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Why Facebook Stock is in Free Fall; and Why it Doesn’t Matter.

Well, Facebook stock has been in a free fall since it IPO’d and no one can seem to pinpoint the culprit. Is it lack of confidence in their mobile strategy? Is it their bet on advertising?  Is Wall Street scared of the CEO who really doesn’t care what they think?

Yes, It’s all this and more. But none of this is unique to Facebook. People asked similar questions about Amazon and eBay and others.  A key difference here is the concept of perfect and imperfect information.

An Imperfect Storm

From Wikipedia: In game theoryperfect information describes the situation when a player has available the same information to determine all of the possible games (all combinations of legal moves) as would be available at the end of the game.  Chess is an example of a game with perfect information as each player can see all of the pieces on the board at all times. Card games where each player’s cards are hidden from other players are examples of games of imperfect information.

With stocks, we are playing cards, not chess.  And with the months and potentially years of build-up to the second largest IPO ever, it is highly probable that several players had much more information that the rest of us. In fact, there is already evidence that something along those lines may have occurred. And shareholders are not happy.

And that’s why Facebook stock is falling… information was nearly perfect for those in the know, and the stock was priced accordingly before it hit the market.  Now that the rest of us can buy Facebook stock, it’s falling because every short-term trader who had the opportunity to buy early got out quickly. That’s what they do.  One investor, after being briefed on Facebook’s revised forecast, unloaded all of its holdings in the first hour of trading, according to Scott Sweet, founder of the IPO Boutique, who advises mutual funds, hedge funds and individuals. The investor sold hundreds of thousands of shares at about $42.

Now we all have to deal with some level of imperfect information–whether it’s stock investing, in choosing which community to live in or home to buy, or even deciding which products to buy every day.  And that’s why Facebook stock falling right now doesn’t matter, its their long-term prospects that do. And IMHO, that all hinges on their approach to advertising.

Advertising: Not Cool, Bro

Advertising is not cool.  Unless it’s funny or entertaining or interesting, which very few advertisers are successful in achieving.  Enter Facebook, the social network built on the idea of being “cool.”  Sean Parker made a speech about it in “The Social Network,” Did you not see the movie Mark? You agreed with Sean then, but now?  Until Facebook figures out how to balance the “cool” that is Facebook with the “not cool,” of advertising, well, this investor is staying on the sidelines.

Here at PowerReviews, where I spend the rest of my non-stock speculating time, we believe that the closer shoppers can get to perfect information, in the fastest amount of time possible, the more “correct,” decisions they will make.  By combining customer reviews and social answers capability with social sharing and loyalty applications, we give our customers’ customers access to a wealth of information that can take them from imperfect to nearly perfect information quickly.

And PowerReviews customers achieve this without breaking the no-advertising rule.  Reviews, answers, comments, pictures and video are just parts of the authentic conversations that are happening amongst your customers. They are not some Madison Avenue jingle and “Special Offer,” available for a limited time.  It’s real and it’s happening now.  See for yourself how Skechers, Teleflora and thousands of other retailers have turned this social content into real ROI for their companies.

The New Conundrum

As for Facebook, as we enter a more even playing field, where new information is fairly equitably distributed and everyone knows pretty much the same information, the more interesting question than “What will Facebook do next,” might just be, “Now that you know your customers are willing to share their thoughts on your products, giving potential customers more perfect information, what will you do next?

 

Author:

Dave currently leads product marketing at PowerReviews. Dave provides software start-ups with easy-to-understand, compelling and customer-proven messaging, marketing programs and sales tools that have been turning B2B software browsers into buyers for over a dozen years. Prior to this role, Dave held product marketing, demand generation and market research positions at KACE (acquired by Dell), ServiceMax, Amdocs and The Yankee Group.

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