One story dominated this morning’s London newspapers – Facebook’s audacious/ inspired/ lunatic $1Bn acquisition of tiny start-up Instagram. It’s no surprise that this is front page news. Everything that Facebook does these days seems to be so. But behind the “wow, that’s a lot of money” stories there should be serious concern about Facebook’s strategy and long term viability.
To me, this acquisition smacks more of desperation than inspiration. In my view Facebook stopped being a genuine innovator in about 2007 and has rested on its laurels ever since.
That was fine until smart computing took off, enabling the mass market of consumers to aggregate several social feeds together in one place. Simultaneously, people’s usage of social networking began to mature. Rather than consolidating all of their activity into one place, they diversified based on needs. Now the (sizable) leading edge of consumers can have Facebook to stalk their friends, Twitter to stalk celebrities, Linkedin to look for a new job, Pinterest to check out new things to buy, Flickr to share photos... You get the idea.
This leaves Facebook in a tricky place. It is no longer cool – it’s even becoming something of a hate figure in sections of the Internet community. It’s no longer innovative – the Facebook homepage is now a mish-mash of different creative and functional ideas borrowed from its newer, cooler rivals. In fact, as the recent IPO filings exposed, it’s really not that profitable and is very dependent on partners like Zynga, whose business models mean they have to diversify off the platform to seek larger audiences.
Fundamentally though, Facebook has one massive problem. Its own business model – flogging banner ads and basic sponsorship - is neither innovative nor particularly profitable. The only thing Facebook offers is the ability to shift very large volumes of inventory. But in what market does non-exclusive volume ever equate to high margins? And don’t give me “targeting” as a possible upside. Advertising is a game of probabilities, not of certainty, and ads are already targeted quite efficiently. For this reason, Facebook is the Yahoo of social networks, not the Google. An Alpha, not an Omega.
But still, at this juncture Facebook does have one thing in its arsenal. Cash. Or at least, a giant line of credit. So what’s it going to do? The classic incumbent's approach - buy up as many of those pesky little start-ups as it possibly can and roll them into its ever more confused user experience. Just as it did with Gowalla.
A game of whack-a-rat, if you will. And just as with the game, the rats will keep popping up. For every Instagram, there’s a Lightbox.