Nobody likes Facebook
Facebook is one of the largest companies in the world; it has over 2.7 billion monthly active users, has created one of the most profitable business models ever seen (80+ gross margins, 50%+ operating income margins, no debt), owns four of the largest social media properties on the planet[1] and has a 4.4 employee satisfaction rating on Glassdoor. However, almost every article you read about the company is negative. From antitrust allegations, to privacy concerns, accusations of proliferating hate-speech, to aiding election tampering, Facebook has developed a general distrust from the world. The recent WhatsApp privacy issue got us thinking about how it seems the walls are closing in around the company and how it might transform itself.
In full disclosure, our clients and we do own small-medium size positions in Facebook. This article is not meant to push the bull case or to defend the company from criticism (some of which is warranted and some of which we find is quite unfounded), but to think about how the company might survive its current onslaught and thrive afterwards. Again, none of this is meant to be investing advice, just an open discussion on the potential future of the company.
To understand the scope of Facebook’s current problem, it’s important to take a quick look at its history. Starting as a web app to rate women’s looks at Harvard University in the early 2000s, Facebook quickly grew to become the premier social media property in the world, eclipsing and eventually eliminating competition such as MySpace. After its 2012 acquisition of Instagram, which at the time was a photo sharing app, Facebook transformed itself from a one-asset platform (what the media calls “big blue”) to what it is today - a multi-property conglomerate. It was a coup of an acquisition considering the current popularity of Instagram. However the purchase has come to bite them in the behind as the FTC has sued the company for illegal monopolization, 9 years after giving them go-ahead for the acquisition. As Facebook began to monetize through advertising, it started to collect and harvest more and more user data. This caused uneasiness amongst users which culminated in the Cambridge Analytics study which resulted in over $5 billion in fines. Further, the 2016 election surfaced issues relating to election manipulation and corners of the platform where racist and vile speech could prosper. This was especially severe in the 2018 violence against Rohingya Muslims in Myanmar where the company admitted the platform was used to incite the violence and the live streaming of the 2019 New Zealand mosque shootings. WhatsApp, which was acquired by Facebook in 2014, has also been accused of aiding the proliferation of ‘fake news’ due to forwards, and was found to be a terrible source of information during the ongoing pandemic. Instagram itself has been criticized for its dopamine-fueled business model that rewards users with likes and attention, creating an addiction of sorts (as highlighted by the recent documentary “The Social Dilemma”[2]).
So taking a 10,000-foot view here, we see a loss of trust from the general public, regulators banging at the door, a potential issue related to the type of media consumed on the platforms and what that does to people physiologically and politically. While we haven’t seen it in the numbers yet, these difficulties may cause people to leave the platform. A strong example of this was the recent change in WhatsApp’s privacy settings that sent many users flocking to Telegram and Signal. Even though Facebook clarified that the change would not affect personal use much (it was more a change for the business function), it’s quite telling of the company’s reputation that most users decided to believe the worst. Further strong competition from the likes of TikTok and Snapchat are drawing both eyeballs and potentially, advertising dollars away from the platform. The advertising business may also be less optimal as privacy laws such as Europe’s GDPR go global and platform changes like Apple’s iOS 14 limit what Facebook can and cannot track.
So when you’re seeing users potentially walk out the door, the platform losing its potency, and advertising dollars getting hit – what choice does the company have other than to slowly decline? The only viable choice is to transform.
Over the past few years we’ve seen Facebook bring a number of initiatives publicly to the platform. These initiatives (which are discussed below), if successful, will transform the company.
1) Strengthen the ecosystem and fix the platform
For a while now Facebook, in their quarterly reports, has not been highlighting individual user metrics per service, but rather has been choosing to focus on “Daily Active People” which is a measure used to track daily active users across all its platforms (Big Blue, Messenger, Instagram, and WhatsApp). This initially hinted at a future combination of the platforms, which was further reinforced by the company’s press releases and this recent change to the WhatsApp terms of agreement. As one of our friends who works at Facebook told us when we were discussing the uproar.
“Yea the recent change wasnt a big one, WhatsApp has always been very separate and light on data they collect, but the goal for fb is to eventually combine insta direct, fb messenger, and WhatsApp into a single network. But they want that new network to be fully e2ee and super private, we are working on lots of giant infra changes to do that now, since regulation like ePD in europe are probably going to be popping up around the world anyway” (SIC).
It’s clear that interoperability between the platforms is the company’s goal, which makes sense. Each platform on its own has limited capability, but combining them into a single network gives users the choice to use one but get the power of all. It will also allow Facebook a chance to deal with their privacy issues by updating platforms (some of which are and will remain end-to-end encrypted) as highlighted in this presentation by Mark Zuckerberg. With a strengthened ecosystem and better interoperability, it will allow Facebook to launch a number of different revenue streams and services.
2) Shopping
In May 2020, Facebook issued a press release launching its Facebook Shops service. This service will, according to the company, “make it easy for businesses to set up a single online store for customers to access on both Facebook and Instagram” and further, “you’ll be able to message a business through WhatsApp, Messenger or Instagram Direct to ask questions, get support, track deliveries and more. And in the future, you’ll be able to view a business’ shop and make purchases right within a chat in WhatsApp, Messenger or Instagram Direct.” The press release also highlighted the launch of Instagram shop which is a way to discover and buy new products using Instagram. We’ve highlighted in previous blog posts on how we think the future of shopping is via discovery rather than search, which makes the concept of Instagram Shop all the more powerful. As one will notice, this roll out is made far more difficult without the changes in interoperability highlighted in the previous point. If this rollout is successful, we can imagine a world where Facebook (specifically big blue) is only moderately used for ‘social media’ and used more as a place to shop and discover.
