How the end of Facebook will come

Facebook looks like a titan. Its empire is big enough now that its end won’t come quickly. But all the ingredients for the fall of Facebook are there already.

Facebook has 13.4 million users in Australia. About 9 million use it every day. Out of a population of 23 million, that’s almost complete saturation. At the moment many families have two generations on facebook. Before long it will be three.

You hear stories that the youth are “using snapchat instead” but I suspect most kids will have a facebook account, even if it is unfashionable to use it. It probably just takes one missed party invitation to crack and sign up.

Globally, 1.23 billion people use Facebook. That’s one in six of the world’s population.

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So at the moment Facebook is everywhere. It’s the Coca-Cola of online communities – it’s everything to everyone. How can it ever be usurped?

The idea humans will only ever need one social network is wrong.

Most people are already on more than one, even if they don’t necessarily see it like that. Twitter and LinkedIn and Ello are obvious ones to mention. But online games and forums are somewhat-competitors to Facebook. So is any site on which you can make an account and leave a comment or ‘like’ an article.

As Facebook becomes the mainstream backbone of our social networking, lots of little social networks to meet specific needs will come up.

Why can’t Facebook just meet all those specific needs?

Whenever someone talks about the one big solution that will replace all the other kludges in our life – in any field – I think about the kitchen.

This is perhaps the most intensively used, tried and tested set of “apps” in human endeavour.

Mostly we need to apply heat to food. Do we have just one big heat source that does everything? Hell no. My kitchen has at least seven different ways of warming food and drink: an oven, a microwave, four gas burners of different sizes, a kettle, a coffee machine, a sandwich press, and a toaster.

Source: Wikipedia
Source: Wikipedia

Mature markets don’t offer a Swiss Army Knife solution. ‘All-in-one’ is really a synonym for ‘not very functional at anything.’ If this wasn’t true, we’d all wear those pants that zip off to become shorts.

Facebook will be the backbone of our social networking. In kitchen terms it is our stove – the one thing everyone has. But that does not mean it will be the only network we need. Everyone will experiment with a few other networks for their own preferences.

One day, one of those social media that meets some people’s needs will have a cool feature that means it suddenly has almost as many users as Facebook.

Then, the owners of that network will have a choice – do they try to become the new backbone, or do they try to remain a niche app? The rewards are probably highest in becoming the new backbone app, so they will try to knock Facebook off its perch.

Facebook’s purchases of Instagram for $1 billion and What’sApp for $19 billion make a lot more sense from this perspective.

Facebook was once just a little app for college kids to find each other. It recognises the potential for a simple and effective app to become global fast. It knows it has to prevent a competitor from rising. The easiest solution is to make your competitors your employees.

But with the payoffs to being a Facebook competitor rising, many more social networks – including things that don’t look exactly like social networks – will enter the fray. Many will end up big enough to get buy-out offers from Zuckerberg.

But eventually one of those will be owned by a young entrepreneur with a Napoleon complex who’ll turn down the offers in order to take a shot at the throne. I give Facebook ten years.

Rapid growth of WhatsApp should actually make Facebook frightened.

Ever since Facebook swapped the GDP of a mid-sized nation for a simple messaging service, the chart below is getting a lot of attention.  But I fear its main point is being missed.

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Facebook got so excited by this sort of user growth that it spent $US19 billion buying WhatsApp. But it should be cowering.

Facebook’s biggest single virtue now, is that it’s the social network your friends are on. Facebook’s entire $175 billion market value hinges on the idea that this “network effect” is enough to lock you in and make sure you never leave. Is it?

The first person to install WhatsApp had no way to use it. The second person to install it could only contact the first one. The thing had no real value until a decent-sized circle of your contacts was on it. Despite this, despite the presence of other perfectly good options, like email, SMS, Viber, and despite its terrible IT-developer’s-idea-of-a-pun name, the application has grown faster than anything the web has ever seen.

WhatsApp’s growth shows people are now damn comfortable in the app store. Nobody is worried about hitting install, checking something out, and deleting it later. That represents an important – but predictable – change in consumer behaviour. And a major threat to the apps we already have installed.

