Facebook Battles the Curse of High Expectations

No one knew just how huge the home computer market could be when Microsoft (Nasdaq: MSFT) launched the first (now hideously primitive-seeming) version of Windows. The dot-com rocket of the late 90's was fueled in large part by the promise of unknown territory, sprinkled liberally with some flat-out lunacy.

But now, the market stands ready to accept Facebook's potential $100 billion IPO with scarcely more than a few skeptical squawks. Since the 90's, we investors have developed a pretty good bead on this whole Internet thing, and we've never seen a single website become so popular so quickly. And dang it, Facebook has real profits, network effects, and all the good stuff most of its predecessors lacked back then. Mark Zuckerberg won't be forced to sell his sock puppet in bankruptcy court. But does that mean its sky-high potential will be met? Perhaps not.

Making the connection
Google (Nasdaq: GOOG) is an obvious analogue when charting Facebook's path forward. Both generate a good amount of their revenue from ads. Both hold commanding online mindshare and market share. Both offer "gateways" of a sort to the Internet. And both have every Internet-connected human being as a potential user. But from a business standpoint, the comparison doesn't hold water. Google has broadened its scope many times since founding, in ways Facebook simply hasn't. Improving on one platform isn't enough when new ones are developed with startling frequency.

To be a Google in size, Facebook has to be its equal in scope and imagination. The two companies' divergent development histories don't make this look so likely.

Separate paths
Google began in 1998, Facebook in 2004. The only fair thing to do is to compare both companies from founding to Facebook's present eight-year lifespan, leaving aside anything Google developed after it turned eight years old.

Sources: Google and Facebook corporate sites.

Facebook put nearly all its effort into making its site indispensable, but its services are largely superfluous. Google's also done much to make its own home page superfluous, but has made its services indispensable. That's the difference between monetizing one site and monetizing the entire Internet.

Got the whole 'net in its hands
The history of the Internet is littered with companies that tried and failed to become a default option for the world's Web surfers. AOL (NYSE: AOL) rose to prominence in the 90's as many Americans' first choice for online connectivity. Early AOL subscribers found plenty of social opportunities in its many chat rooms, and AOL, like Facebook, was at once valued at more than $100 billion.

Like Facebook, Yahoo! in its early years relied on ultimately meaningless statistics ("usage time” for Yahoo! and "monthly active users" for Facebook) to justify what appeared at first glance to be a highly optimistic valuation. Yahoo!, like Facebook, tried to become the go-to online destination. To its credit, Facebook draws over twice Yahoo!'s audience today. Yet Yahoo! made about as much as Facebook did last year, according to both companies' most recent filings.

Add as a friend?
Let's get back to Google for a moment. Microsoft's multiyear, multibillion-dollar Bing development has captured less than a third of the search market that Google has dominated for a decade. Gmail most recently recorded 350 million users, and may have recently eclipsed Microsoft's Hotmail. Before I had Google Maps, it might have taken an hour to find a sandwich shop three blocks away. I can use all three services on my Android phone (which doesn't appear in the above chart since it was developed after the eight-year cutoff). Users can also access Google's core offerings on Apple iPhones, showing that even Google's purported enemies still need its core services in their own platforms.

Facebook, on the other hand, has been all about making one website more enticing. There's certainly potential for revenue and profit to grow, but Facebook is already close to saturating its market. What among Facebook's various services stands out as a modern necessity? If Facebook disappeared tomorrow, would life be irreparably changed, or would the world get over it and transition to alternatives like Google+? The Internet is full of companies whose boundless promise was built on making one site a default destination; try to name one that's come close to Google's success.

Indispensably superfluous and superfluously indispensable
That's what I mean when I use the words "indispensable" and "superfluous." You might not need to visit Google's site, but you're almost guaranteed to need its services at one point or another. Little in Facebook's development history indicates anything other than a desire to layer more functionality onto a single online destination, making the site more appealing but not much more ultimately useful.

We know the Internet much better than we did during the dot-com bubble. So why are we falling into the same trap as before, confusing single-site dominance with limitless potential? What has Facebook shown us to indicate it can be the next Google, instead of the next Yahoo!?

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