by William DiPaolo
The other day I read that Dunkin Donuts, in order to increase sales, is market testing its own version of the breakfast sandwich – a heart-stopping combination of bacon and egg, sandwiched in a glazed doughnut.
Is this what today’s restaurants call “food” these days? From what I can tell, the Doughnut Sandwhich may actually be a hit. And that got me thinking.
Has corporate marketing succeeded to such an extent that consumers are being harmed for financial gain? Or, as consumers, do we so lack leadership that we readily accept anything that tastes/feels good – regardless of long term effects? If so, as a country of consumers, could this mean America has lost its way?
Can’t really say. Being that I’m a vegan I can’t honestly comment on doughnut sandwhiches. But as a software manufacturer I can admit that my industry has its own version of the doughnut sandwhich – revealed in Facebook’s 2012 purchase of Instagram for one billion dollars.
Facebook was founded in 2004, and currently sports a market cap of 70 billion. Financial markets have convinced consumers that a company that gives its product away for free has increased its value by nearly 8 billion each year since its founding. Yet, all revenue comes from advertising – meaning that Facebook is simply a replica of the decades old radio network advertising model. It succeeds only to the extent that it can convince Dunkin Doughnuts to market its new sandwhich on Facebook, rather than somewhere else. Facebook doesn’t create value – it is simply a nine year old marketing alternative with a net worth of 70 billion. Facebook is brand new slice of an already sliced-up pie.
So what happens when the next big thing is created – and also given away for free? Think of television’s impact on radio advertising. Since users don’t pay to use Facebook – none have a problem switching to the next big thing provided someone can create it. And right now there are many well-funded, ivy-league grads working to do just that. Eventually, they will succeed – and Facebook knows it. So how does the current thing protect itself against the next new thing? If Facebook grabbed a 70 billion dollar slice of the marketing pie in just nine years, how can it prevent its competitors from doing the same thing in even less time? By using its currently fluffy market cap to aquire potential threats, most recently Instagram.
Instagram was a simple software concept conceived by two kids and rolled out in 30 days. It’s software allowed users to send photos to each other for the Facebook-like price of $0.00 per user. Eighteen months later a terrified Facebook acquired it for a billion dollars in cash and stock. Afterall, how else can one compete with a company that also sells its software for $0.00?
And yet, what do we see in this business case?
We see a nine year old company worth 70 billion in the public market, which sells its product for $0.00, spending $1 billion to buy an 18 month old company started by two kids in 30 days, that also gives its software away for free.
Doughnut sandwhich, anyone?