Could Facebook Become The Next MySpace?

By: ispeculatornew
Date posted: 07.18.2011 (5:00 am) | Write a Comment  (7 Comments)

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News Corp has been in the news in the past few days for some of its actions in the media space, especially with its UK newspapers. Slightly over 5 years ago, MySpace was the dominant social media player on the web and was purchased for what was often seen as a discount price for $580 million. The acquirer? Rupert Murdoch’s powerful media empire, News Corp. You might have seen that News Corp has now sold its social media property for $35 million, less than 10% of the price it paid for in 2005.

As we have discussed many times in the past, News Corp turned out to be a terrible owner for MySpace. There were numerous mistakes made and Facebook clearly seems better managed. That being said, as Facebook continues to work towards what should be an IPO at a $100 billion + valuation, some questions must be asked.

Could Facebook Go Down As MySpace Did?

There are certainly arguments to be made. On the web, things change at lightning speed. Before MySpace, Friendster also came and went. If you think of Search Engines, before the Google era began, many other search engines such as Yahoo and Altavista dominated but then ended up losing it all. There is no doubt that things can change very quickly. If momentum started turning, things could go much faster than any traditional business. One reason of course is that moving a digital identity is far easier than moving more traditional properties.

Privacy has been one constant worry for Facebook users. Over the years, Mark Zuckerberg has continued to feel pressure about it and it probably would not take many large mistakes for users to start worrying a lot more.

As Facebook gets ready to turn public, will its focus on users and products change? Many companies cannot help but switch to a shorter term focus where profits matter more than anything else. That is when Facebook could start losing momentum if it faces pressure from younger, more dynamic competitors.

Facebook Is Not MySpace

While the possibility of seeing Facebook crumble as did many others exists, I personally don’t think the odds are significant. Why? One reason is that Facebook is much more dominant than MySpace ever was. When all of your friends and contacts are on one social network as is the case on Facebook, moving everything (and everyone!) to a new network would be a major hurdle. Google has its own product, Google+, off to a great start and it could turn into competition for Facebook but that is far from being the case right now.

One interesting thing to consider as well is that as Google transformed the way internet users surfed the web, Facebook has been doing the same. It is having a long term impact on how relationships are created and maintained which is much more difficult to revert from.

Do I consider that Facebook has more downside risk than a traditional media company? Most certainly. However, I do still think that risk is very limited and that its current $100 billion valuation talk remains a major bargain.

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7 Comments

  1. Comment by Bret @ Hope to Prosper — July 25, 2011 @ 6:17 pm

    I’m thinking $100 Billion is an obscenely high valuation for a company with a couple of servers and no real way to protect their customer base. As you already reported, the Internet is littered with the remains of similar companies from the past. Facebook isn’t like Ford or Boeing, with a bunch of factories and patents.

    I am interested how well Google+ will compete with Facebook. Google has failed miserably with their past attempts at social networking, but Google+ has generated a lot of immediate momentum. The circles feature seems like a great idea to the problem of oversharing.

  2. Comment by Intelligent Speculator — July 25, 2011 @ 7:37 pm

    @Bret – By those standards, Google would also be insanely expensive no? Would you agree?

  3. Comment by Bret @ Hope to Prosper — July 25, 2011 @ 10:55 pm

    Not completely. Google is a big server farm and they could get upset by Bing or someone else in the future. But, they have a way bigger moat than Facebook. They have a lot of patented technology and a lot of sucessful business units beyond search. Their Android platform looks like the future for cell phones. And, they have great revenues from Adsense and Adwords that will be solid for many years. Nevertheless, I don’t buy Google stock even though it is hot.

  4. Comment by Intelligent Speculator — July 26, 2011 @ 3:59 am

    @Bret – Interesting, I have different ways to value things personally. For example, I consider Google’s “brand” and search engine (even though its quality is not backed by patents or physical servers) as incredibly valuable resource.

  5. Comment by Bret @ Hope to Prosper — July 26, 2011 @ 10:06 am

    No question that Google is a huge resource. In fact, I would say it is one of the top technological resources of our time. As someone who has worked in the computer industry since 1985, I remember how hard it used to be to find information on the Internet, before Google. Now, almost any piece of information is available in fractions of a second, sorted by relevancy.

    As an investor, also since 1985, I recognize that valuations are based on earnings, not technology or brands. People invested during the dotcom era got a refresher course on earnings. Companies like Google have many durable sources of revenue that can’t be quickly supplanted. Companies like Facebook could become the next Friendster or MySpace in a very short time frame. That’s why I believe Google deserves it’s lofty valuation and Facebook doesn’t. Others are welcome to disagree, but I believe Facebook is highly speculative.

  6. Comment by Intelligent Speculator — July 26, 2011 @ 5:35 pm

    @Bret – I see what you mean of course, I would however ask you, what would need to happen for you to consider Facebook in a similar way as Google?

  7. Comment by Bret @ Hope to Prosper — July 26, 2011 @ 9:50 pm

    Facebook would have to be considerably more diversified with business units that had huge competitive advantages. Right now, it has one income stream that could quickly disappear. I wrote a post that explains this pretty well.

    http://hopetoprosper.com/4-important-lessons-on-investing/

    Bret

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