Why Facebook is Worthless...
And Google is Priceless
In the United States of America, the financial sector — in terms of cost to the consumer — accounts for as much as 40% of the economy.
In other words, forty cents of every dollar all of us spend, in one way or another, winds up in the hands of financial institutions and their employees.
That's a lot of money spent on people who primarily, it seems, spend their time trying to predict the future performance of companies by carefully observing and analyzing what those same companies have done in the past...
They spend hours examining the spreadsheets, looking, more often than not, at numbers the company has already generated in terms of profits and losses.
To me, that sounds a bit like trying to navigate a ship through a narrow strait on a moonless night, with most of the crew standing on the stern, peering into the ship's wake.
I suppose we need to pay people lots of money for staring at already generated (thus largely irrelevant) figures, because most of us can't (or, more likely, don't want to) do that ourselves.
We figure they're smart, so we trust them...
In reality, the very concept of determining future performance primarily from the analysis of past performance is a waste of time.
Finding the next great thing is about seeing past those numbers — and understanding the mechanism that generates them.
What Constitutes Value?
To do this, today I want to cut through the smoke and mirror routine you get from the analysts and look instead at the abstract concept of value.
I'll use a pair of famous examples so everyone can feel involved: the two most famous tech companies to IPO in the last ten years.
Without a doubt, there can only be two: Google and Facebook.
These Internet giants occupy the first two spots on the Alexa rankings (either one or the other is first, depending on whether you include YouTube as part of Google).
At their cores, both companies are built on fundamentally different business models.
And it is this difference that will almost certainly doom one, while keeping the other strong and relevant for as long as the present open format of the Internet remains available to the masses.
More importantly, it is the awareness of this difference that, during this active IPO market, will allow you to see which new sensation will deliver the goods once it goes public — and which one will gradually wither.
So here goes...
The Underlying Mechanism
Google has the inherent ability to save its users time. Facebook does not.
The distinction is that simple: One can be used as a tool, while the other cannot.
Now, I know what you might be thinking... Facebook consolidates your ability to communicate, and is therefore a time-saver.
That may be true. But the problem is that what you do on Facebook is not a value-returning act that can have long-term benefits for the economy.
Google, on the other hand, is a universal research engine that saves hundreds of millions, perhaps billions, of man-hours annually across the globe for people who use it on the job to find facts, learn things, make connections, and establish new revenue streams based on newly conceived and (as of yet) unmonetized business models...
I want to build a website, and I need a developer — I go to Google.
If I want a house renovated, and I need a contractor — I go to Google.
If I want to buy a 3D printer because I want to make custom bobbleheads on the boardwalk for tourists — I go to Google.
Sergei Brin's own mother said it best when she stated that her son and his partner, Larry Page, have saved more people more time than anyone or anything in history.
Just as cars take us from place to place, Google finds us information.
On the other hand, if I want to see what my high-school classmate's dog ate for dinner last night, I go to Facebook.
That, my friends, is the essence of value.
Granted, Google can waste time, too. And it is often used for this purpose by millions across the nation, at the office and at home. However, its ability to create value outbalances this.
Facebook, unfortunately, has no such underlying mechanism. It was never designed to. It was, in the words of its creator, designed for people to learn which of their friends is sleeping with whom.
Google was designed by a couple of mathematicians to help scientists and technical specialists find relevant information. Fifteen years later, Google continues to fill this role quite well.
When Facebook turns 15 in 2019, well, chances are it will be just another social media site, eclipsed by something more efficient at spreading useless information.
Skip the Ads
"But what about the ad revenue?" a wise prospective investor might ask.
Well, ads do bring in a lot of cash for both companies, as well as allow for the development of new products.
But ad delivery itself is a largely valueless product.
Remember, you're not saving time or energy in your job by clicking on a Google or Facebook ad. You're spending money and helping companies earn, but you're not actually getting things done.
Those ads are distractions. They lead to discretionary spending which, in a nation of consumers, is an accepted frailty.
What Google does that no ad-delivery service in the world can is provide a valuable tool to those who need it.
The addition of Google Patents in 2006 is a perfect example of what Google was designed to be from the very start...
All fun and nonsense aside, the world's most popular search engine represents a leap forward in the sharing of useful information. As long as this tool remains accessible, it will remain immeasurably valuable on a broad spectrum — from the individual user all the way up to global economic development.
Big Names to Watch
Now, how can one use this concept of an underlying mechanism to pick through the companies that may be going public in the near future?
By looking at the companies and determining what they provide in terms of real-world value to you.
There are a couple big names you can look at: Twitter, Airbnb, Spotify, Square, Dropbox, and Box.
Of these six (and there are more on the horizon), five provide value outside of what has become universally known as "social media."
These five provide tools people can use to save time by getting what they want faster, more efficiently, and/or in markets which these tools were previously inaccessibly (take Square, for instance).
Of this group, one is a social media site that is destined to be the next big thing to hit the public tech sector — or so I've been hearing...
It also happens to be the one that I believe will make the worst long-term investment.
Next week, I will fill you in on the others — and explain just where the value lies in each. So stay tuned.
To Your Wealth,
Brian is a founding member and President of Angel Publishing and investment director for the income and dividend newsletter The Wealth Advisory. He writes about general investment strategies for Wealth Daily and Energy & Capital. Known as the "original bull on America," Brian is also the author of the 2008 book, Profit from the Peak: The End of Oil and the Greatest Investment Event of the Century. In addition to writing about the economy, investments and politics, Brian is also a frequent guest on CNBC, Bloomberg, Fox and countless radio shows. For more on Brian, take a look at his editor's page.
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