3 Issues That Challenge Facebook Inc’s Dominance

Facebook has a tough challenge ahead when it comes to driving new revenue and keeping users happy.

May 12, 2014 at 10:05AM

There is a popular axiom that says, "It's hard to get to the top, but it's even harder to stay there." As a note about how quickly things change in the social media business, consider that MySpace was the No. 1 most trafficked web site in 2006. However, just four years later, Facebook (NASDAQ:FB) surpassed Google (NASDAQ:GOOG) (NASDAQ:GOOGL) and others to claim the top spot. Today, Facebook is the social network with over 800 million users active on a daily basis. The problem is, as we know technology doesn't stand still and there are three issues that suggest Facebook will have a tough time staying on top.

It's just one measure, but investors should worry
You would expect a site that has over 1.2 billion active monthly users could drive those users to advertisers' sites almost at will. After all, when almost everyone you know is on the site, isn't there some type of power in that?

However, Facebook's dominance and wealth of information about each user doesn't drive its users to retailers' sites like you might think. According to Experian Marketing Services, "social media accounted for 7.7% of traffic to retail websites." What is somewhat surprising is that Pinterest, which is just four years old, drove nearly 11% of its traffic to retailers.

By comparison, Facebook did less than half as well with a 5.3% rate. Google's YouTube site, which theoretically has much less personal information about users than Facebook, drove 3.8%, and Twitter (NYSE:TWTR) drove 2.8% of its traffic to retailers.

Facebook has a detailed profile about each user, and the site is where most people post what they do every day. The fact that the company couldn't beat out Pinterest in driving traffic to retailers should make investors question Facebook's true value.

Off target?
The second issue confronting Facebook is maintaining the delicate balance between the site's usefulness and growing advertising revenue. Just because a company can show more ads doesn't mean they will be effective. This is particularly true on mobile apps where Facebook seems to be stuffing user's feeds with ads.

My own use of Facebook's mobile app reveals that advertisements come up about once every seven to ten posts. While this level of advertisements isn't annoying, any increase in this number would make the use of the mobile app a highly frustrating experience.

This is a huge difference between Facebook and its competition. Google makes billions from search and can then supplement this revenue with display ads on the search pages as well. The company's Google Network business drives revenue from advertisements on other web sites.

Where Twitter is concerned, the company is still in the infancy of its advertising push. Twitter is mainly using promoted topics and posts to drive advertising revenue, and this makes a huge difference in the mobile experience.

The bottom line is, Facebook is getting to a point where more ads will drive users away from the site and the app and less ads would mean less revenue. This is an issue that will be difficult for Facebook to solve.

Facebook is great for selling goods and services – too bad the company makes nothing
One of the newer uses for Facebook is for enterprising individuals to promote their small businesses or generate interest in a new product or service. Most people have at least a few Facebook friends that sell a product or service and they periodically post about a sale or promotion.

This is a great way for entrepreneurs to connect to potential customers, but Facebook's lack of focus on commerce is severely hurting the company's potential. Twitter allows users to promote themselves to gain new followers and thus promote their businesses to more people.

Google offers multiple ways for individuals on YouTube, Blogger, and other services to promote a business, and Blogger in particular is far more customizable than a Facebook page. Sites like tumblr, Wordpress, Squarespace, and others also offer far more customization, and are designed for product and service sales.

Unfortunately, Facebook's limited customization means that users can't readily promote the sale of their goods and services in a static fashion. In short, Facebook is great for selling, but the company isn't set up to make anything off of these transactions.

The bottom line is that Facebook is sitting on top of the social media world, but without solutions to some of these issues, staying on top may be tougher than some would think.

Cable is losing the fight for ad dollars, but you can get rich
You know cable's going away. But do you know how to profit? There's $2.2 trillion out there to be had. Currently, cable grabs a big piece of it. That won't last. And when cable falters, three companies are poised to benefit. Click here for their names. Hint: They're not Netflix, Google, and Apple. 

 

Chad Henage has no position in any stocks mentioned. The Motley Fool recommends Facebook, Google (C shares), and Twitter. The Motley Fool owns shares of Facebook and Google (C shares). 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.

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