Is Facebook the Next America Online (AOL)?

Quick: Name a proprietary online network that captured the hearts and minds of America’s youth, got everyone talking, and was once valued at $160 billion. Facebook (NASDAQ: FB)? Nope. Try America Online (AOL). Although their stories certainly aren’t the same, AOL’s rise and fall offers a cautionary tale to channel partners and customers that are building big communities on Facebook’s social media network. Here’s why.

Rewind to the 1990s. AOL was more than a dial-up Internet Service Provider (ISPs). Kids and even business users logged millions of hours in AOL’s various online forums. A lot of AOL’s content was user generated. Hot stuff… until the open web and multiple broadband providers destroyed AOL’s core dial-up business model. Notes CBS Evening News:

“In the late ’90’s, America Online was the darling of Wall Street, valued at over $160 billion when it merged with Time Warner. But by 2010, AOL lost 86 percent of its subscribers and is now worth $2.6 billion.”

Does a similar fate await Facebook? Hey, let’s not underestimate Facebook’s reach and impact. According to the company’s prospectus, Facebook represents:

• 901 million active users.
• 3.2 billion likes and comments per day

More importantly, Facebook has been profitable (net income) since 2010 and revenue growth has been explosive:

• $153 million in 2007
• $272 million in 2008
• $777 million in 2009
• $1.974 billion in 2010
• $3.711 billion in 2011

Warning Signals

Still, there are signs that Facebook is starting to suffer from slowing growth. But the item that concerns The VAR Guy the most: Users increasingly access Facebook on mobile devices where Facebook itself says “we do not currently directly generate meaningful revenue,” according to Facebooks’ prospectus.

And how’s this for a reality check: An analyst at Morgan Stanley, the lead underwriter for Facebook’s IPO, cut his revenue forecasts for Facebook in the days before the IPO, Reuters is reporting.

Patterns Worth Tracking

So does Facebook face the very same challenges that destroyed AOL? Look at it this way:

• AOL was a gated community that attracted big crowds, and those big crowds generated user content that drew additional members into the system.
• AOL derived most of its revenues from an aging platform (dial-up) that was disrupted by a next-generation platform (broadband).
• Facebook is a gated community that attracts massive crowds (exponentially larger than AOL at its height), and those Facebook crowds generate user content that draw additional members into the system.
• Facebook derives most of its revenues from an aging platform (ads displayed by PCs) that may be disrupted by a next-generation platform (mobile, such as tablets and iPhones).

Key Differences

Those four bullets show a lot of potential similarities between AOL and Facebook. But Facebook has some built-in advantages over the former AOL model.

• Facebook, after all, is built on the web and runs in a browser — which means Facebook is likely open enough to evolve as new hardware platforms come along.
• AOL, in stark contrast, was a proprietary desktop application that launched into a proprietary back-end system. Getting “out” to the web was quite a headache, and overhauling AOL for open web standards was an exercise in futility.

The VAR Guy’s conclusion: Facebook will be around for years to come. But the hype stage is over. As a publicly held company, Facebook’s stock will rise and fall based on actual earnings rather than consumers chasing Internet gold.

Memo to Channel Partners

For channel partners, remember this: The best place to develop and maintain content is on your own website. Sure, build out a Facebook presence. But use it as a highway that leads readers to your web site. Dictate the key components of your Internet presence rather than having Facebook define and dictate the parameters of your presence for you.