Facebook Inc. (Nasdaq: FB) is starting to get a taste of what it means to be the king of the social media hill.
Small and more nimble competitors with novel ideas have sprung up and begun to entice young users away from the No. 1 social media platform – a bad omen for Facebook stock, which 11 months after its IPO still trades 29% below its offer price.
According to Piper Jaffray's annual "Taking Stock of Teens" survey, teens are spending less time with Facebook and more with a vast array of alternatives.
The survey showed that just 33% of teens consider Facebook "the most important social network" compared with 42% last year.
Last month, the creator of social photo album app Albumatic, Adam Ludwin, conducted a focus group of users under 25.
"They gave me the typical teenage response: 'We're bored with Facebook,'" Ludwin told Business Insider.
Anyone who doubts how quickly a social media company can become yesterday's news need only look at MySpace, a once-dominant social media site that lost a third of its users in 2010 mostly as a result of Facebook's growing popularity.
"History is not on Facebook's side when the trend starts to move in the wrong direction," Piper Jaffray analyst Gene Munster told MarketWatch.
Facebook Stock Can't Afford a Major Slip-Up
Facebook absolutely cannot afford to lose its grip on its youngest users, who often foreshadow which social media are on the way up – or down.
Although Facebook has 1 billion users worldwide, the company has struggled to monetize this vast audience; hence, lackluster performance of Facebook stock.
The company has experimented with various forms of advertising and more recently has taken steps to make its software more mobile-friendly, but with limited success.
The transition to mobile has worked to a degree – that's certainly where users are headed – but ad revenue from mobile devices is less than that from PCs, and Facebook has just 13% of it.
That has left Facebook stock with a crazy high P/E ratio of about 1,800.
And with 1 billion users, not only is growing the customer base very difficult, it's going to be hard to hang onto all of them.
Especially the young ones.
Facebook even admitted as much in its annual 10-K report, in which it said "our younger users are aware of and actively engaging with other products and services similar to, or as a substitute for, Facebook."
The company also acknowledged the threat to Facebook stock: "In the event that our users increasingly engage with other products and services, we may experience a decline in user engagement and our business could be harmed."
Facebook Stock: Too Many Challengers
Social media alternatives have shown up like flies at a picnic over the past couple of years, which tells us Facebook pretty much has no "moat" to deter rivals from entering the market.
And those rivals are rapidly gaining traction among teens.
The messaging app Kik, for example, has accumulated 40 million users since its launch in 2010.
Another mobile messaging startup, Whatsapp, claims to have more than 200 million users. At the AllThingsD conference today (Tuesday), Whatsapp CEO Jan Koum said he plans to keep his app ad-free, and instead is banking on a business model that charges users 99 cents a year.
Other hot apps among U.S. teens include Vine (30-second video clips), Reddit and Tumblr.
Chinese teens have taken to Tencent's WeChat app, which already has 400 million users. Two other China-based apps, LINE (120 million users) and KakaoTalk (80 million users) are planning to launch in the U.S. market.
One key factor most of these new social media upstarts have in common is that they encourage real-time interaction between users, a degree of intimacy younger users prefer to Facebook's time-shifted interactions.
"True interactions are conversational in nature," Rich Miner, a partner at Google Ventures who invested in messaging app MessageMe, told Reuters. "More people text and make phone calls than get on to social networks. If one company dominates the replacement of that traffic, then by definition that's very big."
Worse still for Facebook stock, many of these rivals are turning their apps into platforms, just as Facebook did with games like FarmVille.
"The tried-and-true approach for a social network is first you build a network, then you build apps on your own, then you open it up to third-party developers," Charles Hudson, a partner at early-stage venture capital firm SoftTech VC, told Reuters.
Facebook's response has been to cut off integration with some apps, like Snapchat, MessageMe and Voxer, while buying up others.
Facebook's most notable acquisition, Instagram, cost it $1 billion last year – an indication that such tactics could get prohibitively expensive, particularly if such acquisitions contribute little to the bottom line.
The growing threat from other social media apps is just one more reason to stay clear of Facebook stock.
"Long term, it's a problem if they don't do something about it," Piper Jaffray's Munster told MarketWatch. "It's hard to keep things fresh with teens."
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