Facebook Has Lots of Competition on the Horizon

Facebook's stock price is deteriorating by the day, if not the hour. Some people may be inclined to jump in and buy now, believing the worst is behind for the share price. That may not be a good bet to make, and here's why.

Google attacking Facebook's home turf is subtitled 'Social-advertising market will be crowded:'

"Google Inc.’s acquisition of social-media marketing start-up Wildfire Interactive earlier this week highlights a major flaw in the thinking of Facebook Inc. bulls.

That thinking assumes the No. 1 social network will have plenty of time and a clear road to figure out how to profit from its huge base of users. Once Chief Executive Mark Zuckerberg and company do that, the thinking goes, it will just take a couple of years before Facebook grows into its pricey valuation.

Yet Google’s deal for Wildfire — whose software helps businesses and individuals run effective marketing campaigns on social-media sites — shows that Facebook’s competitive landscape is far from static.

In fact, Google is the third large company in as many months to attack Facebook on its social turf.

Last month, Salesforce.com Inc. agreed to acquire Buddy Media, Wildfire’s slightly larger rival, for $689 million. In May, Oracle Corp. snapped up Vitrue, another social-media marketing start-up, for $300 million.

Taken together, Oracle, Salesforce and now Google — which reportedly paid $350 million for Wildfire — now have invested more than $1.3 billion to acquire software and expertise targeted at the advertising market for social media.

This tells me that the obstacles in Facebook’s path to success are not only internal ones relating to management execution. The fight for social-media ad dollars is going to be a bare-knuckle brawl among companies with deep pockets. . . .

Right now, social-media marketing consists mainly of contests, coupon-like promotions and similar campaigns. The secret sauce for Wildfire . . . is its ability to create what is essentially a custom application for every client.

Retailers text to reach youngsters

The start-up says it has 16,000 customers, including more than half the top brands in the Fortune 50 — among them giant consumer companies such as AT&T Inc. and Sony Corp. Read a profile of Wildfire Interactive.

This type of marketing is still in its infancy, but as it grows more sophisticated, these campaigns all will be targeted based on the behavior of social-media users and the personal data contained in their profiles (just as search advertising is now targeted at keywords typed into search requests).

That’s an adjacent market for Google, which is why its acquisition of Wildfire seems like a good strategy. The moves by Salesforce.com, the pioneer of online customer-tracking software, and Oracle, the database giant that’s now attacking Salesforce in that market, are a bit more of a stretch. . . .

Danger of a walled garden

It’s easy to think that Facebook has firm control of this landscape, thanks to its 900 million global users. If Google wants to target them with ads, Facebook could try to block the move or charge rivals for access to its valuable user data.

Facebook just set up its own online exchange to make it easier for advertisers to target consumers, by accessing what the company calls a user’s “social graph.” This demographic and online-behavioral data directs which Facebook users see the so-called sponsored stories and other social ads that Facebook has begun rolling out.

Yet keeping that ad exchange sealed off as a walled garden may be harder than it seems, for two reasons.

First, Facebook isn’t the only social-media site in a world that also includes Twitter, LinkedIn Corp. , Google’s own entry and newer sites such as Instagram and Pinterest. Zuckerberg knows this, which is why he spent $1 billion on Instagram, even though the service has just a tiny fraction of Facebook’s user count.

Second, Facebook’s earnings report last week made clear that its most active users are the roughly 500 million or so who access the social network every day via a mobile device. Those are the users that will be most valuable to online advertisers and marketers.

They’re also the ones Facebook has the least control over, because unlike Google — or Apple Inc.   — it makes neither the hardware nor an operating system for the smartphones or tablets that consumers use to access Facebook’s mobile app.

As I’ve written before, mobile advertising also is much less lucrative than selling ads viewed on desktops or laptops. Read previous column, “Where the fat mobile margins are.”

No one knows exactly how all this will play out, but I think it’s likely that large corporate advertisers are going to want exposure to more social-media users than just those on Facebook. . . .

Facebook is no plodding giant. The company has shown itself to be nimble when developing and improving its software. All that self-reported data in user profiles make its social graph a gold mine for advertisers.

Make no mistake, Facebook has positioned itself to be the biggest player in the market for social-based advertising. But with deep-pocketed rivals gunning for it, no one should assume the top social network will have that market to itself."

Summing Up

Social media is a rapidly and constantly changing market. Accordingly, the long term winners and losers haven't yet been clearly defined. That will take several more years.

As the market expands and customers register their "votes," some social media companies will become stronger, some weaker and some will exit. We just don't know which ones.

With respect to investing, we have zero way of knowing now how profitable Facebook will be in the future or how large its revenue base will be. We don't even have a clue as to how large the relevant market size will be.

Accordingly, I don't intend to buy Facebook stock but plan to sit back and enjoy the industry's competitive struggle from afar.

While there admittedly are no guarantees with any investments, to me it doesn't make sense for individual investors to try to pick the ultimate winners and losers of this probably brutally competitive social-media advertising game.

The customers and advertisers will decide all that sometime down the road. I prefer the spectator route and will be watching the action.

Thanks. Bob.