Is it really the beginning of the end for Facebook?

Mark Ritson tries to explain Douglas Rushkoff counter-intuitive prediction that Facebook is cashing out, sensing its possible decline:

(see my own, I believe important, remarks below)

“In an article for CNN earlier this week, he was in no mood for equivocation. He believes Facebook’s current success will be short lived. Rushkoff argues: “We are witnessing the beginning of the end of Facebook. These aren’t the symptoms of a company that is winning, but one that is cashing out.”

What can he mean? Surely Facebook is about to become one of the world’s biggest brands? That’s certainly been the message from a stream of identikit investment bankers who have appeared across the national news networks over the past week to explain Facebook’s imminent global domination.

It has, after all, become the biggest single provider of display advertising in the UK with mega-advertisers like Procter & Gamble paying millions to advertise their brands using its pages. And if the rumours are true, Facebook generated £260m in profits for 2010 and has an even rosier outlook for the year ahead. Perhaps best of all, banking behemoth Goldman Sachs is trying to find a way to allow billionaire investors to take a $1.5bn share of the company – a deal that values Facebook at $50bn.

Don’t just count the money, follow it to the source. Businesses run on customers, not sales
So where is Rushkoff coming from? Let’s ignore the enthusiasm of Goldman Sachs to encourage its clients to invest billions of dollars in Facebook. Goldman is a brand that long ago sold its soul, its client based integrity and its once sacred 14 principles in order to make as much money as possible. That, at least, was the conclusion of the US government last year when it fined Goldman $0.5bn for selling collateralised debt obligations (CDOs) to its clients during the credit crisis while simultaneously shorting the very same investments for its own profit.

Goldman’s investment vehicle and its $50bn valuation of the brand should not be deemed as evidence of Facebook’s long-term prospects, but rather the bank’s short-term interest in making money irrespective of the investment in question.

But surely there is still no denying Facebook’s long-term business potential? It is here where Rushkoff differs from the bankers and investment analysts. The latter simply count money, but Rushkoff looks to the place where the revenues originate. Don’t just count the money, follow it to the source. Businesses run on customers, not sales. And Rushkoff believes that Facebook is building its business from a fundamentally unsustainable base.

It’s not that MySpace lost and Facebook won
Social media, as Rushkoff sees it, is just as temporary and fleeting as a nightclub or a party. At some point the movers and shakers are going to do just that and when they do everyone else eventually follows.

And the frightening speed with which the likes of Friendster and MySpace lost their lustre illustrates the paradox of making a long-term investment in any social media brand. The scare over the weekend that Facebook was going to close itself down in March, and the thousands of stories and tweets that erupted as a result, illustrate just how mercurial and transitory social media brands actually are.”

My own take on this:

Though I see no sign of any downhill trend at Facebook, I think it is important that we distinguish the two roles of Facebook. One, as a public or ‘commons’ utility, and two, as a profit-maximising business selling our attention and hoping to intermediate transactional social commerce. The problem is, as what we have seen with many previous collapsing social media, is that the connection between both roles is not at all clear.

Regarding the business side: Google has certainly shown that unobtrusive transactional advertising is a realistic option, and if a social media utility like Facebook succeeds in finding the same type of unobstrusive advertising, it may succeed. However, so far, there is very few proof that inserting transactions between social media communication is working. And the reason this is not working, brings us to the other role of Facebook and social media: as public utilities.

People use social media primarily to communicate and organize with their friends, not to monetize their social relationships or with a mindset of consumption, hence, aggresive social commerce is frowned upon and avoided, as is obligatory and obstrusive advertising.

This may actually mean that social media are not appropriate as business vehicles, and thus, that the long term commitment of business in funding corporate platforms, is a dangerous bet. Long-term failure in profitability would then leave two main alternatives. One is regarding social media as publicly funded utilities, which seems unlikely in the current conjucture; two, is that they would exist as commons-governed trusts, on the model of the Wikimedia Foundation and the FLOSS Foundations. These trusts, or other forms, would be primarily concerned with the continued existence of the utility and would strive for a variety of income sources to make them sustainable, this would include pubic funding, commercial funding and crowdfunding, but in any case, they would not be profit oriented.

2 Comments Is it really the beginning of the end for Facebook?

  1. AvatarTom Crowl

    I agree with just about everything here!

