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Where Facebook is faltering, and how it can be fixed

The entrance to the Facebook main campus in Menlo Park, Calif.

Tess Vigeland: So Facebook. First ever earnings report.

If you'd read the tea leaves from all the analysts and Wall Street wags, you were ready for a sad, sad afternoon, and much hand-wringing over the coming pop of the social media bubble. So it's always nice to be able to turn that frown upside down. And you can -- a little bit.

The social media giant reported a 32 percent boost in revenues, just shy of $1.2 billion. But it's still a wholly unprofitable company. And shares were hammered in after-hours trading.

Joining us now with some perspective is our New York bureau chief and well-known Facebook hater -- the site, not the stock -- Heidi Moore. Hello.

Heidi Moore: Hi Tess.

Vigeland: So this frown, where should it be at this point?

Moore: Yeah, it could be maybe a mild smirk. Facebook's problem is the problem of the A student -- it cannot get a B or else everyone will just think that it's losing its touch. And that's what happened with Facebook's earnings today -- it's actually done really well with some major challenges. But its costs are very high, and it didn't solve the one problem it needs to solve, which is selling advertising to people who use Facebook on their smartphones -- which is almost everybody. Don't you use it on your smartphone?

Vigeland: I do in fact, yeah. I mean, I go on the computer every once in a while, but it pops up on my phone quite a bit.

Moore: Yeah, exactly. And they have managed to increase users of smartphones by 67 percent, which is so impressive. But you know, when you sit there in front of your Facebook page, you think you're interacting with your friends. But you're there because Facebook wants to sell your presence to advertisers, and fill your page with ways to make you buy things. And so it's not doing very well with that; although it's increasing advertising and it's increasing mobile users, it's not increasing advertising to mobile users.

Vigeland: I have to say, I can't remember ever -- not once -- clicking on an ad on my Facebook page.

Moore: That's right. I mean, I have very little demand for you know, timeshares in Dakota or whatever they last tried to sell me.

Vigeland: Well, let me ask you kind of where this fits in the tech ecosystem at this point. Zynga reported yesterday -- they're the online gaming firm -- and they were not so hot either. So is there any signal here about what's going on in the social media bubble?

Moore: Well what's really surprising is that social media is all about people on their cell phones, right? You tweet on your cell phone, you use Facebook, you use LinkedIn -- and yet, you look at companies like Zynga, which creates "Farmville," and Facebook, and they haven't yet figured out how to use those platforms that we're all on all the time, that are key to technology, to actually increase their revenues. It's actually incredible -- they're sort of tech companies, but they haven't figured out the tech. It's amazing.

Vigeland: It is amazing, isn't it? Well, you mentioned at the top that Facebook is an A student, it can never get a B. What's it going to have to do to be an A student and stay there and get that 4.0 while it graduates?

Moore: It's going to have to pay attention to the Internet, interestingly -- to the ways that the Internet is growing, which is people on the move. People aren't sitting in front of desktop computers anymore, so if Facebook shows that it can figure out this problem of how to get people when they're mobile, when they're on the move, then it will show that it's really smart. Also, it needs to get its costs down. It wants to grow, and to grow, you have to spend money. But right now, it's spending money -- its costs are up something like 200 percent. It needs to pull those down a little bit to show that it's responsible and, you know, impress investors.

Vigeland: But here we are, how many years after the iPhone debuted -- how do we not have a mobile strategy at this point?

Moore: Your guess is as good as mine, right? I mean, for Facebook. It is strange, and you know, our own business journalism has been like this as well -- everyone looks around and they're like 'wow, the Internet just happened. What are we going to do about that?' And in fact, it's been happening since 1998. But it's really hard to get people to pay for something they expect to be free, and Facebook's whole thing is that it's been free, so to sell people things -- advertising or whatever -- feels a little sleazy to some people. They haven't figured it out yet.

Vigeland: All right, our New York bureau chief Heidi Moore, talking with us about Facebook's earnings report today. Thanks so much.

Moore: Thank you.

About the author

Heidi N. Moore is The Guardian's U.S. finance and economics editor. She was formerly the New York bureau chief and Wall Street correspondent for Marketplace.
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This was a good story, but I would like to disagree with a couple of points made by Heidi Moore.

First, she says, "social media is all about people on their cell phones." There is no doubt that smart phones are a huge driver and critical to the commercial success of social media companies. However, many of these companies started and rose to prominence well before the ubiquity of smart phones. And many people still use computers to access social media sites and will continue to do so. Facebook was started in 2004, for example, but the first iPhone wasn't released until 2007.

The second nit is her statement that the Internet has been, "happening since 1998." In fact, the first network connection between two computers was demonstrated in October of 1969. It became far more viable in 1982 with improvements in the networking technology. The first advertisement that I am aware of that contained a web site address was by Monster.com, and I remember being stunned hearing it on the radio in 1994.

Heidi Moore says "It's actually incredible -- they're sort of tech companies, but they haven't figured out the tech. It's amazing."

What's incredible is the lack of imagination that insists that the only way tech companies can make money is by shoving irrelevant advertising in people's faces all of the time. I think these companies figured out *tech* very well. What they really have to figure out is how to fine-tune a profitable business model without driving away their large audiences (which is what intrusive advertising tends to do).

If advertising were relevant to the viewer - which is the claimed goal of companies like FB, gmail and others when they sell your personal information to marketing firms - then people might not mind it so much. But keep an eye on what advertising actually shows up on your screens. Even with all of your personal data flying around out there, you still mostly see ads for "Cialis" or ads claiming "Hot singles in [fill in your city]" or "Nevada mom discovers one [weird/shocking/simple] trick to create free energy". Despite all of that personal information being bought and sold, advertising is still as unfocused as television commercials.

As things stand, LP and SG are more likely to be more effective with G+, on multiple counts & with less sleaze factor, than Z and FB.
Z is clever, ambitious and has learned a lot, but I still see little value in his teams FB showoff, sell yourself to people (with better things to do), venture.
I concur with the above 3 minds.

It fells sleazy ... because it is sleazy.... the Facebook method that is... in the beginning Z tricked everyone into believing that the facebook subscriber was the customer... when in fact he had in mind all allong that "we gosh darn be the product".... and then at first the story was.. "Yea, we sell some of your information.. we neutralize it though so that the buyer doesn't know who you are"... when now... the buyer knows exactly who we are, where we live, who our friends are, etc. Course credit card companies know all this too..

And then there was the IPO, which was BRILLIANT... Z got top dollar for his early investors... they've made their fortune.... and the new investors.... hmmmm... its a bit of piramid maybe...

He's got a bit of problem... Good.

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