Facebook Could Learn From Comcast, Netflix Fumbles
Maxwell is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.
Remember last month when Netflix (NASDAQ: NFLX) Chief Executive Officer, Reed Hastings, posted a Facebook (FB) rant against Comcast (NASDAQ: CMCSA). It was, at the time, a humorous example of the ‘pot calling the kettle black.’ It was also yet another reminder to the public of how both companies were utterly failing at supplying customer need.
As the long awaited Initial Public Offering of Facebook stock speedily approaches, there are questions on the horizon which could be red flags for potential investors.
What Is Happening
While Facebook’s gadgets and services have helped it amass over 900 million users of the social networking tool, there are things that a private company need not worry about that one publicly owned could pull out its hair trying to resolve. At the high end of a projected range of $28 to $35 a share, Facebook would be valued at 99 times its earnings, a higher multiple than 99 percent of companies in the Standard & Poor’s 500 Index.
That being said, is it even possible to maintain that value? And what would it need to do to accomplish such a feat?
One analyst, Filippo Garbarino, who oversees $50 million at Frontwave Capital Ltd., states flatly that “It’s overvalued at that price. Investors are becoming more selective and there are quite a few fallen angels around, like Netflix. Those who buy Facebook at these levels are more speculators than investors.”
It is interesting that the company seeks a valuation at 24 times revenue, compared with 5 times for Google. Interesting, and potentially harmful.
What Could Happen
Facebook needs to make more money. Its first method for doing so is to charge for advertising, similar to Google’s strategy. However, as this approach is limiting, it is also trying to add variety to it. Now, it charges for ads, then tries to charge again in order to make sure those ads get seen by more people.
Facebook has dubbed this the "Premium ads" campaign. Pay a little more to have your ads reach more than just the estimated 16 percent of fans who currently see it. Sadly, Facebook is simply too big to make this happen – or at least happen in a strategic way. When ad campaigning becomes a numbers game, the idea of charging for it seems a little silly.
It seems like a move right out of Netflix’s playbook. Hastings brought down his powerhouse of a company by mistakenly believing that consumers would accept a price increase without question simply because the company was offering a popular service at moderately low prices. In other words, walking away from customer rule number one, he assumed that the product was too important for people to walk away from. The move spelled disaster – a near 50% in stock value almost overnight.
Back in 2006, Comcast did the same thing. What ensued was a still-unresolved struggle with customer complaints over its disrupting file sharing networks and preventing users from uploading files. With absolutely no justification for actively interfering with attempts to share files online, a legal controversy followed. The main argument was/is that, instead of simple filtering content, Comcast purposely sent bogus packets to Comcast customers to disrupt the transfer. The first lawsuit, Hart v. Comcast, was filed, leading to the opening of an FCC investigation in 2008.
Which Path to Take
Facebook recently ended a trial run in New Zealand of a way to make money from its users. The principle behind the test was the same as that aimed at advertisers. Currently, only about 12 percent of friends see status updates. For an additional charge, Facebook will attempt to ensure your friends see them. No word as to how exactly.
To be fair, because Facebook is so popular, it is almost impossible to ensure the ‘right’ people see certain posts. In it’s scurry to start making money, Facebook will most certainly try anything and everything to make a buck. Translation: The most loved and recognizable social networking site could resort to nickel and diming everyone, which will result in frustration, anger, and hitting the ‘deactivate’ button.
Let’s be honest. The first time we heard of a small fee for checking our second bag at the airport, it ruffled our feathers. Now a charge for every bag, and a hefty one at that, has more than a few honestly considering taking a plane altogether, or at the very least, what we classify as essential for traveling. This week's New Zealand experiment can suck Facebook leaders (those sans hoodies) into solidifying this change in relationship to its customers.
What kind of change can be expected? If Facebook succeeds in charging customers for small things such as space, status updates, or controlling who/how many will see your updates, the slippery slope could be quick and painful for all parties involved.
First off, if you aren’t a paying customer, what say do you have over anything concerning your privacy? Literally any current function can be changed or eliminated completely for those who don’t pay. In the world of ‘My way – Right away’, people may not quibble over a few dollars a month to keep things running as is. But if Facebook ever exceeds that price point, or god forbid, takes the path of charging a few cents for everything, millions would walk away.
Another possible scenario is that it uses the monthly subscription price the same way phone companies such as AT&T and Verizon use data plans. How long before a consumer will have to choose between phone (which is arguably just texting and internet nowadays), and ‘facebooking’? And which would they choose?
Let us return to our examples of Netflix and Comcast. Movies and TV on demand have become not only accepted but expected. The quick and easy method of streaming came into play and with the click of a button you had a library of movies at your fingertips, including TV shows and new releases. Both these companies should be on top of the market, not struggling to stay afloat.
Facebook’s IPO will undoubtedly be successful – but what then? Where will it go for the revenue necessary to keep the Wall Street Monkey off its back? I see no evidence that it has strong enough leadership to prevent a quick and ugly turn. It must establish clear boundaries and strategies in order to ensure its success.
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