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🤬 Facebook - the stroppy teenager?

Back from the summer break to a slew of company results. This week and next focuses on Facebook, whic
🤬 Facebook - the stroppy teenager?
By Connected Paths (Riaz Kanani) • Issue #74 • View online
Back from the summer break to a slew of company results. This week and next focuses on Facebook, which given their slump in share price clearly gave the industry pause for thought.
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The results.
The headlines were that they missed their numbers (grew a mere 42% year-on-year) and grew daily active users by 11% to 1.47bn people.
But - they missed analyst predictions and overall user growth was their lowest ever at 1.44%. In key markets, it lost 1m active users in the EU possibly in part to new privacy regulations whilst staying flat in USA.
That slow growth and the news that they intend to outspend revenue growth in the upcoming years by increasing costs by 50%-60%, mostly due to combating fake news and political concerns that have plagued Facebook this past year.
That clearly has an impact on the expected financials going forward and the stock has reacted accordingly.
Adulthood or still the teenager?
Plenty of commentary has focused on Facebook shifting towards being a mature business. This does not makes sense.
Sure, growth of the Facebook platform itself in America is flat, suggesting market saturation after 14 years with 97% of adults in the US active at least once a month.
But Facebook is about more than just its platform.
When people leave Facebook the platform, even if they do not return, they usually end up on Instagram or use WhatsApp. Both are significant growth opportunities for Facebook and through its Stories feature on Instagram and its Business Messaging feature on WhatsApp, provide plenty of room for revenue growth – both through expanding advertising opportunities and through driving more revenue per user.
More on advertising and the opportunity for business messaging next week.
Building the moat
There are of course plenty of risks on the horizon but Facebook has plenty in its armoury to defend itself.
Many have referred to the increasing cost of regulation and new privacy laws as threats to Facebook in the future. If mishandled both could indeed be so, but this is more likely to increase the barriers to entry for future competitors than shut Facebook down.
Privacy laws and fake news both dramatically increase the cost of delivering a social network and Facebook are moving quickly to combat both at significant expense.
It does not take a genius to know that increasing your operating costs over several years is going to have a negative impact on share price, but in Facebook’s mind investing today protects their long term future.
The network itself clearly continues to be a significant barrier for new startups. With 90%+ adults using the platform at least once a month across both USA and Europe, the competition needs to grow rapidly to stand a chance, whilst hoping that Facebook does not mimic them, reducing the likelihood of switching as it did successfully with Snapchat.
Facebook learned that once you reach a critical mass of friends on the network, it increases the likelihood of them staying. Facebook’s increasing investment in local community capabilities should only serve to increase this further as well as enticing users who don’t use the platform as often back.
The broader company platforms also provides a backstop for Facebook. Both Instagram and WhatsApp have managed to maintain a separate identity that does not get associated with Facebook negativity present in the market today. This either provides Facebook with an opportunity to reach the same people elsewhere or bring them back to the main Facebook platform over time. Either option is success for Facebook.
However, this could become increasingly difficult to maintain in the future now that all the platforms are led by a single person inside Facebook following an internal reorganisation.
No matter how much a company may understand strategically how important it is to keep them separate – apps reflect the culture of the teams building them and continuing to maintain culturally separate teams is going to be necessary to having a distinct platform. With the purpose of joining these teams together to take advantage of synergies, this may be impossible to deliver over time.
Facebook then has plenty of barriers for competitors to compete successfully. Blockchain and even virtual reality may yet prove a challenge further down the line still, though Facebook themselves are experimenting with both so I wouldn’t be surprised to see Facebook move quickly should any threat appear.
Today, it clearly understands the threat in front of it and is willing to invest to defend this over the long term - clearly it needs to shift the negative perception in the market today.
Facebook is nearing its 15th birthday and seeing maturity in some of its key markets but its capabilities are far from complete and with those comes plenty of opportunity for growth.
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Connected Paths (Riaz Kanani)

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