State of the Art: Parrying the Latest Predictions of Facebook’s Demise

“There are now a number of revenue streams that are being driven by venture dollars,” Bill Gurley, a prominent venture capitalist who has been warning of a tech bubble, said recently in an onstage interview at South by Southwest in Austin, Tex. “Facebook and a little bit of Twitter’s revenues are now coming heavily from mobile downloads. These are ads for, like, Game of War with Kate Upton. Those ads are now an increasing percentage of their revenue, and they’re being spent by these excessive venture dollars.”

The notion that Facebook and other social networks will suffer most deeply when the bubble bursts sounds plausible because it rehashes the last tech boom and bust, when advertising revenue run-ups at huge web portals (remember those?) turned out to be funded mainly by venture capital investments. In 2001, revenue at Yahoo — the largest portal, and something like the Facebook of its time — plummeted by almost $400 million when start-ups stopped spending during the bust. Yahoo has never recovered its former glory. Could Facebook face the same fate?

Probably not — or not yet, at least. On closer inspection, the theory that Facebook’s growth depends on unsustainable venture capital is mostly overblown, another strain of Facebook Second Guessing Syndrome. It’s a story that misses important facts about Facebook’s advertising business. For one thing, as Facebook’s executives have repeatedly pointed out, ads from app companies make up a small percentage of the company’s overall business. Most of the social network’s revenue comes from video ads and ads for large brands.

The theory also misses two other points. Not all these ads are coming from unproved start-ups. And the ads are set to be adopted more widely because they actually work.

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The venture capitalist Bill Gurley, left, with Malcolm Gladwell this month during South by Southwest. Credit Robert a Tobiansky/Getty Images for SXSW

According to several app makers and observers of the industry, the ads are tremendously effective at leading paying customers to new apps. It’s the effort to reach these paying customers — and not venture funding — that is often the reason for all the money pouring into ads for apps.

App-pushing ads are known in the industry as app-install ads. They appear in your Facebook News Feed or Twitter stream and encourage you to download apps from companies that make mobile games and e-commerce and travel services; they also come from big brands like Target and Chase. When you tap the ad, you are sent to Apple or Google’s app store. Facebook and Twitter are paid for each click according to prices set by an online bidding process.

According to Cathy Boyle, an analyst at eMarketer, a research firm that studies the online advertising business, the market for app-install ads is growing rapidly. Ms. Boyle estimates that in the United States, app companies spent $1.67 billion on install ads in 2014. She expects that number to grow 80 percent this year, to about $3 billion. The market for app-install ads is growing faster than just about any other digital advertising category, Ms. Boyle said, but it is still relatively small. In 2015, these ads will account for about 10 percent of the American mobile ad market, according to eMarketer.

Facebook and Twitter would not specify the proportion of their revenue from app ads, but both have described it as far from the majority of their business. “We talk about our mobile ad business growing — mobile app ads are a small part of that, growing in line with our total business,” said Sheryl Sandberg, Facebook’s chief operating officer, in a call with investors in October.

One reason spending on these ads is growing is that the ads solve a problem faced both by businesses that make apps and by users who want apps: App stores are becoming ever more crowded, and it is increasingly difficult for new apps to find an audience. In this way, apps for ads on social networks perform the same function as the highly successful ads for websites that Google runs alongside its search results — they show people something that they might click on and pay for, based on a combination of users’ interests and a business’s willingness to pay.

App ads are also like search ads in that they are highly measurable. Marketers can target specific types of customers whom they want to present with an ad for a certain app, and they can also track exactly how much money they make from customers they get through an app ad. By contrast, the advertising boom that doomed the portal industry was not built on measurable ads. Those were mostly web banner ads, whose effectiveness has always been something of a leap of faith.

Acquiring new customers through app ads is “100 percent based on data,” said Bernard Kim, senior vice president for social and mobile publishing at the video game developer Electronic Arts. “We have the ability to track the players that we get through these networks very carefully, and we know what the profitability looks like on a player, so these ads are a very effective tool for us to bring in the players that we want to engage with our titles.”

