Facebook’s #EpicFail — Lack of TRUST by Users and Investors


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On the eve of the Facebook IPO, it’s interesting how much negative publicity has been surfacing. Users don’t trust Facebook to respect privacy. Investors don’t trust Facebook to make money for the long-term.

Of course, privacy has not exactly been Facebook’s strong point over the past couple of years. Two steps forward, one step back as the FB geniuses maneuver its products (us) towards making what we post as public as possible.

I get it. Facebook is a business. It has products also known as users. And customers also known as advertisers. And companies exist to sell products to customers.

But as one of those products er users, I just don’t trust Zuckerberg to look after my interests in a responsible way. While it may be true that the world is moving towards a “share everything” model, that’s not my personal choice and I don’t want some 20-something dictating his world view to me.

I’m not alone. In today’s San Francisco Chronicle, Lack of trust in Facebook may hold back ad sales discusses results of a recent poll which found only 13% of US adults trust Facebook “completely” or “a lot” with regards to protecting privacy.

And for more bad news…

On that unstable base (Would you like to build a business on such low trust?) investors have real concerns about the advertising model. In the poll, 83% of respondents say they “hardly ever” or “never” click on Facebook ads. GM recently pulled Facebook ads because of poor ROI.

Still, the company earns $4.34 per user per year on average. So now we know exactly how much we are valued by Facebook!

With hundreds of millions of users, 4 bucks certainly does add up, but probably not to the $100B valuation implied by the IPO. Bloomberg currently accessing the site via mobile apps, and that’s sure to increase.

Facebook is a great tool for keep up with family and friends. And some companies have found it useful to support their “fans” — although most of the success stories seem to revolve around discount offers. I’m not knocking any of this, nor am I saying that advertising is evil. CustomerThink is advertiser supported, as are most of the sites we all enjoy.

But Facebook seems like a house of cards to me. Here’s what I think will happen:

  1. The IPO will be a success, meaning Zuckerberg and a few others will be billionaires or millionaires. Thanks for stimulating the California economy!
  2. Investors will want Facebook to actually earn its valuation, which will put pressure on management to be even more aggressive on monetization.
  3. Respect for privacy will continue to be a problem, for a simple reason that more privacy = less revenue. And privacy is not a core belief of the founder.
  4. Users will pull back, toning down usage, reducing friends or opting out of all ads and tracking. Although that’s easier said than done, as I recently discovered.
  5. Zuckerberg will get replaced by someone who can balance stakeholder interests more equitably.

Millennials have been at the leading edge of social network adoption the past few years. My son (now 19) was a Facebook addict but has pulled back considerably in the past year. Going to college and having more demands on his time is part of it, but there’s also a burnout or passing fad factor to consider. When everyone is using something (including your parents), it’s no longer cool.

You can see this trend more broadly in this chart from Pew Research, which shows a drop in usage for the youngsters from 2010 to 2011. And these are the people that are most likely to trust Zuckerberg.

Add it all up, and it’s no wonder that half of Americans call Facebook a fad. I don’t agree, but I do think the Facebook we’ll see a few years from now will be run by a different management team; users will be treated better; and the current short-term investors will have cashed out, looking for the next big score.

Update: In a previous post I reported on Facebook’s problems keeping its users happy.

…Facebook users aren’t all that happy with their experience. A recent ACSI E-Business Report found that Facebook scored at 66 — putting it in the bottom 6% of all companies measured, along with perennial bottom-dwellers like cable companies, most airlines and some utilities. Not exactly raving fans.

Since then, Facebook’s forced march of its users to the new Timeline format has stirred up lots of grumbles. One survey before the change found 70% didn’t want the “innovation.”

Facebook went ahead and mandated the change for everyone on March 30. A month and half later, Attensity analyzed over 130K comments posted on Facebook, Twitter and blogs and found 93% negative sentiment towards Timeline with phrases like “Delete FB Account” and “Hate New Timeline.”

I’m sure none of this will matter because Zuckerberg and company knows what’s best for us, whether we like it or not.


  1. My #1 comment could be that this community is not there to discuss potential successes of IPOs … but Bob made some very valuable CRM-related points regarding Zuckerberg’s enterprise, namely that going against building trust with your (potential) customers maybe is the #1 sin of an entrepreneur against its customers.
    The question is this: If it’s not trust Zuckerberg is founding his empire on, then what is it? The most negative answer is that with the money from the IPO he can start a few new initiatives, whatever may happen to Facebook in the years ahead.

  2. If FB continues to invest in IT innovation and its stock continues to rise at the rate it did the other day, then I think it will be a decent long term investment

  3. Well, the IPO happened with shares offered at $38. On the first day, barely closed above that, then dropped nearly 11 percent after the first full day of trading.

    An article in today’s SF Chronicle sums up with this headline: “IPO shut out the masses.”

    Here’s a “social” company that could have priced its shares at a more reasonable $30/share and perhaps left some room for the coveted IPO bump, so that early individual investors had a chance to make some money.

    Instead, despite well-known concerns from financial analysts that Facebook wasn’t worth $100B given its business model, Zuckerberg et al went ahead to get the maximum payday for themselves.

    As a consequence to this decision by the insiders to enrich themselves, “leaving next to nothing for individual and public investors,” the social media buzz on Facebook has been anything but favorable. And that won’t help investor confidence which is key to moving the stock up.

    And there’s more. What if FB’s shares continue a downward slide. The fundamentals simply don’t support a $100B valuation. Many employees will be left hold worthless stock options; not exactly motivating as we learned in the dot bomb days.

    There’s a five letter word for this, and it’s not S O C I A L … it’s G R E E D.

    See the news story online here.

  4. Yesterday Facebook shares fell to a new low, off 24% from the IPO price. Worst-performing large IPO during the past decade, according to this article in the SF Chronicle.

    So investors (mostly the late comers who believed the hype) have lost about $25 billion in less than a week. And in other very sad news, CEO Zuckerberg has also suffered, as his stake in Faceplant dropped to only $14.7B, so he’s off the world’s top 40 billionaire’s list.

    Of course, all of this could be a temporary setback. The early days of Amazon.com were not fun, either. But the core problem remains: how will be Facebook generate the revenue growth needed justify its valuation? The current display ad model won’t do it, especially given the shift to mobile device usage.

    Facebook could decide to sell a mobile phone, charge users for certain services (e.g. corporate brand pages) or invent other ways to make money off its huge user base. But this is all speculation, part of the hype that some investors bought. It will be interesting to watch if/how Facebook recovers from this very poor start. In the short-term, it seems investors will continue to bail until the Z-force comes up with a better plan than “trust me.”

  5. Today Facebook stock hit $19/share, a 50% drop since the IPO.

    Has it hit bottom? Probably not, according to this article in the SF Chronicle.

    Facebook’s stock price is still expensive relative to the current expected earnings growth for the company. At $20, the stock is trading at 31X next year’s projected earnings per share of $0.65. Apple and Google, for comparison, trade at less than 15X. Facebook could easily trade at 20X-30X next year’s earnings and still have a nice valuation. So the stock could go considerably lower.

    Instead of becoming the next Google, Faceobook is turning into Pets.com. Employee morale is taking a hit, because as the lockup periods expire they are looking a lot less money than they expected.

    Reversing the slide means showing investors that the Facebook can grow revenue more rapidly and deal with the shift to mobile. Time will tell…


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