3) Payments
This is a large initiative by Facebook that covers changes in WhatsApp, its investment in Reliance Jio, and the launch of Libra.
WhatsApp Payments:
Facebook has for several years been trying to get WhatsApp payments going in both India and Brazil, but has suffered setbacks on many occasions. It started to get traction in 2019 when it launched a pilot with a million users in India. It has now reached around 20 million users, which is still peanuts compared to the 400 million users in the country. However, this video shows that the user interface and flow is quite straightforward, and does reflect Zuckerberg’s desire that sending money on the app be as seamless as sending a photo. While it still seems their efforts in Brazil are for naught, recent articles show that conversations with regulatory authorities are progressing, and there should be a launch sometime in 2021[3].
Investment in Jio:
In April this year, Facebook made a $5.7bn investment in Jio, making Facebook the largest minority shareholder. Jio is owned by Reliance Industries, which in turn operated by India’s richest man, Mukesh Ambani. Mukesh Ambani is known to get things done in a country which is notorious for red tape and bureaucracy, and as one Twitter user said “He (Ambani) doesn’t play in big boys’ league; he is the league.” So, it seems like Facebook is making the right friends in the right places. This is especially true because of Jio’s foray into broadband, mobile services, and online commerce platforms. This partnership is smack in-line with Facebook’s strategy as highlighted by their CRO and MD of India, when they stated “One focus of our collaboration with Jio will be creating new ways for people and businesses to operate more effectively in the growing digital economy. For instance, by bringing together JioMart, Jio’s small business initiative, with the power of WhatsApp, we can enable people to connect with businesses, shop and ultimately purchase products in a seamless mobile experience.[4]” A combination of Jio’s reach with small businesses powered by payments over Whatsapp is potent to say the least.
Libra (now called Diem):
When Facebook first announced Libra, it was met with a bang, but then turned into a whimper as partners started to depart from the collaboration and the whole initiative was met by skepticism from global regulators. However, it seems that the digital currency will launch sometime soon this year. According to the FT “The 27-strong Libra Association said in April that it had planned to launch digital versions of several currencies, plus a “digital composite” of all of its coins. This followed concerns from regulators over its initial plan to create one synthetic coin backed by a basket of currencies. However, the association would now initially just launch a single coin backed one-for-one by the dollar, one of the people said. The other currencies and the composite would be rolled out at a later point, the person added.”[5]
While there are a lot of questions to be answered, one can see why having its own digital currency is a salivating proposition for Facebook. If they manage to pull off stores and shopping, all of which is supported by transactions using their own currency, they will have a self-contained mini-economy. A real world example of this is Roblox, which has created its own economy in the gaming world using its currency Robux and has been hugely successful.
4) Augmented and Virtual Reality
In September last year, Facebook released its reveal for Oculus Quest 2 (you can view the reveal event here). The new system is cheaper than before, comes without the need for cable connectivity, with a slew of new games and better graphics. It’s been met with fantastic reviews, and shows that the company is not joking around about the virtual reality space. We read online that there are 6x the amount of people working on AR/VR at the company than on Instagram (although take this with a pinch of salt as we have not verified it). Facebook is also investing heavily in augmented reality through its messenger chat function, its Portal product (which is quite under the radar in this part of the world), and its smart glasses.
5) Gaming
In addition to gaming using VR, in October, Facebook launched its cloud gaming on its desktop website and on Android, starting with free-to-play games. This is not a unique proposition per se as Google, Amazon, and Microsoft all have their own platforms. However Facebook is allowing users to bypass downloading the game via the app store and allowing them to try and play games right then and there on big blue. As Facebook’s VP of Play stated “Certain aspects of the business model are very easy to understand. We have a massive game advertising business. One of the hardest things for an advertisement or an advertiser to do is get you to leave Facebook, because you came there to see what your friends are doing, catch up on some news or whatever else, not to jump into an app store and download. So our ability to deliver game content right then and there without leaving the Facebook environment is really powerful.[6]” This is another attempt for Facebook to strengthen their ecosystem and get around Apple’s stranglehold over their gaming advertising business.
As it's clear from the above initiatives, Facebook is in an early stage of its transformation. If they pull it off, then it will be as Zuckerberg predicts when he said “If we get this right then using all these services are going to be a fundamentally different experience years from now.” One can imagine a future where the “social aspect” of the Facebook properties is just the base layer and the real interaction happens in the communication, shopping, payments, and gaming functions. However, execution risk is certainly not zero and there’s a fair bit of “one, two, skip a few, one hundred!” baked into these assumptions as regulation, monetization, and more importantly adoption are all question marks. With this in mind investors must have significant patience and faith in Zuckerberg, who despite not having the best reputation, has been nothing if not resilient in the face of an onslaught that would have crippled most CEOs by now. If he is successful then the Facebook of the future will look nothing like the platform of today, just like today’s platform looks nothing like it did in 2010. But his success in these initiatives is crucial, and the company must transform, because for now, nobody likes Facebook.
Thanks for reading and happy investing!
[1] https://www.statista.com/statistics/272014/global-social-networks-ranked-by-number-of-users/
[2] Full disclosure – haven’t actually watched it yet.
[3] https://www.bnamericas.com/en/features/the-status-of-whatsapp-pay-in-brazil
[4] https://about.fb.com/news/2020/04/facebook-invests-in-jio/
[5] https://www.ft.com/content/cfe4ca11-139a-4d4e-8a65-b3be3a0166be
[6] Concept/Quote taken from Ben Thompson’s Statechery Blog.
Credit: We tend to get inspired by concepts presented by others when we write these blogs. So for this one, due credit goes to Twitter handles; @borrowed_ideas, @iramneek, @LiviamCapital and Ben Thompson (Stratechery blog).