Facebook: The Underpants Gnomes of the Tech World
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Show of hands: how many of you have a Facebook (NASDAQ: FB) profile? How many of you have visited the site or used its mobile app in the last 24 hours? Judging by Facebook's enormous user base of over 1 billion people worldwide, it's likely that it's almost all of you reading this post.
How many of you would buy Facebook stock? If you've been paying any attention at all to the company's performance, none of you are buying shares.
Despite Facebook's ubiquity, it simply hasn't been able to translate its massive success with users into profits. The company posted a $157 million loss last quarter, despite sales of $1.18 billion.
The company is a lot like the Underpants Gnomes from South Park. They appeared in one of the show's early episodes doing exactly what their moniker said they did: stealing underpants in the dead of night. Their business model was a follows:
1. Steal Underpants
Like the gnomes, Facebook has had trouble with the third part of the plan. Your photos, status updates, and favorite movies, music, and TV shows function as Facebook's "underpants."
Facebook's business model is focused on selling ads, but the online ad market just doesn't seem as profitable as with other media. First of all, it's hard to tell how effective it is in persuading customers to buy things they wouldn't already buy. Plus, users would avoid ads if possible. And thanks to software like Adblock Plus, it's perfectly possible.
The mobile ad space, which Facebook is trying to target, is also very new, and agencies are still trying to figure out what the best way to sell ads to the growing mobile market share is.
Facebook's costs are mainly eaten up, like a lot of tech companies, by research and development, which accounted for $705 million of Facebook's costs last quarter. Facebook might be coming up with some interesting new features, but since R & D is eating up so much of the company's income, it looks to investors as the "?????" in its business model.
Google (NASDAQ: GOOG) dwarfs Facebook in terms of sales. The company racked in $12.2 billion in sales last quarter and ended up with a profit of $2.8 billion. Google seemed to have figured out online advertising with AdSense, which gives webmasters an easy source of income and advertisers an easy source for unobtrusive ads.
It also doesn't hurt that Google develops one of the major smartphone platforms, Android. Google's whole operation focuses on getting people's eyeballs in front of ads, and whether it's on computers or desktops, Google's can target any platform.
Apple (NASDAQ: AAPL) thrives just by making actual hardware. Apple posted a profit of $8.8 billion last quarter, with sales of $35.0 billion. Even as hip as its products are, Apple hasn't managed to enter the social networking market. The two companies might be a good fit, since Apple makes some of the most popular mobile devices around and Facebook is the most popular social networking service; they might want to partner up, or Apple might even want to acquire Facebook. It would at least distract Apple from its war with Google, which only resulted in the disastrous maps app.
Facebook could also follow LinkedIn's (NYSE: LNKD) lead and offer a premium tier. The professional social networking site posted a profit of $2.8 million, with sales of $228.2 million last quarter. Having users pay for advanced features might not go over well, since Facebook has promised users that the service will stay free, and premium services would look like it was reneging on its promises. On the other hand, Facebook is launching a new feature to allow users to pay to promote their posts to their friends, perfect for narcissists with a little disposable income.
No matter what happens, Facebook needs to get rid of the "?????" and replace it with a real way to generate profits quickly.
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ddelony has no positions in the stocks mentioned above. The Motley Fool owns shares of Apple, Facebook, Google, and LinkedIn and has the following options: long JAN 2014 $20.00 calls on Facebook. Motley Fool newsletter services recommend Apple, Facebook, Google, and LinkedIn. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.If you have questions about this post or the Fool’s blog network, click here for information.