Is Facebook Making A Strategic Error, Or Is Their Current Problem Just A Matter Of Timing?

1) Yes, FB is trying to pump its share price via advertising in anticipation of the IPO. We should expect advertising higher costs as the public awareness of FB’s income limitations increases.

2) Even if FB produces only 1B a quarter in revenue or only $5 per user, the costs of running that company are small in practice, and marketing expenses are controllable. It can be a profitable business. The question for investors is, can it be a GROWTH business?

3) If FB solves mail and search and duplicates the Google advertising tools, it can improve its value to advertisers even if its knowledge of customers is not as thorough as they hope, because customers will prefer less noisy searches to Google’s noisy and dirty searches. This is probably the strategic internal error they are making. They are very likely overvaluing the data about the individual in pursuit of mass advertising dollars instead of accurately valuing the desirability to the user of the interface and the protection from ‘noise’.

FB will not become another Google. Google profits from the fact that its results are BAD. Because its results are bad, it can sell advertising to small business. FB however, can profit from the fact that its search results CAN be GOOD by narrowing acceptable results and narrowing advertising and therefore increasing advertising rates over those of Google. The problem Google has is that it CANNOT ATTRACT TOP BRANDS. The virtue of FB is that it CAN if it creates a walled garden. FB can strategically create a flight to quality for good brands just as Google has created a flight to opportunity for small and weak brands. “FB is television, and Google is the yellow pages.”

4) THE QUESTION FOR INVESTORS THEN is whether FB will pursue the short term trend, and continue to overvalue customer information — which looks bad but may not indicate anything other than an issue of timing — or whether FB will pursue the long term opportunity, of creating a less cluttered garden on the internet which converts their perceived weakness into a strength that is both desirable for users, consumers and for brands, and one which can rival google’s revenue, but rival it with UPMARKET revenue. The important point here, is that investors can INFLUENCE THAT STRATEGIC DIRECTION.

I have no idea whether this strategy is commonly understood inside the company or without. But as one of the few people who has built a large scale technology and marketing company (Top 25 Digital Agency), and who has worked with other strategic Fortune 100 technology leaders to try to solve this problem, the business opportunity is obvious to me since Google’s challenge at attracting top brands due to its all-encompassing aspirations is legion. Google helps small business. FB can help large brands. And advertising large brands requires a bit of a garden. And FB has it. But the client interface for that business model is not Google’s. It’s more intimate. It has to be.

That is what I suspect FB’s strategic error is: they’re looking in the wrong direction. That direction can be fixed however. And investors should invest in the OPPORTUNITY to create that wealth even if FB’s numbers look depressed because of timing.

Curt Doolittle