Facebook Needs to Earn Your Trust
In my column for CNN, I point out some problems with Facebook's business model:
A shrewd Wall Street friend once advised me: "There's all the difference in the world between a great business and a great investment."
That's good advice to keep in mind after the drop in Facebook's share price last week. Shares in the social media company closed Friday at $21, a loss of $17 since the company's public offering in May. (It moved up by 83 cents in Monday's trading.)
By any definition, Facebook has grown into a very successful business. Facebook is one of those rare companies that reshape the world. It has signed up almost 1 billion users, it collects almost $4 billion in revenues, it earns more than $1 billion in profits.
Yet Facebook is rapidly proving itself a correspondingly disappointing investment -- and worse may be ahead. The stock's latest drop was triggered by a company admission that its more profitable U.S. desktop user base had ceased to grow, was now in fact shrinking, as more users access Facebook on mobile devices .
Meanwhile, an advertiser raised doubts that Facebook ads generate as many clicks from consumers as the company claims, and the company said it's looking into the complaint.
For a company that derives almost 90% of its revenue from ads, many of them based on per-click pricing, such doubts represent a serious challenge to its market valuation.
The challenge arises because Facebook as a company has decided it cares more about its future as an investment than its future as a business.
A great business ceaselessly asks itself the question: How can we serve our customers better? What products and services can we offer -- and how should we price them -- so that people will want to buy them? Such a company builds its profits upon customer satisfaction. I rent cars from Hertz about three or four times a year. Each time, I'm impressed when I notice some small way the experience is smoother and better than it was the time before. Every time I buy a new Mac computer, I'm delighted by the amazing superiority of the new machine over its predecessor.
But unfortunately, some companies think in a very different way. They think: "Our customers are basically not very intelligent people. They don't read contracts carefully. We can take advantage of their weaknesses to make more money in the short term than we'd make from a more ethical approach." Think of the credit card companies always scheming to hit lower-income customers with small fees, or cell-phone companies that decided against developing warnings to customers when they exceed the minutes allotted by their contract, or pretty much the entire sub-prime mortgage industry.