How Long Can Facebook Stay Afloat?

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By Jacob Maslow

zuckerbergThe title of this blog post might make you roll your eyes or raise your eyebrows. You might think that this is another one of those alarmist hate pieces on everybody’s beloved social networking platform. Well, regardless of how you view it and despite all the nice earnings numbers recently, Facebook (NASDAQ:FB) is up against the wall. It is up against a technical wall.

The wall that I am talking about is the amount of resources, programming talent, and overhead it needs to continue operating on a per-user basis. You might be puzzled by this because Facebook, after all, is making money. Well, the problem with this is that Facebook’s user base is highly uneven.

In the United States, its user base is not growing fast enough. In fact, in certain segments, it is showing some dangerous signs of stagnating. In other developed markets, the same pattern holds. However, in developing countries like the Philippines, Southeast Asia, and other emerging markets, Facebook is enjoying a healthy growth rate. What does this all have to do with Facebook’s profitability? A lot.

First, we are in this ridiculous situation where the ad value of users from the United States, Canada, Australia, and other developed countries vastly outweighs the ad value, if any, of users from the Philippines, Pakistan, and other countries. The reason for this, of course, is the amount of value advertisers place on each click from those countries. This is a very important point to keep in mind. For the most part, the system usage of a person accessing Facebook from the Philippines is the same as the system usage of somebody accessing Facebook from Beverly Hills, California. However, from an advertiser’s perspective, the Beverly Hills user is more expensive and worth pursuing. However, in terms of operational costs, they are the same.

Consider if Facebook’s overall usage and infrastructure load is weighted more towards developing countries. Then their user base in developed and highly lucrative markets remains stagnant or actually starts to decline. It is only a matter of time until Facebook faces a tipping point. At that tipping point, the amount of resources, infrastructure and overhead needed to keep Facebook afloat will overtake whatever revenue streams Facebook is able to squeeze out of its developed market users.

This scenario doesn’t face a question of if, but a question of when. Facebook definitely needs to squeeze as much revenue from all its user interactions and data while there is still time. Otherwise, it is going to be facing the same question that platforms like Friendster and Multiply unsuccessfully tried to solve in the past. You don’t want to be in the very tough position of trying to monetize a developing world traffic. It is an almost impossible task.


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