On Monday, Jerry Brown will announce new budget cuts that will hurt UCLA. Anticipating this, I have been brainstorming about new ways to raise UCLA's return on its tiny endowment. Shorting Facebook offers one winning strategy. While there is great fanfare about Facebook's IPO, I am pessimistic about this company's future --- relative to the hype surrounding this juggernaut . Permit me to explain.
Compare Starbucks and Facebook. Starbucks can collect more revenue from people if it opens up more stores in more nations or if with a given number of stores it manages to get more customers into each store or nudges incumbent customers to spend more at the current set of Starbucks. With our daily need for coffee, diminishing returns doesn't kick in. Starbucks is a high quality product that I view as a "reward" (a relative cheap reward) for a day of effort and suffering.
In contrast, let's turn to Facebook. It is rightly proud that 1 billion users have accounts but at least in my case I find that I'm logging in less and less frequently. Diminishing returns have kicked in. I'm proud of having reconnected with the Scarsdale Class of 1984 and my Hamilton College class of 1988 but I have nothing to say to these old friends. I have now seen photos of them and I know how many kids they have and what they done with their lives. What else is there to say? Facebook is losing me because the social connections it offers me are stale. I'm glad to have reconnected with my old friends but I don't have enough time in the day to invent a future with people from my past. I have a feeling that my experience holds true for many other people. I have roughly 200 facebook friends and only a subset (roughly 15) post something on a weekly basis. This isn't good news for FB.
Now let's turn to FB's revenue model. As more computer activity moves to the smartphone and tablet, will such smaller devices be conducive to advertisements? I don't think so. I believe that advertisers won't feel they are getting their $ worth and will pull the plug on paying FB for advertising. What will FB do then?
Does Google face that equal challenge? I believe that there will continue to be a set of people who "compute at a desktop or notebook" and Google will continue to make $ from this group.
A final concern that I have with Facebook is its implicit assumption that we only learn from our social network and friends. In truth, people combine information from multiple sources. The wise person will check in with their peer group (using FB) and use Google to see what are the leading links for a topic such as "best restaurants in LA". Facebook appears to believe that we only learn from local knowledge. This seems exaggerated to me and is likely to backfire in the near future.
So, UCLA -- find a financial instrument that allows you to sell Facebook in June 2012 and buy it back in June 2013. You will earn big $ on this trade!
UPDATE: Another challenge that FB faces is that it is a leisure activity. People use Google at Work and we are at work for half of the time we are awake. You are not supposed to use FB at work. It is a leisure activity. For FB to continue to occupy our time, the Zuck must convince people to remain glued to his site rather than to actually live their lives in the real world. There isn't enough time in the day to do both.
So, the Zuck should hire a time diary expert to make a histogram of how much time people spend on Facebook and study dynamic patterns. A person like me used to spend 40 minutes a day and now I'm at 0 minutes. I apologize Zuck but I have a life to live. Am I typical? Or only typical of 46 year old bald dudes?
UPDATE #2: General Motors agrees with my logic. They have stopped sending FB $10 million dollar advertising checks.
