With the Facebook IPO just around the corner some people have started wondering if a “Facebook killer” might be lurking in the bushes and the new photo sharing website Pinterest has become the new darling. Well, maybe.
I got a message from an industry watcher today, Kenneth Wisnefski, social media expert and founder / CEO of WebiMax, that said Pinterest was up and coming and a threat to Facebook’s IPO, but I disagree. Here are some bullets from the email and my thoughts.
- I expect Facebook’s stock price will soar in the beginning of the trading session, however once investors look closely at their fundamentals they will realize that Facebook really lacks a solid revenue stream (90% of revenue stems from advertising).
- Facebook’s dependency on advertising revenue in addition to their vulnerability from smaller social media firms, like Pinterest, decreases my confidence in their long-term sustainable growth that we once expected.
- Pinterest’s ease of use makes it more attractive to small businesses and we have already seen small business marketers shift toward using Pinterest and divert away from Facebook. If this is sustained, consumers may gravitate toward Pinterest versus Facebook.
Well, then, here’s what I think.
- Advertising is not necessarily a bad business model. It’s done good things for the likes of Google but as more companies enter the space and become good at the model, the demand for ads will prove to be less elastic than the supply and we will see tightening in the market and a decrease in profitability for the model. Nonetheless, Facebook is early to the party and I believe their SEC filings make the point that they want to diversify so calling the business model a liability at this point is overblown.
- “Vulnerability from smaller social media firms”? This sounds like somebody is trying to repeal the law of gravity. It doesn’t work this way. Certainly markets are open to disruption and certainly small companies disrupt bigger ones. But for disruption to occur the disrupter has to demonstrate superior attributes in a market slightly adjacent to the disruptee. Salesforce disrupted Siebel not in CRM but in the delivery mechanism. I don’t see a sustainable difference between Pinterest and Facebook, especially since Facebook bought Instagram. I think Pinterest will be a niche player in photo sharing.
- Pinterest might have the ease of use thing down simply because there is less of it than there is of Facebook. When Salesforce started out with just four tabs they claimed ease of use and simplicity. But that doesn’t say anything about the richness of the product or the experience.
- There is also the issue of switching costs which most people take into account when they consider going with a rival. Facebook is a network and according to Metcalf’s law, networks are valuable because they have lots of connections. A new network by definition has fewer connections than an established one, which makes switching more problematic. Switching here gets you less not more and for the vast majority, Facebook’s network is a walled garden.
As I look at Pinterest I see a consumer site for sharing photos whereas Facebook has developed from those roots to a budding platform for doing real business and for hosting applications. This platform is what enables Facebook to look toward other revenue forms and what makes it a better business solution. So while Pinterest might very well be better than Facebook in some ways, to say it is superior or that it is a disrupter is to overstate the case. It is a mistake to think that better technology wins the day.
Time after time we see that the company in first and with greater marketing resources is the winner. If you doubt this, check out “The 22 Immutable Laws of Marketing” by Trout and Reiss. It was published in 1994 and while it shows some wear and tear, it still gets this idea right.