Troubled Facebook needs to take a leaf out of Amazon’s book if it’s not to turn into Fadebook

In May this year I made an amateur estimate of Facebook’s valuation at the time of the IPO and ended up with a number that looked crazy; my maths told me the stock price should be more like $7 than $40. It has now dropped to sub-$20 and falling with widely held views that the value will continue to fall as employees start dumping stock after their lock in period ends. My $7 is not looking quite so crazy now.

I have to accept that I am operating without the knowledge and skills of the legions of advisers Facebook rely upon but nevertheless, standing back from the emotional sentiment of the brand which fuels expectations, I still do not understand the basic economic structure of their business model. Further I also wonder if this experiences will temper the appetite for further IPOs in the social media space.

It seems to me there exist a number of fundamental flaws not being factored into the speculative expectations.

With any fund raising exercise great effort goes in to creating forecasts to attract investors. For ease of the maths let’s assume Facebook has one billion users. Currently Facebook generates around $4 billion of revenue, around $4 per user per annum. There will be spreadsheets that speculate on the growth of both users and revenue per head.

The bet is on what might happen, not what has happened; so the gamble is on jacking up the revenue per head from $4 to say $10 and onwards. It will look like a ‘no-brainer’ on the spreadsheets but it isn’t a slam dunk, getting the revenue up is crucial to justify the IPO valuation.

My observation is quite basic but fundamental to the future development of Facebook and other social networks. It is based on corporate culture.

Amazon sells stuff online so the culture is all about the customer. I think they have a superb customer service operation, getting in touch with them is very easy and they deal with problems in double quick time. Recently I ordered some CDs, one didn’t arrive, I told them via email and they dispatched a replacement the same day via first class post and it arrived the next morning. Brilliant and I felt good about Amazon.

Try getting in touch with LinkedIn. Impossible. The volume of complaints is massive, all focused on the same issue; “I have a problem and I can’t find anyone to help me”. My ‘account’ on LinkedIn has suddenly disappeared, I have been deleted, erased, removed, and I cannot find any way of getting LinkedIn to talk to me.

I’ve just had the same experience with Facebook; someone is pretending to be me with my email address and password and, again, trying to get to anyone at Facebook to do anything is very, very challenging. So I’ve resorted to deleting my account.

The difference between Amazon and Facebook is the orientation of the company in relation to their user base. Amazon would die if their customers had constant bad experiences, they would just stop using them and go elsewhere. With Facebook they don’t have the same motivation hence their customer service is poor, just like LinkedIn.

I realise the opposing argument would be Facebook isn’t an ‘e-tailer’, it’s a platform that provides social interaction. However the longer term relationship with the users will impact on the reputation and ultimately the success of the brand. I wonder if on the Facebook campus the staff are inwardly focused rather than outwardly focused? Do they assume their user base will just keep growing? Is historic growth a cause of complacency?

The obvious unanswered question is: will Facebook generate the level of revenue that could see the stock price recover over time? Currently there is little evidence to answer in the affirmative. The killer issue is whether advertisers’ confidence provide the revenue required and at the moment the jury is out.

There are several reasons why. First the ‘fit’ between the philosophy of Facebook and commercial advertising is not a comfortable one for many users.

Secondly there are insufficient metrics to support the effectiveness of advertising on Facebook and, thirdly, the ‘demand’ for Facebook has a sense of fragility – just like share prices user numbers could go down as well as up.

In my view Facebook/LinkedIn/Twitter et al need to learn from other successful brands where customer service is paramount to the longer term health of their business. Traditional brands who have neglected customer service have suffered severely in more trying economic times; social networks need to begin thinking about marketing challenges such as user numbers hitting a plateau, having a retention strategy, figuring out acquisition of users in a competitive market and, of course, making money.

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About Paul Simons

Paul joined Cadbury-Schweppes in brand management and then moved to United Biscuits. He switched to advertising in his late 20s, at Cogent Elliott and then Gold Greenlees Trott. He founded Simons Palmer Denton Clemmow & Johnson in the late 80s, one of the leading creative agencies of the 90s. Simons Palmer then merged with TBWA to create a top ten agency. Paul then joined O&M as chairman & CEO of the UK group. After three years he left to create a new AIM-quoted advertising group Cagney Plc. He is now a consultant to a number of client companies. Paul also shares his thoughts on his blog. Visit Paul Simons Blog.