Skeptics remain. One tech investor who has been critical of these ads pointed out that start-ups are often very bad at calculating the long-term value of new customers. This miscalculation often causes them to overspend on marketing. Several recent venture-funded flops, including Groupon and Fab.com, were tripped up by huge marketing spending that did not lead to lucrative long-term customers.

If today’s money-burning, venture-funded app companies — Uber, Lyft, Airbnb and many more — are also overestimating the value of new customers, could they wake up one day to find they’re spending too much on app ads?

Facebook does not think so. In an interview, Andrew Bosworth, the company’s vice president for advertising, argued that start-ups today were more disciplined than in the recent past, with many analyzing not just how much they’re spending to get new users but also whether those people are actually buying stuff. “That’s been the big shift. The big V.C.-backed Fab.coms of the world spent on acquisition but couldn’t actually convert,” he said. But when today’s start-ups look at these ads, “They’re asking, ‘Can you put a dollar in and get two dollars out?’ If you can, you spend, and if you can’t, you don’t.”

Sure, Mr. Bosworth’s argument is a variation of “this time is different,” which is the stock defense during every boom. But he added that Facebook wasn’t counting on app ads for its long-term survival. “I think this will be a stable ongoing market,” he said. “I think it will plateau at some point in terms of share, as smartphone growth plateaus. I don’t think it will shrink dramatically, but I just think there will come a point where it plateaus.”

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Grading the Digital School: At Waldorf School in Silicon Valley, Technology Can Wait

“I fundamentally reject the notion you need technology aids in grammar school,” said Alan Eagle, 50, whose daughter, Andie, is one of the 196 children at the Waldorf elementary school; his son William, 13, is at the nearby middle school. “The idea that an app on an iPad can better teach my kids to read or do arithmetic, that’s ridiculous.”

Mr. Eagle knows a bit about technology. He holds a computer science degree from Dartmouth and works in executive communications at Google, where he has written speeches for the chairman, Eric E. Schmidt. He uses an iPad and a smartphone. But he says his daughter, a fifth grader, “doesn’t know how to use Google,” and his son is just learning. (Starting in eighth grade, the school endorses the limited use of gadgets.)

Three-quarters of the students here have parents with a strong high-tech connection. Mr. Eagle, like other parents, sees no contradiction. Technology, he says, has its time and place: “If I worked at Miramax and made good, artsy, rated R movies, I wouldn’t want my kids to see them until they were 17.”

While other schools in the region brag about their wired classrooms, the Waldorf school embraces a simple, retro look — blackboards with colorful chalk, bookshelves with encyclopedias, wooden desks filled with workbooks and No. 2 pencils.

On a recent Tuesday, Andie Eagle and her fifth-grade classmates refreshed their knitting skills, crisscrossing wooden needles around balls of yarn, making fabric swatches. It’s an activity the school says helps develop problem-solving, patterning, math skills and coordination. The long-term goal: make socks.

Down the hall, a teacher drilled third-graders on multiplication by asking them to pretend to turn their bodies into lightning bolts. She asked them a math problem — four times five — and, in unison, they shouted “20” and zapped their fingers at the number on the blackboard. A roomful of human calculators.

In second grade, students standing in a circle learned language skills by repeating verses after the teacher, while simultaneously playing catch with bean bags. It’s an exercise aimed at synchronizing body and brain. Here, as in other classes, the day can start with a recitation or verse about God that reflects a nondenominational emphasis on the divine.

Andie’s teacher, Cathy Waheed, who is a former computer engineer, tries to make learning both irresistible and highly tactile. Last year she taught fractions by having the children cut up food — apples, quesadillas, cake — into quarters, halves and sixteenths.

“For three weeks, we ate our way through fractions,” she said. “When I made enough fractional pieces of cake to feed everyone, do you think I had their attention?”

Some education experts say that the push to equip classrooms with computers is unwarranted because studies do not clearly show that this leads to better test scores or other measurable gains.

Is learning through cake fractions and knitting any better? The Waldorf advocates make it tough to compare, partly because as private schools they administer no standardized tests in elementary grades. And they would be the first to admit that their early-grade students may not score well on such tests because, they say, they don’t drill them on a standardized math and reading curriculum.

