The buzz of this week was that Snapchat, the pre-revenue/no-revenue instant-messaging craze, turned down a $3 billion buyout offer from Facebook.
Much of the commentary centered around the folly, or heroism, of Snapchat’s young founders Evan Spiegel, who is 23, and Bobby Murphy, now 25. Why should they take a lowball offer and go to work for someone else when an independent Snapchat might be worth $6 billion, or $12 billion, or $20 billion, in a few years? On the other hand, should the energy surrounding social media dissipate, should investors start demanding that companies have actual revenue and profits again, or should Snapchat be surpassed by the next new thing, the founders will look like chumps.
But the failed pickup effort says as much about Facebook—and the broader social media and technology industry—as it does about Snapchat.
The narrative that emerges is one in which the math team member tries, without success, to ask the cheerleader out. The New York Times noted that Zuckerberg “traveled to Venice, Calif., to meet with the company, according to Snapchat’s founders, instead of them visiting him at his headquarters in Northern California.”
It’s ironic. If the markets were a high school, Facebook’s balance sheet and market position would make it the 220-pound jock.
The idea that Facebook should be a supplicant to anybody is absurd. Investors love Facebook, and have given it a stock market value of $120 billion. The company’s stock trades at 126 times earnings, meaning that investors are very enthused about its growth prospects. And Facebook has been able to do what so many have failed to do: turn a profit on Internet advertising, while reaping lots of revenue from mobile. In its most recent quarter, sales rose 60 percent from the year earlier. Mobile advertising, a tough nut to crack , accounted for about half of the company’s ad revenue. Users like the company’s products. Facebook last quarter claimed 728 million active users, up 25 percent from the previous year. It’s growing rapidly off a very high base. This is the chart of Facebook’s performance as a public company.
But of course, this isn’t enough. In fact, it’s not nearly enough. Facebook doesn’t just want to be big, profitable, and growing. It wants—no, needs—to be perceived as popular. Mark Zuckerberg, the 29-year-old CEO and founder of Facebook, says the company is so beyond trying to run with the Winklevii. “People assume that we’re trying to be cool. That’s never been my goal—I’m like the least cool person there is,” he said in an interview with Atlantic magazine editor James Bennet this fall. At another point, he noted that “We’re almost 10 years old and we’re definitely not a niche thing at this point, so those angles on coolness are pretty done for us.” But the dude doth protest too much. Facebook needs to be seen as cool—as a cool place to work, and as a cool place to hang out.
Historically, most huge businesses haven’t had to worry about being cool. But social media is a different type of business. It’s fragile and insecure by its very nature. Just as Facebook ate everybody else’s lunch, the $120 billion company lives in constant fear that someone will destroy its business. To challenge ExxonMobil, or Walmart, an upstart would have to raise hundreds of billions of dollars and then spend it wisely and quickly. But the cost of innovation in social media is extremely low, and the ability to scale up businesses rapidly is great. Instagram, which Facebook felt compelled to buy for $1 billion, spent a few tens of millions of dollars.
What’s more, unlike most other mature, large-cap companies, Facebook relies heavily on young people. Sure, plenty of oldsters are on Facebook. But it is the millennials, the teens, and even today’s tweens that matter most to Facebook. These are the power users of new apps and social media. And these are the consumers advertisers want to reach before they have established brand preferences. But relying on kids is a problem for Facebook. They don’t have much independent consuming power. And at the same time, they’re remarkably fickle. Whether it’s music (hello, Miley), television shows (goodbye, Miley), or social media (remember MySpace?), kids today flit from one thing to another with alacrity. The same kids who were spending every waking moment on Facebook last year are now obsessively swapping selfies on Snapchat. A few years ago, everybody played Farmville. Now, according to the two online gaming consultants I employ (my two under-16 kids), “nobody plays that anymore.” Building a business around teen trends is a guarantee of sleepless night. “I’m facing a crisis in this industry,” Pony Ma, a founder of internet giant Tencent told The New York Times. “Young people, the things they like on the Internet, increasingly I don’t understand it. This is my biggest worry.” The only guarantee in this world is either to build—or buy—whatever kids think is cool right now.
Facebook also needs to be perceived as cool by its employees. In this economy, the sort of people who work there have lots of options. Because there’s so much money coursing around the social-media space, they’re constantly being peppered with offers to take jobs elsewhere. Or they can join friends and raise money to start their own business. The IPO already happened. The stock isn’t likely to rise tenfold from here in the next several years. And if engineers, coders, and marketers no longer think it’s cool to show up to work, they’ll take their great ideas and go elsewhere.
While consumer-facing brands have long worried about being popular, America’s greatest firms have not historically worried too much about being cool. IBM, which has rolled out a host of extremely important innovations, was never referred to by anybody as cool. I doubt the word “cool” has ever been mentioned in the headquarters of ExxonMobil, the second-most valuable company in the world. Warren Buffett, the second-wealthiest man in America, is cool only because he’s uncool.
In business, you don’t have to shift strategies every six months or 12 months, or constantly acquire shiny new objects, to be regarded as successful. Rather, you have to be relevant, and to make a reliable and quality product that you can sell to adults. Yes, technology companies have always been insecure. But they’re insecure about their products and services, not about their image. Andrew Grove, the former chief executive of Intel, titled his memoir, Only the Paranoid Survive. For Grove, survival was about appealing to the economic and technological needs and utility of his customers—making chips that were faster and could perform more functions than chips made by other companies. Amazon.com displays a similar level of paranoia. But one senses that Jeff Bezos worries a lot more about being cheap, efficient, and comprehensive than he does about Amazon being a cool place to shop.
It’s ironic. If the markets were a high school, Facebook’s balance sheet and market position would make it the 220-pound jock. But there’s a strange social hierarchy in the social-media world—it’s one in which immature companies with no revenue can be as appealing (or even more appealing) than companies with long track records and healthy profit margins. This power disparity is what led Facebook to seek out Snapchat, and it’s what led Snapchat to say no.