Why Teens Will Decide the Fate of Facebook

Teens are fleeing Facebook by the millions. Without the younger crowd to market to, advertisers will eventually leave as well.

Feb 5, 2014 at 2:00PM

Recent research has illustrated that there's been an ongoing exodus of teens away from social medial giant Facebook (NASDAQ:FB). As the number of younger users continues to decline, the relevant questions are, where are these users going, and why?

Has Facebook become uncool?
It's a sad fact that a significant number of teenagers perceive many of the things used by their parents and grandparents as "uncool." This also applies to social media giant Facebook. The company has spent many years and countless dollars evolving the social media site to have characteristics and features suitable for, and desired by, all age groups.

However, Facebook's success in creating an outlet that even grandparents can navigate may have acutally served to undermine the company's future. It seems as if teens don't really want an online venue they can share with their parents, even if there isn't anything fundamentally wrong with the service.

Twitter stands to benefit, at least a little bit
(NYSE:TWTR), on the other hand, may be able to benefit from the finicky youth. Though perfectly designed for the fast-paced teenagers of today, with photo and video sharing capabilities similar to Facebook's, only a portion of the younger crowd has turned to Twitter in favor of other social media services. Since far fewer parents and grandparents use the service, a number of teens still consider Twitter an acceptable alternative to Facebook, at least for the time being.

Where is everyone going?
The sad fact, however, is that teenagers are a fickle bunch, and with the plethora of other social media websites and messaging apps available, it's unlikely that the younger crowd will ever return to Facebook. Newer, cooler apps like WeChat and Snapchat have drawn millions of new teens and tweens. This isn't because those apps provide features or functionality that Facebook lacks, but simply because the ethereal powers-that-be have made them trendy.

According to iStrategyLabs, an analysis of changes in Facebook's user base since 2011 has revealed that the number of teen users between the ages of 13-17 has declined 25.3%, while the number of users over the age of 55 has increased 80.4%.


The numbers don't tell the whole story
According to the New York Times, Facebook's revenue from advertising was $2.34 billion in the quarter that ended last December, 76% more than the same quarter in 2012. Total revenue for the quarter was $2.59 billion, which was $1 billion more than the same quarter in 2012. Twitter (with fourth-quarter earnings set to report on Feb. 5) is expected to show similar results. Advertising revenue comprises nearly 90% of the company's total annual revenue of $630 million. Quarterly ad revenue is expected to increase by approximately 120% for the fourth quarter of 2013.  

Both companies are reporting impressive revenue and growth, and Facebook's recent performance does not indicate loss attributed to its shrinking teen user base. However, this is not surprising because not all teenagers actually possess the ability to spend real money. Therefore, the effects of a diminishing teen user base won't be felt for a number of years.

What are the ramifications?
The statistically significant reduction in the number of younger users on Facebook will have a profound impact on profitability and sustainability. Without a steady and continuing inflow of younger users, the social media website has only a finite number of consumers to market to. While it may take several years before these effects really start to make a difference, the writing is already on the wall.

Within the next several years, the younger generation will exercise a significant measure of control over where and how a large portion of disposable income will be spent. Because more than 90% of Twitter's revenue comes from advertising, marketers have a vested interest in gaining the approval of younger generations in hopes of establishing a solid foundation of future buyers. This is why Facebook is inherently doomed, as advertising dollars will ultimately follow the demographic with the most influence, i.e., the teenage crowd.

Foolish final thoughts
The speed with which technology advances continues to increase exponentially, which will ultimately lead to the rise and fall of countless entities and software applications. Those companies lucky enough to be part of the "in crowd" will experience the financial benefit of being "cool" for the younger generation.

Unfortunately, Facebook is no longer among such companies today, and will probably never be again. The pool of consumers to whom Facebook can serve up new advertisements is now shrinking due to the lack of new teenage users. Eventually, advertisers will move their business elsewhere, leaving Facebook without that continuing revenue stream. The writing is on the wall, and it says "sell."

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Greg Gambone has no position in any stocks mentioned. The Motley Fool recommends Facebook and Twitter. The Motley Fool owns shares of Facebook. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

4 in 5 Americans Are Ignoring Buffett's Warning

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Jun 12, 2015 at 5:01PM

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