Goldman Sachs' enormous valuation of Facebook implies that this social network is in for the long haul, but previous online networking trends suggest otherwise
The history of the net has featured many absurd moments, but this week was some sort of peak of the art. In the same week I read that a) based on a $450 million round of investment from Goldman Sachs, Facebook is now valued at $50 billion – higher than Boeing's market capitalization and b) Facebook's founder, Mark Zuckerberg, is so tired of the stress of running the service that he plans to shut it down on 15 March. As I seem to recall a CS Lewis character remarking irritably, "Why don't they teach logic in these schools?" If you have a company worth $50 billion and you don't much like running it any more, you sell the damn thing and retire. It's not like Zuckerberg even needs to wait to be Time's Man of the Year.
While it's safe to say that Facebook isn't going anywhere soon, it's less clear what its long-term future might be, and the users who panicked at the thought of the service's disappearance would do well to plan ahead; if there's one thing we know about the history of the net's social media, it's that the party keeps moving. Facebook's half-a-billion-strong user base is, to be sure, bigger than anything else assembled in the history of the net. But I think the future as seen by Douglas Rushkoff, writing for CNN last week is more likely: Facebook, he argued based on its arguably inflated valuation, is at the beginning of its end, as MySpace was when Rupert Murdoch bought it in 2005 for $580 million. (Though this says as much about Murdoch's net track record as it does about MySpace: Murdoch bought the text-based Delphi, at its peak in late 1993.)
Back in 1999, at the height of the dot-com boom, the New Yorker published an article (abstract; full text requires subscription) comparing the then-spiking stock price of AOL with that of the Radio Corporation of America (RCA) back in the 1920s, when radio was the hot, new democratic medium. RCA was selling radios that gave people unprecedented access to news and entertainment (including stock quotes); AOL was selling online accounts that gave people unprecedented access to news, entertainment, and their friends. The comparison, as the article noted, wasn't perfect, but the comparison chart the article was written around was, as the author put it, "jolly". It still looks jolly now, recreated some months later for this analysis of the comparison.
There is more to every company than just its stock price, and there is more to AOL than its subscriber numbers. But the interesting chart to study – if I had the ability to create such a chart – would be the successive waves of rising, peaking, and falling numbers of subscribers of the various forms of social media. In more or less chronological order: bulletin boards, Usenet, Prodigy, Genie, Delphi, CompuServe, AOL, and now MySpace, which this week announced extensive job cuts.
At its peak, AOL had 30 million; at the end of September 2010 it had 4.1 million in the US. As subscriber revenues continue to shrink, the company is changing its emphasis to producing content that will draw in readers from all over the Web – that is, it's increasingly dependent on advertising, like many companies. But the broader point is that at its peak, a lot of people couldn't conceive that it would shrink to this extent, because of the basic principle of human congregation: people go where their friends are. When friends gradually start to migrate to better interfaces, more convenient services, or simply sites their more annoying acquaintances haven't discovered yet, others follow. That doesn't necessarily mean death for the service they're leaving: AOL, like CIX, the The WELL, and LiveJournal before it, may well find a stable size at which it remains sufficiently profitable to stay alive, perhaps even comfortably so. But it does mean it stops being the growth story of the day.
As several financial commentators have pointed out, the Goldman investment is good for Goldman no matter what happens to Facebook, and may not be ring-fenced enough to keep Facebook private. My guess is that even if Facebook has reached its peak it will be a long, slow ride down the mountain and between then and now. at least the early investors will make a lot of money.
But in the long term, we should remember that Facebook is barely five years old. According to figures leaked by one of the private investors, its price-earnings ratio is 141. The good news is that if you're rich enough to buy shares in it you can probably afford to lose the money.
As far as I'm aware, little research has been done on the net's migration patterns. From my own experience, I can say that my friends lists on today's social media include many people I've known on other services (and not necessarily in real life) as the old groups reform in a new setting. Facebook may believe that because the profiles on its service are so complex, including everything from status updates and comments to photographs and games, users will stay locked in. Maybe. But my guess is that the next online party location will look very different. If email is for old people, it won't be long before Facebook is too.
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