Part of the answer, say analysts and academics, lies in Wall Street’s skepticism of a founding principle of Silicon Valley’s business culture — that the best way to build a company is to ignore profits in favor of building a huge audience.
Few companies have a larger or more loyal audience than Facebook, with more than 900 million users and reams of the personal information that marketers covet. Many analysts expect that Facebook will continue to find ways to make money from that vast global reach; it already brings in $3.7 billion a year.
Yet Wall Street’s evident frustration with the stock price reflects growing concerns about the long-term prospects for companies that are popular but do not charge users for services.
Another social-media company, meanwhile, the business-
oriented LinkedIn, has seen its stock climb 65 percent this year as it relies on a mix of advertising dollars and fees for premium services.
“Free serves purposes, but you have to go beyond free to make some money,” said professor Rita McGrath, who teaches corporate strategy at Columbia Business School.
Facebook’s troubles bear some resemblance to those experienced by traditional media companies that depend mainly on advertising for profits. They once built empires by helping department stores, automakers and beer companies reach customers but have struggled to make similar profits while moving their businesses online, where ad rates are lower and content is often free.
The most striking success story for free content is Google, which brought in $38 billion in revenue last year, mostly from advertising. Because consumers use search engines when they are looking to buy products, Google provides an ideal opportunity for advertisers, much as the Yellow Pages have for generations.
Yet for most other online businesses, display ads are an intrusion on the user experience. People wanting to connect with old friends, or get the latest news on the presidential race, may tolerate commercial messages, but they are not seeking them.
Such a disconnect did not keep radio and television companies from making billions of dollars serving commercials to captive audiences over many decades. But analysts say the online world is different — users are in charge. Off-point messages get tuned out. Alternatives are just a click away.
“Facebook is in a pickle,” said Donna Hoffman, co-director of the Sloan Center for Internet Retailing at the University of California at Riverside. “The advertising broadcast model is dead wrong for this medium. . . . It can never work.”