Facebook currently has over 1 billion users worldwide, and a market capitalisation of around $130 billion. It might seem implausible to many that this giant company might collapse so rapidly. But this is exactly what happened to MySpace, the most visited website in the world from 2005 to early 2008. By 2011, it had all but disappeared. Even giant firms fail. This is the lesson of economic history, ever since companies operating on a truly global scale began to appear in the late 19th century. Of the world’s top 100 non-financial companies a century ago, in 1914, all with market capitalisations of many billions in today’s prices, most have either gone bankrupt or are mere shadows of their former selves. Some of them disappeared very quickly. But while other companies have failed, as a Facebook user it seems ridiculous that Facebook will face the same fate in just a few years. It seems so ridiculous that it’s hard to believe Princeton University are even associated with it. Admittedly Facebook has become increasingly frustrating as it becomes the new ‘YouTube’, as your newsfeed becomes flooded with vines and other videos, but the number of active users on Facebook is ever increasing.
So how can Facebook die? Economists may refer to the observable attributes of the alternatives, such as price and quality. As Facebook is fantastically popular, it must be because the product not only provides features which many people want, but because it does so much more effectively than its rivals. A dominant market leader can only be displaced, on this view of the world, if either a superior rival emerges, or if there is some unforeseen and sudden shift in consumer tastes. This was the cause of MySpace’s death, which was killed by facebook and twitter which were substitute goods. But what’s killing Facebook? Not snapchat. Not Google+. Therefore we can rule competition out as a suspect for the cause of Facebook’s proclaimed death, as it remains dominant.
However surprisingly, these were not the arguments which John Cannarella and Joshua Spechler outlined in their report. They did not take into account Facebook’s features; rather they look at user behaviour based on network contacts. The researches stated, “… every user that joins the network expects to stay indefinitely, but ultimately loses interest as their peers begin to lose interest. Thus, a user that joins early on is expected to stay on the network longer than a user that joins later. Eventually, users begin to leave and recovery spreads infectiously as users begin to lose interest in the social network. The notion of infectious abandonment is supported by work analyzing user churn in mobile networks, which show that users are more likely to leave the network if their contacts have left.” However the mathematical and economical modelling used to come to this conclusion is totally flawed. That’s because they used a tool called Google Trends to see how often people searched for “Facebook” on Google over the years. They saw Google searches for “Facebook” decline, noted that when MySpace and Bebo waned, so did Google searches for those terms, and came to their dire conclusions.
So why is this a big deal? Because when a big news outlet like NBC News run;s a story, people believe it. They don’t stop to read the original paper and if they did, the academic jargon would make it incomprehensible to most. But it has an effect. Facebook is a publicly traded company. A story like this could affect the stock price and change the valuation by millions. It could also be the sort of thing that creates the end it predicts by convincing people that Facebook is dying and they should go somewhere else. Therefore the natural reaction of an economist is to make the prediction that John Cannarella and Joshua Spechler were motivated by the possibility of buying cheap shares. The incentive of making a fortune outweighed their loss of reputation or credibility after producing such a flawed conclusion.
Facebook’s response to the Princeton study was quite amusing, mocking the outrageous modelling they used to come to their conclusion. They used Princeton’s Facebook “likes” and “peer reviewed articles” and evaluated them over time. They noted an alarming downward trend of Princeton’s Facebook “likes” and made a conclusion based on the similarities between student enrolment and Google Trends index. From this, Facebook concluded that Princeton would also suffer a decline in enrolment of 50% by 2018.
According to CNN, “Princeton received 24,498 applicants for its current freshman class and accepted only 7.4% of them, ensuring its status as one of the nation’s elite universities. And as of September 2013 Facebook had 1.2 billion monthly active users.” Neither institution is really in any danger of disappearing any time soon.
By Sam Timmins