Is This a Major Red Flag for Facebook?

  on November 15 2012 8:09 AM

Investors are bracing for additional employee lockups on Facebook (NASDAQ:FB) shares to expire on Wednesday. Many concerned that an additional 800 million shares floating around will hurt the already wounded stock price. Facebook saw something of a rally on October 23 after releasing third-quarter numbers that suggested the company was gaining a grasp on monetization. But shares have dipped back below $20 per share while investors remain dubious about the lockup and monetization efforts.

Raising some concerns was the amount of short interest in the stock, which increased to 18.6 percent of float in October. However, the Wall Street Journal reports that short interest has dropped by nearly 40 percent so far this month.

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While employees dumping shares would definitely be a red flag for Facebook, the company should have more on its mind than its stock price. At least, so says American business magnate, Shark Tank investor, and owner of the Dallas Mavericks Mark Cuban, who looks ready to become an outspoken critic of the social network.

Mr. Cuban made public a screen grab from the Dallas Mavericks Facebook page that asked him to spend $3,000 to reach 1 million of his own fans with a post. Not an advertisement, a post targeted at only those people who already like his page.

Mr. Cuban points out that owners of pages with many “Likes” don’t reach 100 percent of their audience with every post. The theory is to try and keep news feeds clean and relevant by not flooding them with every update posted by every page a user likes. The news feed is Facebook’s prime time, and if a company wants to get its content to stick in the news feed, it has to pay for sponsored posts.

Facebook currently uses an algorithm to to place the right posts in front of the right people. While the algorithm is constantly changing, a large update in September, aimed at cutting down on news feed spam, seems to have also cut down on the ability of brands to reach their audiences.

In an email partially posted to ReadWriteWeb, Mr. Cuban slammed the change, calling it a weakness in the company’s strategy and saying that he would start to move the Maverick’s social presence to other websites. Interestingly enough, he pointed at MySpace as an option.

“Actually, MySpace is going through a reformatting that looks pretty good. There is a greater than zero chance that it could gather quite a bit of momentum,” he said in the email.

Mr. Cuban sums up his attitude on the situation: ”I get that they want to reduce the speed at which news scrolls off of people’s Facebook pages. The more stuff, the less you see; the less you see, the less you engage. All good points by Facebook. But it’s a reflection of overall design and strategy weakness. Again, why would a brand invest in getting likes they can’t reach without paying a premium?”

The strategy looks like a botched attempt at revenue generation that will end up driving brands away from Facebook. General Motors (NYSE:GM) infamously pulled a huge advertising campaign from Facebook right before its IPO, casting a shadow of doubt over the effectiveness of advertising through the social network that still lingers. Major companies that do still use Facebook as a platform include Ford (NYSE:F) and Coca-Cola (NYSE:KO). It will be interesting to see if their attitude toward Facebook shifts because of this development.

At the end of the day, Mr. Cuban claims that Facebook doesn’t understand its own initiative to drive revenue. The complexity of the system will “come back to haunt Facebook,” especially with alternatives like Twitter on the table.

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