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BY GINA G. SCALA
NEWJERSEYNEWSROOM.COM
There’s no such thing as a free lunch. It's an age-old adage meaning, basically, you don’t get something for nothing.
That’s the quandary on Wall Street as Facebook, the world’s largest social media networking company, struggles following its May IPO. By all accounts, the Mark Zuckerberg-founded company holds the title for the worse initial public offering in history and brings into question the company’s business model of trying to get rich while giving away a service; and whether it can be done successfully.
With more than 900 million users worldwide, Facebook fetches $3.7 billion a year without charging their loyal audience for its services. In return, Facebook gains the much coveted personal information marketers will pay dearly to have.
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“Free serves purposes, but you have to go beyond free to make some money,” professor Rita McGrath, who teaches corporate strategy at Columbia Business School, said.
A good example is that of fellow social-media company LinkedIn. The business-oriented site, which has effectively redefined business networking, has seen its stock mount a 65 percent increase this year thanks to a balance of advertising fees and charging users for premium services.
There are several reasons, other than fees for premium services, that LinkedIn has outpaced Facebook.
LinkedIn has a more professional feel than Facebook, despite the presence of major global businesses on the site.
Advertising on LinkedIn is only 28 percent of its profits, while it comprises 85 percent of revenue for Facebook.
LinkedIn learned quickly how to play the Wall Street odds and exceed analysts’ expectations. In fact, it has crushed estimates for 4 out of the 5 previous quarters.
Facebook, on the other hand, has underwhelmed Wall Street from nearly the beginning; prompting angry investors to file a class action lawsuit and just last week billionaire Peter Thiel divested his company of nearly 20.1 million in Facebook stock following the expiration of a lock-up agreement.
“Facebook is in a pickle,” Donna Hoffman, co-director of the Sloan Center for Internet Retailing at the University of California at Riverside, told the Washington Post. “The advertising broadcast model is dead wrong for this medium. . . . It can never work.”
Only time will tell.
