What’s Up With Facebook?

Today, one needs to be literally living under a rock to have not heard about the Facebook® acquisition of WhatsApp™. Everywhere across the media spectrum heads are being scratched on why Facebook would spend (wait for it……) $19 BILLION dollars in total for a company that most anyone outside of silicon valley never even heard of.

Is this a move of brilliance and foresight, or, is there something else? I believe it’s a little bit of both along with the following caveat: Not all brilliance, is brilliant.

Let’s first put a few things into perspective. Today, there is a meme throughout the tech world (especially silicon valley) that a Billion dollars is pittance to pay for an idea. Yes, that idea may actually be in the physical world as in a working company or product, but (and its a very big but) until an idea generates a profit (as in actual legal tender that banks will take as a deposit) it’s basically still just an idea. However, “ideas” in today’s world are chump change. And change for chumps seems to start at around the billion dollar threshold.

What’s so glaringly obvious on this current move by Facebook and why, to me is this: More than a sheer move and acquisition of brilliance,  it seems more as an act of the brilliant, willing to throw billions out the window in desperation. Yes I said it – “desperation.” Let me elaborate.

It wasn’t all that long ago when everyone heralded the latest and greatest songbird of the social media coal mine; Twitter™. With great fanfare and more we watched its IPO (initial public offering) take to the skies well above its opening price.

Again the songbird was chirping like many before it with a vibrato in its tone sounding hauntingly familiar to many who “bird watch.” To my ear, the call of; “It’s different this time!” sounded much like the other canaries that came before it. Then a strange thing happened that hadn’t happened before – they had to report publicly, numbers that all these early investors needed to hear so that they too would rejoice in song. Only those numbers were nothing to sing about. As a matter of fact they probably wished they needn’t be spoken at all. That number? User growth.

What followed next was exactly what happens when new world meets the old world. When “free money” (as in Federal Reserve quantitative easing programs aka QE) is no longer as free-flowing as just 6 months earlier. The first sign of disappointment causes knee jerk reactions. Hence Twitter’s immediate stock price pummeling by the market. Welcome to the real world is all I can say here.

Once you go public, that sweet song everyone listened to had better be just as sweet at earnings time or – you’ll be singing a new tune. Yet this is far from the only worries the whole social media genre has working against it in my opinion. There’s something far more troubling and needs to be curtailed or this whole ruse of “social everything” falls apart. The issue? It’s all smoke and mirrors.

Now first off let me state this clearly as to not get everyone riled up in a tizzy as if I just insulted someone’s mother: The idea, infrastructure, ability, and the whole phenom itself that is all wrapped up in this thing known as “social media”  I believe is both genius, and exploitable. (exploitable meaning creating sustainable commerce or businesses)

And – the very people behind the companies formulating better, and far more superior ways of connection and interaction on a near daily basis is absolutely amazing and commendable. I’m speaking directly at the business side where money is to be made, profits to be dispersed, and general business models that are sustainable entities performing in and around the public markets. That is what I’m addressing, nothing more.

So with that out-of-the-way let’s get back to the whole user growth issue. Why is this such an issue or Achilles’s heel for the media space in general? In my view: It’s the key that can open the door letting in the unwanted wind that can knock down a very carefully built house of cards. The idea that ad revenues are the end all, save all, “Ace in the hole” will leave many an investor shaking their head when they find that card might not be a wild card – but a Joker.

What’s being brought to light more, and more about the whole “user growth” issue is what is a “user?” It seems more, and more that “user growth” can be found to mean, “click farm growth.” And that my friends is a very, very, very, (did I say very?) real issue to a publicly traded company if that story finds greater traction.

One of the stunning details to my ear when I listened to parts of Twitter’s investor report was the size of its user base outside the U.S. It wasn’t a mere percentage number, it was an exponential number as in over 2 to 1 or, more than 2/3’rds of all its users. You might say, So what! That’s great news meaning the world is using their service and will be growing it even more once the U.S. catches up. Ah yes, but I would like to through the proverbial cold water on that with just this fact: Nearly if not ALL the click farms are located outside the U.S,. and guess what these click farms do? For a price (a very cheap price I might add) they’ll give you thousands, if not millions of the very product these companies need as “product” to sell advertisers: Followers, Likes, and Users.

