publically said a few years ago that privacy as we understand it is over – and then began pushing Facebook privacy policies to make that a self-fulfilling prophecy.

There is no immediate likelihood Facebook will implode. But like other monolithic internet companies which were dominant – like AOL, Yahoo, MySpace and Digg – a new upstart will come along and take down this giant.

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