Facebook perhaps recognises it could be gazumped. It is trying to make our commitment to Facebook a virtue, with, for example, recent videos reflecting our history on Facebook, etc. But if its major selling point is that it stores your old memories, will that be enough? If we all keep our Facebook – like we all keep our old school photos – but use something else for day-to-day use, then Facebook loses.

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There’s another even bigger point to make here about the lesson of WhatsApp’s incredible growth.

When I wrote about Facebook’s acquisition of WhatsApp a few days ago I mainly just goggled at the incredible price. $US19 billion in cash and stock, or about $A21 billion. Since then I have had a very constructive argument with someone I respect greatly in the tech space, about what the point of the acquisition is.

I argued you could have lots of customers but no good way to monetise them. Twitter was a really good example, I said. The old-school capital market guys that floated facebook and were currently propping up their shareprice would, I reasoned, have to learn the hard way to not rely on their old-world model that says a successful business is one with lots of customers.

But I got an eye-opener in response.

“Don’t get me wrong, I wouldn’t buy FB shares at the current frothy prices either. Nor would I pay $19 Billion dollars for WhatApp. But the long-term play is a little more interesting than “monetise internet service”. The aim as I read it is to eliminate the existing rent-seeking middlemen (in this case, telcos) by undercutting their service. Then, once you have sufficient user lock-in and network effects, you can *become* the rent-seeking middleman, but at an unprecedented global scale! Not exactly a glorious ambition, but it may just work out that way.”

That made me think about the way I look at the internet.

There is one company that has created “sufficient user lock-in and network effects” to be considered the backbone of the internet. Google. Revenue of $15 billion and profit of $3 billion in one three-month period in 2013. Google is to the internet what the state-owned telecommunications companies were to the early days of the communication by wire. A behemoth.

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The question then becomes, is Google a model for the rest of the net? Can Facebook et al do that too? Or is Google an outlier?

The telcos became rent-seeking middlemen by owning a network that could not be replicated. They had physical wires that they controlled. Competitors needed to make huge investments to beat them. There’s an analogy to Google there.

Google’s search results are so good not just because of its smart Page Rank algorithm, but because of its expensive web-crawling. Its competitors, like DuckDuckGo, use third-party results in their search results, because web crawling is expensive to do right:

“While our indexes are getting bigger, we do not expect to be wholly independent from third-parties. Bing and Google each spend hundreds of millions of dollars a year crawling and indexing the deep Web. It costs so much that even big companies like Yahoo and Ask are giving up general crawling and indexing. Therefore, it seems silly to compete on crawling and, besides, we do not have the money to do so. Instead, we’ve focused on building a better search engine by concentrating on what we think are long-term value-adds.”

Google’s core products, search and ads, are protected by both being smarter than the competitors, and expensive to replicate. They look safe.

But its various add-ons, like Maps, Gmail, Youtube and the play store could in theory be beaten. It has happened before. See: 10 Google services that failed and why.

Facebook’s offering is not necessarily expensive to replicate.  Open source social networks are out there. Market leaders diaspora and Movim both make privacy a big feature. Who knows what the spark will be that sets them, or something like them, on the path to exponential growth.

Goldman Sachs and JP Morgan take note. The Google model may prove to be a once-off. The internet will continue provide a lot of terrific services, but will not necessarily continue to provide a lot of money. The economic rule that price equals marginal cost of production in the absence of market power has not broken. And marginal costs online are often very close to zero.

Just to emphasise this point, I’d like to finish this piece by introducing you to an app called Telegram. It does everything WhatsApp does, but cheaper. There are no ads. There are no fees. And it is run by a not-for-profit.

Add me when you join. :)


The value of Whatsapp, in perspective for Australia

WhatsApp will be bought by Facebook for $19 billion. That would make it the 14th most valuable company on the Australian Stock Exchange, more valuable than Fortescue Metals, more than Macquarie Group, two thirds as valuable as Rio Tinto.


The deal puts the $1 billion Facebook paid to buy Instagram firmly in the category of forgotten history.

Whatsapp, for those of you not in the know, is just another way to send text messages.


It has been downloaded over 100 million times, but it is free for the first year, doesn’t sell ads and costs $0.99 a year thereafter. So yes, it is a graveyard for investors capital.

The internet economy is great for consumers. But the expected monetisation of all this time spent is just never going to happen in the way companies seem to believe. Time spent online is not like time spent walking around a mall.