Facebook Needs a Better Business Model

After all the hype of recent weeks around the Facebook offering, the actual day was a disappointment for investors. Fixed at a release price of $38 per share, it fell substantially below that on the next day. Estimates were that Mark Zuckerberg lost $2.2 Billion that day. But then, he can afford it.

One cannot guage an investment in the rush of its first couple of days on the market. There is just too much speculation going on and it will take some time for the investors to settle down to a more normal frame of mind. Then they will look more closely at two things - earnings and cash flow, and decide whether they will be able to get a reasonable return on investment, through dividends and growth. That's the investors, not the speculators and gamblers.

To gain earnings and cash flow, a company needs a good business model At this point, Facebook has a business model, but it is almost entirely based on advertising, which has gotten to be a tough market on the internet. It's difficult to get the attention of people, and ads have been expensive. One can expect internet ads to drop in price as the number of players continues to grow. Simple economics.

In order to excel in the earnings game, Facebook probably needs a stronger and more diverse business model. Something unique and maybe completely different than what it has done so far. Amazon and Google faced similar issues, when they started out. Both had to change their original business model in order to survive. Both succeeded quite well. Both got into products and services that were very different and unique compared to their original concept.

There seems little doubt that Facebook will make some changes. All that wealth can draw in a lot of creative resources and talent to design and implement those changes. So analyses like this recent article, which argue that the Facebook model is so bad it will fail and also bring down the rest of the Web are one-sided extrapolations of existing weaknesses, which surely will be addressed in some fashion. And others seeking out comparative metrics to support the value of Facebook also fail to take innovation into account.

For investors with a taste for risk, or for speculators, Facebook offers up a lot of potential. For more conservative, long term investors, it's a good time to wait it out and see what innovation takes place - what kind of business model Facebook builds for the long term.