Facebook: The King of Communication
An analysis of the social network giant pre-Cambridge Analytica
We are entering an era of unparalleled tech dominance, when companies like Google, Amazon, Facebook, and Apple control ever-larger portions of our lives.
This is the third in a series of in-depth articles on the future of the tech giants—including a breakdown of their business models, biggest threats, future plans, and probable acquisitions. Today’s topic is, of course, Facebook.
Gods of the Valley - A SeriesPart 1: Amazon Eats the World
Part 2: The Future of Google
Part 3: Facebook: The King of Communication
Part 4: Apple's Greatness Is Fading
Court cases and hurt feelings aside, Facebook found what the world was waiting for: an easy way to stay connected with those around you while also increasing your influence and circle of friends.
And with a ridiculous Net Promoter Score and viral network effect, Facebook spread like wildfire (or a disease, depending on who you ask).
Fast-forward to today, and Facebook is synonymous with social media and owns our digital identities. As of June 2017, Facebook hit an unprecedented two billion MAUs (monthly active users). That is nearly ⅓ of the population.
But that is just the basics. To really understand the behemoth and see where it is headed, we need to dive deeper.
Let the games begin.
The Business of Facebook
The implications are starting to affect individuals and governments today (more on this later). But first, the business …
1. Facebook: #1 social media platform
As we said before, Facebook has over two billion monthly active users. Take a second to let that number sink in. Yet despite the massive market penetration, they are still growing 16% year-over-year. How is that possible?
That’s the logical question behind such dominance, and it gets even better (or worse). There are 1.15 billion DAUs (daily active users) on mobile—meaning more than 15% of the world checks Facebook on their phone at least once a day.
This growth and dominance is due in large part to the brilliant leadership of Mark Zuckerberg. Prior to 2012, Facebook’s mobile presence was pathetic. Facebook didn’t even have native iOS or Android apps. As such, growth wasn’t spectacular.
But it was obvious the world was going mobile. This was especially true in developing countries, which skipped the entire PC revolution and jumped straight to mobile. With billions more individuals coming online every year, Zuck made a big bet.
Facebook put its entire desktop business/development on hold to focus first and foremost on mobile. And it worked. Facebook was able to go from ~135 million MAUs (mobile only) in early-mid 2012 to over 1.15 billion in Q4 of 2016.
More importantly, look at Facebook’s revenue growth!
The lion’s share of Facebook’s growth has been mobile advertising, with mobile now accounting for 86% of its revenue.
Today, digital advertising is a duopoly, with Google and Facebook attracting between 57–84% of global digital (outside of China), depending on the source.
Scarier still is the fact that more than 99% of new growth in digital ad spend goes to the duopoly (as of Q3 2016).
2. Instagram: #1 photo sharing site
Facebook acquired Instagram in 2012 for $1B. At the time, this seemed a ridiculous sum for a pre-revenue company with 30 million users (formed only two years prior). In hindsight, it was genius.
It’s worth noting that the Instagram acquisition happened pre-IPO for Facebook, so it wasn’t like there was a mountain of cash waiting to be spent. And even with Facebook’s $104B valuation at IPO (which failed miserably for quite a while), this was still a sizable portion of Facebook’s worth.
But again, the Instagram acquisition was genius. And Zuckerberg did something few CEOs do well; he got out of the way. Rather than monetizing Instagram and pleasing public markets, they waited until 2015, a full three years later. At this point, Instagram’s experience combined with Facebook’s user base built an unstoppable rocketship.
And with 100 million new MAUs every six months, Instagram is exploding in popularity. Copying Snapchat Stories certainly helped (which Zuck was 100% happy to rip, pixel by pixel).
And our favorite part of explosive growth is when it also crushes competition (Zuck actually offered $3B to acquire Snap in 2013).
Note: Snap’s stock has dropped 50% since the ill-timed (controversial and greedy) IPO.
The best part about Instagram is that it attracts a different segment of the market and use case than Facebook’s core product. Instagram better addresses a millennial audience, building an even larger advertising base.
And soon Instagram may surpass Facebook in popularity. The advertising numbers aren’t half bad either, blowing past Merril Lynch’s projections.
It turns out Facebook’s flywheel and ad engine are pretty powerful.
3. WhatsApp: #1 messaging app
Note: I refuse to consider Facebook Messenger a messaging app as it is just Facebook’s messaging feature. Thus, messages from Facebook come through and grossly distort usage numbers.
Either way, Facebook bought WhatsApp in February of 2014 for a whopping $19B. Again, this seemed absurd. WhatsApp doesn’t make money; how could it be worth so much?
But Facebook’s core business has always been built around attention, eyeballs, and waiting to monetize.
And if Instagram is any indication, they know what they’re doing.
