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Unless Mark Zuckerberg can pull a new rabbit or two out of his hat, it is possible we may be seeing another Internet giant going the way of a Yahoo which at the same time declared it was no longer a digital media company in its 10-K filing. Photo: Getty Images (Getty Images)
Unless Mark Zuckerberg can pull a new rabbit or two out of his hat, it is possible we may be seeing another Internet giant going the way of a Yahoo which at the same time declared it was no longer a digital media company in its 10-K filing. Photo: Getty Images
(Getty Images)

Is Mark Zuckerberg’s iceberg melting?

Investors in Net start-ups like Facebook and Groupon have staked billions on their future. What if there is no future?

There is now a very real possibility that after flirting with danger ever since its post-IPO stock price crashed nearly 40%, Internet giant Facebook may be facing a slow death.

Even as it prepares to launch a news feed on 7 March, fresh research by Pew Internet reveals 96% of the users say that in future they would spend the same amount or less time on Facebook. Only 3% said they would increase the time they spend. In the Internet era, when there is no growth, there is death. What should be of particular concern to the social media giant is that 38% of Facebook users aged 18-29 expect to spend less time using the site in 2013. In this age group, the percentage that plans to spend more time is zilch.

In its annual 10-K report filed last month, Facebook accepts that its business could be hurt by younger members fleeing the site. “We believe that some of our users have reduced their engagement with Facebook in favour of increased engagement with other products and services such as Instagram." Of course, Instagram, a photo sharing app for the iPhone, is a Facebook property as well. But after spending years driving traffic to its social networking platform, it would be little consolation for the company if it is replaced in its visitor’s affections even by one of its own fractals. Unless Mark Zuckerberg can pull a new rabbit or two out of his hat, it is possible we may be seeing another Internet giant going the way of a Yahoo which at the same time declared it was no longer a digital media company in its 10-K filing.

And it isn’t just Facebook. Groupon, founded less than five years ago, had a huge IPO. Yet, in the face of mounting losses, low barriers to entry and larger, more value-offering rivals, it’s quite likely that Groupon won’t exist in 10 years. Fed on liberal doses of freebies, the Web-based consumer offers little succour to cash-starved start-ups. In India, Gartner Inc. data says that only 15% of mobile phone users in India download apps, with 90% of them preferring free ones.

For most Internet companies it’s the “Red Queen Effect", the hypothesis that species have to run in order to stay in the same spot. It is borrowed from the adventures of Alice in Through The Looking Glass, where she discovers that any forward movement takes her back to her starting point.

In the digital economy this phenomenon is being enacted every single day. Encyclopedias at one time made huge money. Britannica made pots of money selling them in the physical world. So did Microsoft with its Encarta CD. Their successor on the Web, Wikipedia survives on donations. Books is another business where the bricks and mortar business yielded to its digital avatar and again, while sales of e-books have grown, profits even for the top players have remained ephemeral. Pity the fate of Barnes and Noble Inc., the largest traditional US bookseller, which shifted to electronic books in the face of growing competition from discount stores and online rivals. The company, invested heavily in its Nook e-book readers and a digital library to try to carve out a niche in the current retail landscape. Last week it posted a loss in the fiscal third quarter, hurt by weak sales during the all-important holiday quarter for both its Nook e-book readers as well as at its bookstores.

More feely than touchy, the New Economy’s very basis is a vacuous value assessment of services in ways that the industrial age would find hard to fathom. Stock prices of most Internet companies are so much in variance to their earnings, that the underlying value remains opaque.

At the cusp of the Internet revolution, almost 15 years ago, when Warren Buffett was asked about Internet stocks such as the then-hot Yahoo, he told the Associated Press (as reported by CNET ): “If I taught a class, on my final exam I would take an Internet company and ask [my students], ‘How much is this company worth? Anyone who would answer I would flunk."

You just have to see the sad state of “Jerry and David’s Guide to the World Wide Web" today to realize the perceptiveness of the wizened old man of investing.

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