The problem that Facebook Inc (NASDAQ:FB) has is that, while the company holds a lot of promise for the future, there is the possibility that it could easily fall behind as technology rapidly changes.
Making money from users
Online advertising spending is expected to go up in 2013. General Motors Company (NYSE:GM), which, very publicly, last year stopped ad campaigns on Facebook Inc (NASDAQ:FB) because they were ineffective, has started to use them again. That’s a good sign since Facebook makes most of its money from display ads that appear on the right side of the site.
But, does General Motors Company (NYSE:GM) actually benefit from Facebook Inc (NASDAQ:FB) ads? It’s questionable, yet given how expensive cars are, the company has to try new and innovative marketing methods. Many companies that have been doing social media marketing for some time are realizing that it isn’t all that effective. A lot of the hype surrounding Facebook suggested that it would be a conduit into which declining television revenue could be diverted. That gimmick might work for Facebook Inc (NASDAQ:FB) over the short term, but it’s not a very good business strategy.
Facebook Inc (NASDAQ:FB) is in a constant struggle to monetize its users. Although it has over a billion of them, being able to convert that sheer number of people into revenue is an ongoing challenge.
A partnership fades
The Facebook Inc (NASDAQ:FB) Credits virtual currency, which the company expected to be a valuable social payment system, has lost momentum. The strategy of Facebook as a platform for third party apps and games has fallen flat. The performance of web-based gaming outfit, Zynga Inc (NASDAQ:ZNGA) , which derives a lot of its users from Facebook Inc (NASDAQ:FB), has been dismal.
Zynga Inc (NASDAQ:ZNGA) has been working to separate itself from Facebook’s platform in order to exist as a more independent entity and become less reliant on Facebook’s ad business. Still, it would be best to stay away from this company’s stock. The share price has fallen dramatically, and Zynga Inc (NASDAQ:ZNGA)’s revenue has been in the red in three of the last four quarters.
Monetizing mobile
Facebook Inc (NASDAQ:FB) is betting that mobile is going to be a big driver of growth for the company. The release of its Facebook Home mobile app is an example of that. So far, Home has been a very divisive product for Facebook’s users. Some have embraced it. Others find it downright intrusive. Since it replaces your smartphone’s home screen with Facebook itself, it can turn off people who don’t want to be actively on it all of the time.
The only mobile platform Facebook Home is available on is Android, owned by Google Inc (NASDAQ:GOOG), one of Facebook Inc (NASDAQ:FB)’s biggest competitors. This is a big bet for Facebook because Home could one-up Google Inc (NASDAQ:GOOG) with a completely different and intuitive interface. That might make it successful in delivering mobile ads in an effective form, which so far has been a constant struggle for every tech company. Or, it could repel users with its constant stream of Facebook-related content.
Social network competitors
That’s probably what could eventually cause Facebook’s decline: oversaturation. Teenagers, the early adopters of technology, are getting fed up with Facebook. And there are choices as the social media market becomes more mature and fragmented. Twitter is an alternative. LinkedIn Corp (NYSE:LNKD) just acquired Pulse in order to become more of a portal for news and stories for professionals. That’s a stark difference from what you see in a Facebook news feed.
So, what should an intrepid investor do when thinking about putting money in the social media space? Invest in LinkedIn Corp (NYSE:LNKD). Over the past year, the company’s revenue has risen 81%, and it only has 90 million users. As it continues to attract users, it will continue to grow. The only problem is that the stock price is already quite high.
But, LinkedIn Corp (NYSE:LNKD) is a better investment than Facebook. Staying away from Facebook as an investment would be a smart move. Until the company can easily explain its business model to investors, it’s not a good bet. While the company’s revenue increased at the end of the year, income was flat. That suggests growing pains and no real definitive understanding about how Facebook will make money on users in the long-term.
In the end
Facebook will announce its earnings from the first quarter of 2013 on May 1. It will be interesting to see how Facebook Home is performing. Hopefully, the company will also discuss what it thinks will help it continue to grow its business over time.
The article Facebook’s Fading Fortunes originally appeared on Fool.com.
Copyright © 1995 – 2013 The Motley Fool, LLC. All rights reserved. The Motley Fool has a disclosure policy.
