Facebook's (NASDAQ:FB) had a good year following its original IPO disaster. At first, shareholders were angry, and skeptics were very active after the summer 2012 crash. Many referred to Facebook as "the next AOL" and predicted the Internet trend toward mobile usage would kill Facebook, just as the shift away from dial-up toppled AOL's dominance. During CEO Mark Zuckerberg's first interview after the crash, he advised people to "double down" as Internet usage migrates to mobile, predicting the migration to mobile would be a boon for Facebook.
Facebook has since risen from less than $20 to more than $50 per share. Over half a billion people now use Facebook on their phones every day. Forty-one percent of its revenue is now from mobile revenue; it is getting closer to surpassing desktop revenue. While Facebook is still a young company with plenty of unknown challenges ahead, Facebook is no AOL.
AOL vs. Facebook model
AOL began with a subscription-based business model that used dial-up to access the Internet. Subscribers began to leave in droves when cable and DSL access became affordable. AOL, therefore, had to switch to an ad-based model and compete with Yahoo, Google, etc. all of whom have more experience, expertise, and resources. Customer satisfaction began to plunge and has stayed in the dumps ever since.
Unlike AOL, Facebook has never relied on paying subscribers in its business model, with the exception of a shrinking amount of royalty revenue it gets from partners such as Zynga (NASDAQ:ZNGA). Historically, most of Zynga's revenue has been a pay-to-use model. However, Facebook's revenue from Zynga is currently so small it doesn't bother to mention it in its earnings releases or 10Q filings anymore. Facebook's business model is therefore almost entirely ad-based.
A difference that distinguishes Facebook from AOL is "the network effect." The network effect is what happens when goods or services become more valuable simply because everybody else is using them. More than 67% of adult Internet users use Facebook as of December 2012. Around 130 million people in the U.S. use Facebook every single day.
This phenomenon was always missing from AOL. At its peak in 2002, AOL only had 26.7 million customers, or less than 10% of the population in the US. This means the overwhelming vast majority of the US population did not use AOL to communicate.
Still, Facebook is not invincible. As technology changes, companies themselves must adapt successfully to remain on top or risk losing market share. Even AOL under its free email model was able to grow and take market share from competitors for a while. It grew its number of email users to 48 million in 2006 (before that figure cut in half to 24 million five years later as Gmail became popular).
Eventually there will be a new popular medium after "mobile" that Facebook will have to try to reconquer. Facebook's user base has gotten so large it is simply running out of new potential users. Zuckerberg has warned:
It's possible that because the market is expanding due to mobile, even as time spent per person increases on Facebook, maybe our market share can decrease....We believe that we're close to fully penetrated in the U.S. teen demographic." This means Facebook can and must focus more on further monetization of its user base and less on the acquisition of new users.
Facebook so far has proven its skeptics wrong. It is surviving and thriving in the monetization evolution from desktop computing to mobile computing. In contrast, AOL failed to be successful in the evolution from dial-up to high-speed Internet. While AOL is a shadow of its old former self, Facebook is growing during a time of change. Still, investors should monitor the Facebook user statistics with each quarterly report to assure that Facebook's user base is still loyal.
Nickey Friedman has no position in any stocks mentioned. The Motley Fool recommends Facebook. 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.