Monday, August 20, 2012

Three Reasons Facebook's Mark Zuckerberg Need Not Step Down

On May 18 of this year, Facebook stock debuted on NASDAQ at $38 per share. Last week, three months later, it was selling for half that price. As the stock has plunged, questions about CEO Mark Zuckerberg's leadership have risen. Late last week, the LA Times asked "Is Mark Zuckerberg in over his hoodie as Facebook CEO?," a swipe at the attire Zuckerberg famously wore on the day the stock launched. CNET Columnist Ben Parr received an email from an attorney's PR firm promoting his drive to force Zuckerberg out. And even Perez Hilton got into the act, taking a break from scribbling on celebrity photos to ask, "Should Mark Zuckerberg Step Down As CEO Of Facebook?"

Should Zuckerberg step down? That is up to him to answer. Zuckerberg could certainly follow in the footsteps of Twitter's founders who stepped aside to allow a more seasoned leader to take the helm, not that the sailing has been that smooth over at Twitter since the transition. Under Dick Costolo, Twitter has alienated its developer community and violated its long-standing commitment to free speech by encouraging NBC to request the suspension of a critic's Twitter account. Although Twitter's revenues are rising, they reportedly lag Facebook's revenues considerably. It is difficult to evaluate Twitter's performance since it remains privately held, but the company's SecondMarket valuation was downward trending this year until rumors surfaced of Apple's interest in a share of the microblogging network. The point is that, while CEO leadership is important, CEOs are not miracle workers (no matter what you may have read about Marissa Mayer).

Whether or not Zuckerberg should step down is a question only he can answer. But need he step down or will he be forced to do so? If you think this, you have not been paying attention. Here are three reasons why Zuckerberg's position is secure:
  1. It is his damn company: As noted on this blog six months ago, Facebook's S-1 IPO filing could not have been clearer about the control Zuckerberg wields at Facebook. After the IPO, Zuckerberg owned 56.9% of the voting shares, and the IPO took pains to warn investors what this meant. It noted Facebook would be a "controlled company" and that "Our CEO has control over key decision making as a result of his control of a majority of our voting stock." In case this was not clear enough, the IPO also included this comment: "Mr. Zuckerberg will be able to effectively control all matters submitted to our stockholders for a vote, as well as the overall management and direction of our company." Facebook's CEO, much like the social network itself, came with a "Like" button but no "Dislike" button, and there is virtually no chance Zuckerberg can be forced from his position running Facebook. If he steps aside, the decision will be entirely his own.
  2. Investors' unreasonable expectations and mistakes are not Zuckerberg's responsibility. If you thought Facebook was going to be a safe or strong short-term stock, you were truly misguided. The stock debuted at a price that represented a PE ratio (price/earnings ratio) of 95. At the time, successful tech companies like Apple, eBay, Microsoft and IBM were trading at PE ratios of less than 16. AAPL PE Ratio Chart In other words, Facebook was going to need to grow its net income 500% in short order to justify its price, much less create positive market momentum. (The first person who says, "Earnings don't matter" will be sentenced to go back in time to March 2000 to relive the dot-com bubble burst and learn what he or she should have the last time around.) If you are looking for someone to blame for the fact the shares were overvalued, then pick on analysts at firms like Sterne Agee, Needham & Co. and Wedbush Securities, all of whom rated Facebook a "buy" in May and suggested target prices in the $40s. As far as I'm concerned, there has been nothing surprising about Facebook's stock performance since its IPO, and if you think I am Monday morning quarterbacking, feel free to check out my blog post from December 2011 when I predicted the continuation of the "slow-motion social media valuation bubble burst." Or, heck, go back even earlier when in June 2011 I noted that Facebook or Twitter "could pull an Amazon, lose 90% of their market cap and spend another decade clawing their way back."
  3. Facebook's financial performance under Zuckerberg has been exactly as expected. The sinking price of Facebook shares has far more to do with investor perception than with company or CEO performance. In July, Facebook's first quarterly filing as a public company "just squeaked in at analysts’ expectations." That included an almost one-third rise in quarterly revenue in a year, a 32% year-over-year increase in Daily Active Users and a 67% increase in Mobile Monthly Active Users. On a non-GAAP basis (the way the market evaluates Facebook), the Earnings Per Share were level with the year prior, which is not surprising given the company is still fueling worldwide growth with a 50% increase in headcount and a two-thirds increase in capital investments. Overall, while Facebook's lack of earnings growth may disappoint the street, the company's performance is on track for what market watchers expect. Compared to Zynga, which recently slashed its earnings estimates for 2012, Facebook looks like a solid, growing, successful, well-run, young company. 

In short, it is pretty darn tough to see how Zuckerberg would be forced out from his CEO position considering he controls the company and is delivering the financial results expected. This is not to say that I think Zuckerberg has been a good CEO in recent years. I have railed against Facebook's lack of revenue diversification and innovation, and its focus on advertising rather than facilitating new social business models has been, in my opinion, a serious blunder in long-term strategy. Moreover, as my former Forrester peer Nate Elliott noted, the company has not delivered the sorts of marketing metrics that marketers need to justify greater investment in Facebook advertising.

Even more concerning is that Facebook's desperation to quickly grow revenue and income seems to be pushing the company away from Zuckerberg's own core beliefs. As David Kirkpatrick, the author of The Facebook Effect, noted in the early years of Facebook, Zuckerberg "resisted pleas to turn Thefacebook into a highly commercialized ad platform, because he thought users would dislike it." Facebook's CEO continued to show ambivalence and concern about advertising years later when in 2010 he said, "There’s a big misperception that we’re making these changes for advertising. Anyone who knows me knows that that’s crazy.”

It is hard to square Zuckerberg's stated vision with the actions of the company this year. Facebook seems to be exploring some very dangerous and unpalatable waters, such as charging users to have their posts seen by more of their own friends and permitting advertisers to place ads in users' news feeds even if those users have not "liked" or given permission for those advertisers to do so. Moreover, Facebook's new Reach Generator threatens to push aside content users want to see in favor of content advertisers want them to see.

I do expect more out of CEO Zuckerberg, but that has more to do with my expectations around social business models and strategy than with the company's 2012 financial performance. In the end, however, what I or anyone else thinks is meaningless. The world can "poke" Mark Zuckerberg as much as it wants, but he and only he will make the decision when the time is right for a new CEO.

No comments: