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Analysis: As Facebook grows up, grand ambitions get reality check

A smartphone user shows the Facebook application on his phone in the central Bosnian town of Zenica, in this photo illustration taken May 2,
A smartphone user shows the Facebook application on his phone in the central Bosnian town of Zenica, in this photo illustration taken May 2,

By Alexei Oreskovic

SAN FRANCISCO (Reuters) - Facebook, which once seemed poised to take over the Internet, is showing its limitations: a host of newer services are gaining ground among trend-setting youth; a much-hyped smartphone app has received a tepid response; and grand ambitions such as taking on Google in the search business seem ever more fanciful.

In a volatile Internet industry where companies can rise and fall almost overnight, one might even say that the nine-year-old Facebook Inc is suffering a mid-life crisis.

Yet even if the social network falls short of its goal of becoming an all-encompassing Web destination that consumers turn to for everything from messaging to shopping, experts say Facebook has likely achieved enough scale and ubiquity to assure its staying power.

"They've gotten so big that it's one of those things you have to use," said Dan Niles, chief investment officer of tech-focused hedge fund firm AlphaOne Capital Partners, which does not have a Facebook position. "You may not like the electricity company but I guarantee you you're still getting electricity."

Concerns that Facebook is losing its grip on consumers, underscored by a recent report from Pew Research that showed declining enthusiasm among some teens, have kept a lid on the company's share price even as stock markets rallied. Facebook shares closed at $23.52 on Tuesday, near their six-month low and almost 40 percent below the company's May 2012 IPO price.

With 1.11 billion users, a rich trove of data on those users' interests and relationships, vast personal collections of photos and online identity profiles that serve as the log-in for many other services, Facebook faces little near-term risk that consumers will abandon it in large numbers.

Consumers spend significantly more time on Facebook than on competing online properties such as Google, Microsoft or Yahoo, according to Nielsen Media Research. And the number of Facebook users who visit the site every day increased to 59.9 percent in the first quarter, compared to 58.3 percent in the fourth quarter.

"The newer, exciting stuff is coming from startups, but Facebook is really going to be the glue at the middle," said Bill Lee, an entrepreneur who has started several Web companies.

For that reason, he said, Facebook is not going to "pull a MySpace," referring to the one-time social networking leader that was bought by News Corp before it all but collapsed when users lost interest and decamped to Facebook.

DEATH BY A THOUSAND SNAPCHATS?

Teens use Facebook more than any other social service, according to the Pew report. But in focus groups that were part of the same study, many mentioned waning enthusiasm for the site, citing the increasing number of adults on the service and the flood of frivolous posts shared by friends. (See http://r.reuters.com/caf68t for report)

The most immediate threat to Facebook, analysts say, comes from a new crop of mobile apps designed for messaging and photo sharing that are attracting millions of users and threatening to siphon some of their time away from Facebook. Japan's Line has racked up 140 million users since launching two years ago, for example, while SnapChat, which allows users to send photos that disappear after a few seconds, said in December that 50 million photos are shared every day.

Facebook Chief Operating Officer Sheryl Sandberg dismissed the notion that teenagers were leaving for newer services. She noted during a recent talk at the AllThingsDigital conference that Facebook continued to grow even as other social services were expanding.

But Facebook has acknowledged in regulatory filings that some younger users have reduced their engagement with the site to spend more time on other products such as Instagram, a photo-sharing app which Facebook bought in September.

If Facebook is not able to keep improving its own product, the horde of smaller services could start to chisel away at usage on the social network, said Chuck Jones, founder of technology research firm Sand Hill Insights. But he said it would be a slow process.

"Death by a thousand SnapChats could happen in three-to-five years, but not in the next six-to-12 months," he said.

Meanwhile, other online activities that not long ago seemed destined to move inside the walls of Facebook's social network have stayed independent.

"People imagined that Facebook would become the Internet," said John Caplan, the CEO of OpenSky, an online shopping service that operates a standalone social network. But while Facebook's core functionality of photo-sharing and connecting with friends is unparalleled, there are few signs that it is dominating other types of online activity.

"The reason why we didn't build it on Facebook is that you're not on Facebook to go shopping," Caplan said of his service.

Similarly, job-seeking and other forms of professional networking are largely dominated by LinkedIn. Twitter has thrived as a more popular way to get up-to-the-second breaking news and updates from favorite celebrities and other public figures. Google continues to own the critical Internet search business.

Net Jacobsson, a former Facebook executive, says a narrower scope and ambition for the company is not necessarily bad.

"If you try to be everything, you somehow lose your mission," said Jacobsson. "You try to grab too much, it becomes too bloated and people feel that," he said.

HOME TROUBLES

Facebook shares are down about 12 percent this year, compared to a 16 percent rise in the Dow Jones Industrial Average and the Nasdaq Composite's 14 percent increase.

Part of the pressure, say analysts, has come from the disappointing performance of the Facebook Home mobile app.

Despite an advertising blitz, the app scored an average 2.5 stars out of five stars in the Google Play store, with many users complaining that what Facebook sees as a feature they see as a bug: Home puts Facebook front-and-center on the phone and shunts other apps to the background.

AT&T Inc slashed the price of a smartphone model that came pre-loaded with Facebook Home from $99 to 99 cents just a few weeks after it was released.

Josh Elman, a former Facebook manager who now works at venture capital firm Greylock Partners, said the flaws with Home raise questions about whether Facebook's product team has become too insular and is not in touch with the way the general public uses products. He added, though, that there was merit in the broader concept of a social networking-oriented phone.

Improving the core service, rather than simply trying to match every competitive product, could be the key to Facebook's future success as it tries to stay on top of a more crowded field, say analysts.

And one of the biggest black eyes the social network has suffered - a botched initial public offering that results in billions of dollars in losses for investors - may end up looking a lot better in hindsight.

That is because the IPO succeeded in maximizing the amount of money the company raised. Now, with $9 billion in cash and securities in the bank, Facebook can acquire any fast-growing threats, as it did with Instagram, said Joe Beninato, general manager of digital wallet initiatives at Urban Airship, a startup that helps businesses develop mobile services.

"If something comes along that really looks like it could cause them an issue, they have some pretty big assets to fall back on," he said.

(Reporting by Alexei Oreskovic; Editing by Jonathan Weber and Leslie Gevirtz)

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