Facebook’s Biggest Nightmare

by Tom Taulli | July 11, 2013 3:12 pm

Facebook’s Biggest Nightmare

Facebook (FB[1]) is forced to deal with a seemingly endless number of rivals — from biggies like Google (GOOG[2]) and even Yahoo (YHOO[3]) to hot startups like Pinterest, Kik and Whatsapp.

But perhaps the scariest is Snapchat.

The app actually started out as part of a class project at Stanford. Co-founders Evan Spiegel and Bobby Murphy got lots of pushback from their classmates when they presented Snapchat in April 2011. But they still thought their app idea had tremendous potential, so they launched the product in September of that year.

It was an instant hit.

Like many other successful apps, Snapchat is fairly simple and focused. The website’s own description:

“Snapchat is a new way to share moments with friends. Snap an ugly selfie or a video, add a caption, and send it to a friend (or maybe a few). They’ll receive it, laugh, and then the snap disappears.”

True, it has generated lots of controversy (which isn’t necessarily a bad thing for a startup), as many decried its use for “sexting.” But Snapchat is more than just another way for teens to engage in naughty behavior — if anything, the app is a total rejection of Facebook’s philosophy that everything should be shared and open to the world.

Snapchat requires the user to provide only a select number of friends to get a snap. Again, referring to the company’s own text:

“Sharing those moments should be fun. Communication is more entertaining when it’s with the people who know us best. And we know that no one is better at making us laugh than our friends.”

As a testament the app’s success, the company recently snagged a $60 million investment. The general partner of the lead investor Institutional Venture Partners, Dennis Phelps, put together an extensive analysis[4] of why he participated in the round.

He points out that the growth and engagement metrics have been “off the charts” (the app processes about 200 million messages per day), and that they’re on par with other breakout companies like Twitter, Instagram and Pinterest.

While a big part of the user base of Snapchat is Millennials and Gen Z, the app has started to expand to other groups. Even Wall Street is using the app for communicating with other traders.

But perhaps the most interesting observation from Phelps is about the founders. He says they are “prime examples of the next generation of technology entrepreneurs that grew up with smartphones and barely knew the web when it existed only on a desktop browser.” Even if not intentional, that’s a knock against Facebook’s Mark Zuckerberg — the 29-year-old CEO somehow looks like an old-timer already.

Still, if the thought of a small app like Snapchat bumping FB sounds kind of crazy, ask yourself this:

What cool product or service has Facebook launched lately?

I can’t think of any. As I recently wrote[5], FB has put out a number of new offerings — but they’ve been lackluster ideas including Home, Graph Search, Gifts and Poke (a Snapshat wannabe).

The next wave of growth is mobile. Just look at today’s reorg announcement[6] from Microsoft (MSFT[7]) — CEO Steve Ballmer is in panic mode, and he’s reassembling the troops to better address mobile, among other things.

Facebook is not smoothly navigating this transition. Part of it could be the organization’s bureaucracy making it tough to be creative and move fast, or maybe Zuckerberg doesn’t actually “get” mobile and will continue to fumble things.

Whatever the reason, the situation looks dicey for Facebook. And there are many hungry entrepreneurs who are gunning hard for the holy grail of mobile.

Tom Taulli runs the InvestorPlace blog IPO Playbook[8]. He is also the author of High-Profit IPO Strategies[9]All About Commodities[10] and All About Short Selling[11]. Follow him on Twitter at @ttaulli[12]. As of this writing, he did not hold a position in any of the aforementioned securities.

Endnotes:
  1. FB: http://studio-5.financialcontent.com/investplace/quote?Symbol=FB
  2. GOOG: http://studio-5.financialcontent.com/investplace/quote?Symbol=GOOG
  3. YHOO: http://studio-5.financialcontent.com/investplace/quote?Symbol=YHOO
  4. extensive analysis: http://ivp.com/news/press-release/ten-reasons-why-ivp-invested-in-snapchat
  5. As I recently wrote: http://investorplace.com/2013/06/has-facebook-gone-stale/
  6. reorg announcement: http://investorplace.com/2013/07/microsoft-tries-for-a-reboot/
  7. MSFT: http://studio-5.financialcontent.com/investplace/quote?Symbol=MSFT
  8. IPO Playbook: http://investorplace.com/ipo-playbook/
  9. High-Profit IPO Strategies: http://goo.gl/TXQsz
  10. All About Commodities: http://goo.gl/FfP8R
  11. All About Short Selling: http://goo.gl/t5Jzb
  12. @ttaulli: https://twitter.com/ttaulli

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