    And have done a fair amount of work with hopes of addressing this.

    The ONLY slight caveat… it may be that a universally-owned* platform could be constructed to not only be at least somewhat profitable… but could thereby use any such profits to re-enforce the capabilities of its weakest members.

    (this is only an hypothesis, or maybe even just an attempt at a pragmatic ‘dream’ for the future… it’s not set in stone)

    Let me explain how such “universal ownership” might be defined in terms of a needed utility I call the Commons-dedicated Account Network:

    A self-supporting , Commons-owned neutral network of accounts for both political and charitable monetary contribution… which for fundamental reasons of scale must allow a viable, one-button, secure micro-transaction. Such a network ideally should maintain its own cloud and bank. Accounts may be created and/or maintained with zero balances and/or only momentary balances during a pass-through transfer (monetization model requires no burden on the actual transaction.)

    (a simple but functional demo at )

    The reason Facebook doesn’t have the persistence people think it might is while Facebook is currently dominant, it doesn’t address the requirements for deep peer-to-peer association. It doesn’t understand its roots in proximity and capability… in other words it doesn’t really help people accomplish anything much with others.

    The Internet is a landscape… I believe no larger change to the human landscape of interaction has occurred since the birth of agriculture… which essentially coincided with the birth of currencies and finance as transactional technologies.

    This is a CRITICAL change in the nature of transaction. Within a hunter-gatherer group ALL transactions were in:

    Politics – the exchange of ideas for individual and group decision to enhance the survivability of that group and any allies.

    Charity – the exchange of collective ‘wealth’ within the group for achievement of better social balance… and again… to enhance the survivability of that group and any allies.

    Aesthetics – the exchange of ‘creative forms’ to enhance a non-material based sense of well-being or accomplishment and… to enhance the survivability of that group and any allies.

    While there was certainly inter-group barter pre-money… It was only with the move to settled existence that the commercial transaction and its attendant technologies (finance, banking, law, etc.) arose.

    I believe web technology, for the first time since the birth of the commercial transaction… has the opportunity to restore these earlier transactions to, if not the former dominance they once held, at least into a much healthier balance.

    I believe there is value, (and maybe even an imperative) to the extent possible currently, to EXTRACT these transactions from the current financial system (while still relying on it so long as necessary).

    And that under a “For Profit” model it MAY be possible to make interests relying on the commercial transaction (this is not necessarily evil in itself) to a certain extent DEPENDENT on the well-being… and goodwill… of the non-commercial sector and it’s landscape (platform/network).

    *Universal ownership (a possible structure?): Admittedly idealistic but perhaps not entirely impracticable): one share per living human… non-transferable… expires with death… profits to be distributed NOT EQUALLY… but rather as a drawing right to food, shelter and basic healthcare for those lacking them.

    A very abbreviated logic chain:

    1. There’s potential in the political and speech-related microtransaction for networked citizen lobbying, candidate support, journalism, etc. if it can be harnessed.
    2. Problem is the cost and hassle of the microtransaction.
    3. This problem is solved by system similar to x-box points (which is how they handle microtransaction issue for certain system content).
    4. Additional problem is catalyzing the network
    5. Addition of charitable potentials solves this for a variety of reasons related to system monetization and a more general user-utility
    6. Patent has just been granted for this mechanism: Patent #7,870,067
    7. Establishment of useful network opens up new fields for empowered association
    8. There are theoretical reasons for need for such a system but points 1-7 above are about a PRAGMATIC implementation.
    9. Should any of the points above be in doubt (which is reasonable) ask a question.


    Social Networks & The Social Organism: Healing the Breach

    Empowering the Commons: The Dedicated Account (Part I)

    Capability ENABLES Responsibility

    Fixing the Political Relationship

    P.S. While essentially a simple financial innovation… To see how it may relate to privacy and Online ID see the following article by Nancy Scola at TechPresident and my comment:

    What’s to Actually Like About “Obama’s Online ID”? CDT’s Aaron Brauer-Rieke Explains…

    Inquiries welcome… investment and assistance even more so.

  2. AvatarTom Crowl

    Forgot to add News/Journalism to my list of earliest transactions:

    Politics, Charity, News/Journalism, Aesthetics…

    Journalism: “Hey, Ooga… I just saw the first berries of the season!”… again rooted in enhancing collective survivability, in this case by exchange of information

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