Is Facebook Another Web Flame Out?

Reuben is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

Facebook (NASDAQ: FB) has been a disappointment since the day of its initial public offering. Although the benefit of keeping in touch with friends is nice, so far the company hasn't impressed Wall Street with its ability to monetize its customer base. Is the company joining the long list of Internet has beens? There are two Internet companies, however, that look to be on a better path.

Keeping in Touch

One of the nicest things about Facebook is that it allows people to connect with each other. Family and friends can stay in touch with ease, which is nice in an increasingly complicated and time starved world. From Facebook's side of the equation, it has a treasure trove of information about its customers, only it has been having a hard time converting that knowledge into profits.

Part of the trouble is that people don't seem to be willing to pay for keeping in touch. So, that means advertising is the way to profits. However, customers also don't want to share their information with advertisers. Facebook has tried a few times to monetize the information only to back down when customers pushed back.

The latest effort is a new search tool. While that may help, it is unlikely to unseat Google from the throne as Internet search king. Facebook is also working hard to transition its business into the mobile space, which will be a key to remaining relevant in the future. That shift alone, however, may not be enough to turn customer information into an advertising gold mine since its customers are very sensitive to the way in which their data is used.

So Far Not So Good

Thus, Facebook's shares have languished since their initial offering. Now, there is research that casts an even darker cloud over the company's business. PEW Research Center reports that 67% of American adults use Facebook, but that 61% of those users report having taken a break from the site at some point or another.

The reasons for taking a “Facebook vacation” included just being too busy, spending too much time on the site, and wanting to get away from the “drama” of the site. Two other reasons were also given, “an absence of compelling content” and just a general disinterest in the site altogether. In fact, of those who reported that they didn't use Facebook, 20% had once used the side, but stopped.

With such a large percentage of the U.S. population on Facebook, how much more room is there for the company to grow? International expansion is likely to be the only avenue for notable subscriber growth. While that could provide years of upside, it can also complicate the business. China gave Google a hard time about user information, imagine what it might decide to do some day with Facebook's data treasure box.

Not the Only One

Facebook isn't the only hot Internet destination that hasn't lived up to the hype. Yahoo! is a great example of a company that hasn't been able to reach what some thought was immense potential. When the Yahoo! service first came out, it was the portal to the Internet. Then Google took that spot and Yahoo! has struggled ever since. A succession of leaders haven't been able to turn things around, though a high-profile hire from Google is currently trying, again, to make Yahoo! a better business.

The one good thing that Yahoo! did was to buy a big stake in China's Alibaba (which is basically just copycatting U.S. ideas in China). That purchase is paying massive dividends, with Yahoo! selling back half its stake for $7.6 billion. Since it still has half its stake, and Alibaba is looking to go public in the next few years, Yahoo! is clearly in line for another billion dollar windfall. While that money may help keep the once dominant web player in the game, the company's lingering issues prove that great potential clearly doesn't always translate into great execution.

Doing Better

IAC Interactive (NASDAQ: IACI), on the other hand, has made a business of both finding new Internet ideas to grow and struggling companies that it believes can be brought back to health. The company's goal is to monetize the traffic across its various web sites. The recent purchase of Tutor.com is a good example of a small Internet firm that can be grown; IAC plans to increase that company's exposure to earn more money. Ask.com and About.com are examples of struggling brands where IAC is working on a reinvention. Note that both Ask and About tried to become web portals in their own right, but couldn't compete with Google or Yahoo!

IAC Interactive has done a great job so far at turning its large collection of brands into a recurring revenue stream. The strength of the model, which is basically all about advertising, is shown in the fact that the company recently initiated a dividend.

Then there is a more direct competitor to Facebook that is doing much better than the social network king, because it is the business networking king. LinkedIn's (NYSE: LNKD) 2012 results speak volumes. Revenue for the year increase 86% over the previous year and earnings jumped over 70%. While the company doesn't have nearly as many users as Facebook, its customer base grew 39% in 2012, surpassing 200 million for the first time. International expansion is also a key growth driver here.

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LNKD data by YCharts

The price divergence between Facebook and LinkedIn is telling. The big difference between the two is the business focus. While companies want to be on Facebook, individuals want to be on LinkedIn so they can network and, hopefully, make more money. And people and businesses are willing to pay for added services LinkedIn has to offer. Few are willing to pay for extras in the social realm.

Still Time

It's clearly too early to tell if Facebook is going to be a heavily used site, but not particularly great business. It isn't looking good so far, and the rapid decline of Myspace isn't a harbinger of likely success. Still, there are companies on the web that are doing a good job of surviving and thriving. IAC is something of a scavenger, while LinkedIn seems to have found and dominated a lucrative niche. Both might be better options for investors concerned about Facebook's ability to live up to its potential.

Yours,
 

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Reuben Gregg Brewer has no position in any stocks mentioned. The Motley Fool recommends Google and LinkedIn. The Motley Fool owns shares of 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. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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