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Cathy Waheed helps Shira Zeev, a fifth grader. Waldorf parents are happy to delay their children’s engagement with technology. Credit Jim Wilson/The New York Times

When asked for evidence of the schools’ effectiveness, the Association of Waldorf Schools of North America points to research by an affiliated group showing that 94 percent of students graduating from Waldorf high schools in the United States between 1994 and 2004 attended college, with many heading to prestigious institutions like Oberlin, Berkeley and Vassar.

Of course, that figure may not be surprising, given that these are students from families that value education highly enough to seek out a selective private school, and usually have the means to pay for it. And it is difficult to separate the effects of the low-tech instructional methods from other factors. For example, parents of students at the Los Altos school say it attracts great teachers who go through extensive training in the Waldorf approach, creating a strong sense of mission that can be lacking in other schools.

Absent clear evidence, the debate comes down to subjectivity, parental choice and a difference of opinion over a single world: engagement. Advocates for equipping schools with technology say computers can hold students’ attention and, in fact, that young people who have been weaned on electronic devices will not tune in without them.

Ann Flynn, director of education technology for the National School Boards Association, which represents school boards nationwide, said computers were essential. “If schools have access to the tools and can afford them, but are not using the tools, they are cheating our children,” Ms. Flynn said.

Paul Thomas, a former teacher and an associate professor of education at Furman University, who has written 12 books about public educational methods, disagreed, saying that “a spare approach to technology in the classroom will always benefit learning.”

“Teaching is a human experience,” he said. “Technology is a distraction when we need literacy, numeracy and critical thinking.”

And Waldorf parents argue that real engagement comes from great teachers with interesting lesson plans.

“Engagement is about human contact, the contact with the teacher, the contact with their peers,” said Pierre Laurent, 50, who works at a high-tech start-up and formerly worked at Intel and Microsoft. He has three children in Waldorf schools, which so impressed the family that his wife, Monica, joined one as a teacher in 2006.

And where advocates for stocking classrooms with technology say children need computer time to compete in the modern world, Waldorf parents counter: what’s the rush, given how easy it is to pick up those skills?

“It’s supereasy. It’s like learning to use toothpaste,” Mr. Eagle said. “At Google and all these places, we make technology as brain-dead easy to use as possible. There’s no reason why kids can’t figure it out when they get older.”

There are also plenty of high-tech parents at a Waldorf school in San Francisco and just north of it at the Greenwood School in Mill Valley, which doesn’t have Waldorf accreditation but is inspired by its principles.

California has some 40 Waldorf schools, giving it a disproportionate share — perhaps because the movement is growing roots here, said Lucy Wurtz, who, along with her husband, Brad, helped found the Waldorf high school in Los Altos in 2007. Mr. Wurtz is chief executive of Power Assure, which helps computer data centers reduce their energy load.

The Waldorf experience does not come cheap: annual tuition at the Silicon Valley schools is $17,750 for kindergarten through eighth grade and $24,400 for high school, though Ms. Wurtz said financial assistance was available. She says the typical Waldorf parent, who has a range of elite private and public schools to choose from, tends to be liberal and highly educated, with strong views about education; they also have a knowledge that when they are ready to teach their children about technology they have ample access and expertise at home.

The students, meanwhile, say they don’t pine for technology, nor have they gone completely cold turkey. Andie Eagle and her fifth-grade classmates say they occasionally watch movies. One girl, whose father works as an Apple engineer, says he sometimes asks her to test games he is debugging. One boy plays with flight-simulator programs on weekends.

The students say they can become frustrated when their parents and relatives get so wrapped up in phones and other devices. Aurad Kamkar, 11, said he recently went to visit cousins and found himself sitting around with five of them playing with their gadgets, not paying attention to him or each other. He started waving his arms at them: “I said: ‘Hello guys, I’m here.’ ”

Finn Heilig, 10, whose father works at Google, says he liked learning with pen and paper — rather than on a computer — because he could monitor his progress over the years.

“You can look back and see how sloppy your handwriting was in first grade. You can’t do that with computers ’cause all the letters are the same,” Finn said. “Besides, if you learn to write on paper, you can still write if water spills on the computer or the power goes out.”

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