Why Facebook and Twitter will Fail

Facebook and Twitter will fail as independent ventures. I love both (I have accounts on both. See my sidebar) but they will go the way of acquisition by a major player this year ( I am not stating that it will be Microsoft). They will be acquired not because of their occasional outages, interface frustrations or mainstream adoption demand on their servers.

Facebook and Twitter will fail because of simple economics. In particular, the failure of Web 2.0 monetization models that violate simple economic principles.

The standard playbook in Web 2.0 economics is to give away a kool service for free to ramp up the eyeballs and then figure out how to make money from advertisers. The principle being: “get the users and money will come”. This is a dangerous game that venture capitalists who fund these ventures play that ultimately leads to the dreaded “cashflow” problems.

How much is twitter worth?

What is monthly Twitter access worth to you? How much will you pay per month? If you had to pay $10 a month would you do it? What about $50? How many users would twitter have if it charged $5 month?

How do you value Facebook?

This is why Facebook is having such a hard time with its “valuation”. Without the decision by a consumer to pay (thus determining its value), it becomes very difficult to determine its market worth. So you are left with is an advertising perspective, based on eyeballs,  to determine value.

Advertising is a volume game. The more eyeballs, the greater the worth. However advertising is a discount pricing model. The more ads you buy the less you pay per eyeball (even though the overall cost of the ads may be more). So advertising has diminishing revenue returns per eyeball. All the while your expenses per eyeball increases (not linearly but it increases none the less.) due to more resources (employees, R&D, servers etc..) It not the best way to build a business model.

A simplified equation for service businesses:
revenue\user – expense\user = profit or loss (for most it is big losses)

Well, you may say, what about Google?

Google’s Adsense is an advertising platform. They don’t just make money from their search engine users. They make money from everyone that uses Adsense too. It’s not the same model. But even Google is feeling the effects because part of their model is ad based. How much revenue would Google make solely from it’s search engine searches?

How per month would you pay for Twitter? Facebook?


Comments are closed.