The Facebook Effect

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Nothing conjures up visions of grandeur today faster than anything related to social media. No not0330-fb using it, that’s for the uninformed.  The real place one wants to focus their eyeballs is in the mad rush to develop something that sounds as if it can make money. then, don’t try selling it to users first. No, first things first. Sell it to the most highly coveted customers known in tech today: the investors.

Get this group on board first and customers be damned for we’re talking cha-ching here. Actual customers or users are secondary to today’s silicon valley mindset. You just need the “story” of users or customers to sell the idea first, not the other way around.

This way of thinking was once laughed upon, but now? It’s the new psyche (or reborn) mindset of tech and just as it was in the 1990′s, this mindset comes to fruition at exactly the wrong time: Right before the bubble bursts.

Social media for all intents and purposes came along at precisely the right time. No not as something spectacular and groundbreaking as connecting people around the globe and more. No, it came at precisely the time Wall Street needed a place (and a story for it) to allocate all that speculative money afforded them via the Federal Reserves QE programs. This was where the real “social networking” story took place. For there is no other place on earth where, the speculation of a customer – trumps an actual one, like on Wall Street.

If you think this is off base just imagine this hypothetical scenario playing out in any closed room meeting.

First pitch: We’ve created this widget that allows customers to do A, B, or C with their devices as never before. Currently we are still developing but we have 25K current users that pay a subscription fee of X, and are looking to expand and offer plans at levels of Y and Z. We are cash flow positive and believe $350 million would take this to the next level. The response? Next!!!

Pitch 2: We’ve created this platform that currently is underdevelopment, has under 10K active users however all the users think it’s currently “the bomb.” It’s a little “buggy” (as in barely works without crashing) yet we feel it’s the alternative to every other similar platform not currently making any money either. If just 1 current user gets 2 of their friends to even try us, we’re talking global with billions, and billions, if nor even more billions of eyeballs to sell ads to. Dude, all we want is $3 BILLION and you can own us: forget about investing for only a piece. It’s a no-brainier! Response? Sold!!!

This is the affect of the tech world’s psyche today. However, this is now being accelerated and perpetuated by none other than the original darling of Wall Street itself, Facebook™ as in, don’t worry, create it and we’ll buy it. For we understand the hearts and brains of hackers unlike anyone else. So don’t worry, just keep window shopping for that Ferrari™. After all, this is silicon valley, and we do things our way, regardless if it makes business sense or not.

The real issue that is troubling from my view is that Zuck and crew are not doing all these so-called “visionary” moves or acquisitions out of strength. I firmly believe they are out of panic, Why?

Well, if history is any guide, to paraphrase the late Andrew Carnegie: “The older I get the less I listen to what people say and the more I pay attention to what they do.” And to my eye Facebook is doing anything but what it should be doing first: Making money that justifies its market cap based on the narrative touted for its existence in the first place: A place that can sell ads that people and companies want to buy consistently because they prove their value to those very customers via the social media platform. Period.

Suddenly throughout the social media space there seems to be outright panic in the once heralded narrative where ad sales would solve all ills along with curing cancer. Guess what? Not only has it not solved or cured anything, the patients seem to be relapsing. Suddenly the prescription of where ad revenues were the only choice for a healthy bottom line, has given way to “alternative medicine.” e.g., Virtual reality and more.

Suddenly we find the Wall Street darlings of today talking, buying, suggesting, hypothesizing anything and everything under the sun other than the business model one thought was their raison d’être: Eyeballs for advertisers to buy ads for. As I said earlier “suddenly” why does one think this is? Well as they say, let’s go to the charts shall we….

Charts courtesy of

Chart courtesy of

These two bellwethers of the social media space have been on a near meteoric rise. Then seemingly out of nowhere the “book” has been dropped on top of the songbird. However, one thing you haven’t heard to fix this dilemma is anything related to the selling of more ads. Now it’s music and virtual reality.

Yep, that’s the new plan. But wait didn’t we hear that type of talk once before? When was changing the original business model for a newer, better, brighter, more bubblicious model prevalent before fulfilling the promises of the first? Oh yes, that’s right, during the 90′s tech bubble. Imagine that.

As you can see in the above chart Twitter™ it would seem morphed into the proverbial “canary in the coal mine.” In an unrelenting surge to market heights nearly doubling from its IPO debut, it is now flirting with the unthinkable: losing money. (or value)

And where or when did it peak? Right before the Fed decided to pull the plug. Since then not only is no one listening to the tweeting of the once beloved king of songbirds, the bird itself is suggesting maybe you want to hear music via their platform. Sounds novel if one wants to disregard, Pandora™, Spotify™, et al and their commercially viable successes. (or lack there of) I thought they were going to pay the bills via ads in tweets, now they need to become radios?

Facebook’s issue are much deeper and I believe far more ominous. Ponder this scenario from a viewpoint of where you know little to nothing of the player yet had to make a pure business decision on whether to keep, pull, or put more money into a company…

You were sold the narrative that investing in said company would be beneficial to your investment for the company was “the” leader in a market space. It had 1oo’s of millions of active users and was growing that base to be over a billion. The core strategy to monetize all those eyeballs were to sell advertisers the opportunity to get in front of said eyes. Then a new meme begins to take hold where no matter where one turns both people as well as companies are publicly stating they’re being gamed. So-called “likes” (one of the main metrics pushed for validation) are being fraudulently generated across the globe where you can shop online and get deals from not one, but a myriad of dealers falling over-themselves to sell you thousands for mere pennies.

Follow that with the near unrelenting pace Zuck and crew have spent Billions upon Billions of dollars in a frenzy to do what? No, not generate ad sales that help warrant existing business. No, they purchased more companies and ideas that do exactly what they are doing: Hoping these eyeballs will turn into real ad dollars that will eventually pay the expenses and investors.

However as of yet, that’s still the hope, not the reality. But don’t worry, they’ve just bought a company that manufactures virtual reality headsets you can don as to help you out with your perception of what is virtual and what is – reality.

Tack on to that they’ve only spent around $22 BILLION on these “ideas” that hey, someday will turn a profit, right? But again don’t worry because they say they are going to be soooo disruptive in future.

What would you think? I know what both myself as well as a great many others would say: “Get my money out of there – now!” And that seems to be exactly what looks to be transpiring.

FB shares in less than a month have tumbled over $10 a share. That roughly equates to a loss in market cap of around $20 Billion dollars. Tack that onto their recent buying sprees and your far from talking chump change. And I believe it’s just the start.

As it stands currently FB has bled out nearly 25% of its market cap since January between its recent spending spree and Wall Streets recent “demanding of its money back” spree. (market cap of around $170 Billion in January minus approx $20 Billion in acquisitions and another $20 Billion in fallen stock value.)

Without the free money generated via QE looking for a home (any home) where the narrative of speculation trumps true EBIDTA (not non-gap) the only narrative now being spoken will resemble, “where’s my money?”

This is shaping up to be a real psyche change that will have a stunning effect for both silicon valley and the tech world at large. For once it’s shown that the purchasing of billion dollar babies that needn’t talk results only potential results is over – the jig will be up. If it isn’t already.

Once the Federal Reserve demonstrated they were actually serious and cut QE off at the knees in January it changed everything. And I mean – everything.

And that my friends will have a far more disruptive affect neither the tech world nor silicon valley ever dreamed of. But rather – they just may now be having nightmares over.

© 2014 Mark St.Cyr