Facebook has been on quite the acquisition binge lately. First acquiring the service WhatsApp for $19,000,000,000 and then Occulus Rift for a meager $2,000,000,000. What’s most interesting is that neither service is a direct fit into their core business model, so what motivated Facebook to drop $21B on them?
Facebook’s core business is declining
Whether Facebook wants to admit it or not, their core business is in decline. My teenagers have moved away from it, and so have their friends. I never embraced it, and my wife has begun to shy away from it. As I’ve mentioned before, Facebook suffers from what I call the nightclub effect. It’s the hottest thing on the block until something better comes along, then people move on to the next shiny object that catches their attention. Facebook has tried to reinvent itself to stay fresh, but it has become a slave to its investors and Wall Street. It is under pressure to make money, not to please its user base. As Bill Leider commented on a Jeff Turner article titled, Facebook Is Not Your Friend. Get Over It. (a great read which I highly recommend by the way), “… Facebook is a publicly held company. Their priorities are: increase earnings; increase shareholder wealth; increase market share….”
Furthermore, Facebook is suffering from a spam driven engagement model. It is generating revenue from businesses who now have to promote their pages and posts to generate likes so their content is seen. Unfortunately, these likes are being generated by spambots and fake users, which drives the business to spend more money to drive engagement, which results in even higher amounts of spam driven traffic. Given that Facebook benefits from spam driven likes, it is not motivated to fix the problem. Effectively, Facebook is fleecing businesses with the false hope that likes will lead to increased engagement and business. If you don’t believe it could happen, then watch this 9-minute video by Veritasium.
The problem has gotten so large, that companies who have used Facebook as their primary outpost are leaving, as evidenced by this rant from Eat24. Jeff Turner’s post linked above goes into a lot more detail on this topic, so I would encourage you to read it for more insight.
What’s the motivation behind Facebook’s shopping spree?
Facebook has been very active in the M&A space with over 40 acquisitions during the last four years. A lot of these acquisitions have been acqui-hires, where the companies were acquired for their talent to plug a hole in Facebook’s technical capabilities, such as mobile. The services associated with these acquisitions were subsequently shutdown. In fact, of all the acquisitions, Instagram is the only one that truly stands-out as a successful acquisition that has been kept intact and had a direct impact on Facebook’s user and revenue growth.
Given Facebook’s propensity for acqui-hires, I don’t understand the WhatsApp and Oculus Rift acquisitions. Clearly, it can’t be purely for the talent, as that is a hefty price to pay for engineers. Other say it is a genius move that we don’t understand since they are investing so far into the future. Personally, I tend more toward the opinions Michael Mace shared in his recent post – Facebook, Ego, and Oculus Rift. In other words, the party line is that Facebook is investing in the future while the reality is that Facebook is assimilating companies to maintain its coolness factor in the eyes of the public.
The numbers involved with the WhatsApp and Oculus Rift acquisitions make it very difficult to rationalize shutting down these services anytime soon. The companies were obviously acquired for their product pieces. However, unlike Instagram, I don’t see these fit in with Facebook’s social strategy. It could be that I don’t know enough since I’m looking in from the outside, or maybe I’m not smart enough to connect the dots, but I don’t see how buying an SMS messaging substitute such as WhatsApp or a virtual reality company such as Oculus Rift feed into Facebook’s core business.
Plus, as Michael Mace points out in his article, I’m not convinced that Facebook has the knowledge required to manage these acquisitions, let alone the bandwidth to integrate two large acquisitions in such a short amount of time. For example, what does a virtual reality platform have to do with social networking. The popular opinion is that Facebook is investing in a new computing platform. They are certainly making an investment with their $2B purchase, but what does Facebook know about building and bringing to market a new computing platform. When and if they do, how does it help contribute to Facebook’s core business? How will they monetize it?
What’s luck got to do with it?
Supporters of Mark Zuckerberg are defending his actions. They claim he is smarter than the rest of us and that these acquisitions fit into these plans. Playing devil’s advocate, I tend to question whether Zuckerberg is truly smarter or has been the beneficiary of good luck. Luck as a factor of business success should not be understimated. I’ve seen it first hand in other companies where superior luck being mistaken for superior intelligence has led to decisions, including acquisitions, which ended up undoing the company.
Now, I’m not implying that Zuckerberg and the Facebook management team are not smart. I’m sure they’re much smarter than me and most other management teams. I’m also not questioning their execution. I believe that the majority of Facebook’s success has been due to the drive and execution capability of Facebook’s leadership. My contention is that good luck amplifies these traits and can lead to irrational decisions.
Looking into the future
I could be dead wrong (it wouldn’t be the first time), but if I was a betting man, I would contend that Facebook will struggle as they encounter increasingly strong headwinds in their core social media business. Investors are fickle, and as their core business comes under more stress, they will become impatient waiting for a return on these large acquisitions. Facebook has created extremely high expectations with the purchase prices, meaning it will be very tough to meet them, let alone exceed them.
I wish Mark Zuckerberg and the rest of the Facebook the best of luck on their journey. I believe they’ve bitten off more than they can chew with these acquisitions. Hopefully, it will turn out that I was wrong and just too short-sighted to see the big picture.