So prevalent is this now becoming I give it no more than another year (if that) before it’s reported en masse across old school main stream media. And that is another big problem for all these current Wall Street darlings. Why? Well…when you finally have something to throw back at the very advertisers that shunned you in place of the new kids on the block that crushed their business model, do you not think they’ll return the favor in spades?

Let me give you just a few examples that have come to light recently.

First, you can go on to any search engine you choose and type: “Buy likes followers” and you’ll get a myriad of places to shop to look just like that celebrity you want to emulate. All, at discount prices. And if you think others aren’t on to this let me share with you a great video as to explain this very subject. It was made this month by an outfit named Veritsium and is only 9 minutes long. (You can view it here) For anyone that’s just the slightest unsure of what I’m proposing here, this is a must see as to put it in real world context quickly. Along with understanding why my thesis on this subject is making calls of what some might see as preposterous. Personally, I believe I’m being more prescient than preposterous, but only time will tell.

Which now brings us me back to the prior subject. Facebook buying WhatsApp for $19 Billion dollars. What’s up with all this? Well… I just read a 2 part wonderfully argued piece by Sarah Lacy the editor of Pandodaily™.  In her article she bases her insights around 3 words, “follow the photos.” (you can read the full article here) I absolutely agree with her insights however, I would add 3 more that mirror them: Follow The User. As in, being able to justify with smoke and mirrors if need be they are actually “users.” For if that get’s questioned with any real rigor – all bets are off for these darlings of Wall Street in my view.

So one might be asking; “Just what do you mean or implying by that?” Easy…

If user growth or monikers such as followers, likes, and such are the product you need to sell advertisers so they’ll spend their money with you rather than some other media outlet. If the user generation, user origin or more begins to become more of a hurdle to defend rather than an asset to entice. Then a smart company would do what’s needed to be done if they were both bold enough – and rich enough…

Buy the threatening potential revenue killing narrative at any cost before there may be no more money to do it.

Think of it this way (or as to understand how I view this whole deal) WhatsApp is being reported to have more than 350 million active users. And here’s the key – all outside the U.S. or for lack of a better term, in emerging countries.

And why is that so important in my view? Well if I was in charge of sales at FB I now have the perfect insulation or inoculation from the virus of “click farm user growth.” Now when one looks at my user base all those emerging countries (you know, the ones that have the high amounts of active click farms) suddenly disappear beneath my overlay of real user based on the folded user acquisition of WhatsApp.

You think that narrative at a sales presentation or earnings announcement isn’t worth $19 Billion? I would suggest you think again.

Let me put it into a visual to make my point. First is a price chart of Twitter and their stock valuation. Look at the drop when they announced their earnings report and the reaction to that stocks valuation. For many it wasn’t a bad report however, for the speculative crowd or investor, that user growth figure was a key figure on whether to stay or go. And by the looks of it, not only did they go – they haven’t come back.

Songbird? Or Canary?
Songbird? Or Canary?
And What If The Same Here?
And What If The Same Here?

You think $19 Billion is expensive compared to what is at stake in market cap losses if such a premise and disillusionment to the meme of “social everything” is lost? I could be absolutely wrong (and a great many will gladly tell me how I am) But here’s what I’m not wrong about: Thinking that I may just possibly be right. And the reason for that is at least I’m thinking about the possibilities and implications. Rather than just allowing myself to be mesmerized by numbers that in the end could actually be worse than ever imagined.

Because they might have been imaginary to begin with.

© 2014 Mark St.Cyr

Addendum: For those wondering why I’m making this argument, I use as exhibit A, another of these former Wall Street darlings that seemingly were the “brilliant of the brilliant” in their decision-making prowess. Remember when Groupon® turned down Google® for $6 Billion dollars? Well look at what happens when the market of today’s “new reality is the old reality” meets user growth problems or uncertainties. That  22% sell off? That is just this evening’s move. Not some trend of days, weeks, months, or years. Think this isn’t first and foremost on Mr. Zuckerberg’s mind, let alone everyone at Facebook itself? I would prod you to think again.

Chart courtesy of ZeroHedge™
Chart courtesy of ZeroHedge™