Facebook Doomed To Be Yahoo, Says Snapchat CEO
Dec 29, 2014 74,532views 527Likes 226CommentsShare on LinkedInShare
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Will Facebook go the way of Yahoo? Snapchat CEO Evan Spiegel thinks so.
During the dot-com boom, Yahoo reached a $128 billion market cap on massive,
fast-growing advertising revenues. Then, when the bubble burst, Yahoo's
market cap shrank to less than $10 billion.
The reason: The companies buying Yahoo's ads weren't traditional brand
advertisers — the kinds of companies that bought TV and magazine ads. They
were dot-coms themselves. They were paying inordinate sums to become Yahoo's
official partners in various sectors, from greeting cards to pet stores to
The money they were spending on ads wasn't coming from their own revenues,
but from investments made by venture capitalists.
When the bubble burst and venture-capital funding dried up for startups,
Yahoo's source of revenues went away too.
In an email leaked in the recent Sony hack, Spiegel says he thinks a similar
fate awaits Facebook.
He believes Facebook's ad revenues are also overdependent on venture-backed
startups buying traffic and users. Only instead of buying links on the Yahoo
homepage, they're buying app install ads.
Spiegel thinks that if venture-capital funding for startups dries up — and
he believes it might, when the Fed stops printing money and inflating public
tech stocks — Facebook will suddenly, and violently, shrink.
"Facebook has continued to perform in the market despite declining user
engagement and pullback of brand advertising dollars — largely due to
mobile advertising performance, especially app install advertisements," he
"This is a huge red flag because it indicates that sustainable brand dollars
have not yet moved to Facebook mobile platform and mobile revenue growth
has been driven by technology companies (many of which are VC funded).
"VC dollars are being spent on user acquisition despite unknown [lifetime
value] of users — a recipe for disaster.
"This props up Facebook's share price and continues to justify VC investment
in technology products based on abnormally large market cap companies (i.e.
, "If this company attracts just 5% of users that FB has, it will be HUGE"
— fuels spend on user acquisition as user growth is tied to values).
"When the market for tech stocks cools, Facebook market cap will plummet,
access to capital for unproven businesses will become inaccessible, and ad
spend on user acquisition will rapidly decrease — compounding problems for
Facebook and driving stock even lower."
Spiegel's views on Facebook are unusually bearish. He doesn't seem to
appreciate how many traditional advertisers are switching their spending
from TV, magazines, and billboards to Facebook. They are spending more than
a billion dollars marketing on Facebook every quarter.
At Business Insider's annual conference earlier this month, we asked a
Target executive which she'd cut first: TV ad spending or Facebook spending.
In an upset for Facebook, she said it would be a really hard choice.
Ultimately, she said that TV is more important for establishing Target's
brand, but that Facebook is a crucial and big part of the company's
marketing mix. She said she'd cut spending everywhere else (except TV)
before cutting Facebook.
It's also important to understand the context around Spiegel's email. He was
sending a note to an investor in his company not long after he rejected a $
3 billion acquisition offer from Facebook. It was in his interest at the
time to assure this investor that Snapchat had a better future as an
independent company than it did inside Facebook.
All that said, it is true that Facebook is at least somewhat dependent on
venture-capital-backed startups spending money to buy users who may not
prove to become valuable customers in the long term. The Wall Street Journal
's Mike Shields reports that, generally, Facebook's app-install ad customers
are startups that make mobile games.
The problem for Facebook investors is that the company will not say how
dependent it is on those types of ad buyers.
During Facebook's last conference call with investors and analysts, COO
Sheryl Sandberg was asked how dependent the company is on mobile app ads
sold to "developers" — code for venture-backed app makers.
She said, "Our growth in mobile ads is very broad based. It's across all
market or segments, and it's across all of our different ad formats, and we
talk about our mobile ad business growing. Mobile app ads are a small part
of that, that's growing in line with our total business.
"The other thing that I think people get a little confused about is who is
using mobile app ads," she said. "I think commonly when you think about
mobile app ads, people often think about developers, and developers are
moving them, and we're pleased we're able to help them grow. But they're
also being used by some of the largest branders and marketers in the world."
That's a somewhat informative answer from Sandberg. She's saying Facebook
investors shouldn't feel over-exposed to the venture-capital market. But it'
s an incomplete answer. She should tell investors exactly how exposed they
are. Facebook should, as soon as possible, begin to break out how much of
its revenues are generated by app install ads.