Stern Agee, a financial services company, estimates WhatsApp could generate close to $5B in revenue with over 2.3B users by 2023. I would go bigger.
As we saw with Instagram, analysts tend to underestimate the velocity of growth and upside potential of true network effects companies. Facebook’s infrastructure and advertising engine are like steroids for an attention-focused advertising business.
And due to WhatsApp’s more private, intimate nature, it creates growth opportunities that an outward-facing site like Facebook and to some extent Instagram cannot match.
Even as people become more reserved about social media sharing and controlling their data, WhatsApp can still win, rigging the game in Facebook’s favor.
As Facebook/WhatsApp begins to open up WhatsApp’s API, the business opportunities and use cases will explode—more on this later.
4. Oculus: #6 VR headset brand
In 2012, Palmer Luckey and Oculus raised $2,437,429 from 9,522 backers on Kickstarter to make VR a thing. The Oculus Rift, the first virtual reality headset of its kind, broke all sorts of records on Kickstarter, featuring an otherworldly video pitch/demo and promising the future of VR today.
Following this massively successful launch, Facebook swooped in to acquire the company for a pretty $2B two years later.
The ironic thing is that Oculus didn’t ship the first Rift VR goggles for another two years, in March of 2016—40 months after originally promised. And while hardware is hard, it isn’t that hard. Obviously, the Oculus Rift was a bit half-baked at the time of launch.
Controversy aside, this was a smart(ish) acquisition for Facebook. Zuckerberg was rightly terrified of VR. New paradigm shifts often kill incumbents. By being proactive and pragmatic, here and in other instances, Zuckerberg has shown himself to be a student of history and willing to spend whatever is necessary to ensure Facebook’s long-term success.
Interestingly, the VR market has failed to take off as experts predicted, surprise surprise. User adoption of these clunky, expensive rigs has been slow, and the build-up of content and virtual “experiences” has taken time.
An interesting debate has arisen over whether VR or AR (augmented reality) is the future. I for one believe in AR and hope VR doesn’t come to eat society, a la Ready Player One. That said, having recently experienced fully immersive VR, I was pretty blown away and see huge implications for society at large. The fear of heights (and falling) was incredibly real; I tread carefully to avoid plunging to my “death.”
As the technology advances, miniaturizes, and comes down in price, I fully expect VR to explode. That said, currently, Facebook’s $2B investment has only shipped a subpar 950,000 units, with the 2017 worldwide market only reaching 13.65 million (just 0.91% of the global smartphone market).
5. Facebook peer-to-peer payments
As you will see with Facebook, when you have a massive, dedicated user base, you can often branch out into other services and offerings to increase the Lifetime Value (LTV). This is something Facebook constantly experiments with.
While most of Facebook’s efforts have largely failed (like its attempts to compete with eBay and Craigslist via Facebook Marketplace), it’s working hard on mobile payments. And with companies like Venmo processing billions and the worldwide movement of money becoming more and more democratized, it is clear where Facebook wants to be.
That said, with only $180M in mobile payments revenue in Q3 of 2017, Facebook has a long way to go.
6. Facebook Instant Articles
The last primary piece of Facebook’s media empire is its publishing platform. Designed to complement (i.e., compete with) sites like Wordpress, Medium, and all news, media, and publications, Facebook Instant Articles allow publishers to more easily access Facebook’s organic audience.
Unfortunately (for publishers), this places complete control of business in the hands of Facebook. Content is then monetized via advertising (more recently, paywalls have been enabled as well), with revenues split between the two. Unfortunately, I was unable to find exact revenue share percentages.
From research, it appears that Instant Articles isn’t doing all that great, as it is clearly a barely veiled attempt by Facebook to own the internet, content, and media.
And as businesses have seen in the past, Facebook can change the algorithm (or rules) without a moment’s notice.
Facebook’s Growth Opportunities
Messenger and WhatAapp monetization/growth
When it comes to technology and societal trends, Asia is almost always miles ahead. This is especially true with mobile and messaging apps.
WeChat, China’s equivalent of WhatsApp, is the most ridiculous, life-encompassing application in existence today. Users do everything through WeChat, from paying for goods, P2P payments, and sending Bitcoin, to booking an Uber (actually Didi), ordering food or wine, or reading the latest news.
And of course, with such a high degree of use and importance (and control) in consumers’ lives, WeChat is an incredibly valuable, profitable product/platform. Look for both Messenger and WhatsApp to try and follow suit.
WeChat is owned by Chinese internet giant Tencent, a massive conglomeration with a market cap of $543B (more than Facebook). And while WeChat’s revenue and profit numbers are not public, as of August 2015 it was valued at ~$83B, ½ of Tencent’s total market cap. This implies WeChat, a messaging app, may be worth over $271B today.
This makes WhatsApp’s measly $19B acquisition seem tiny by comparison. This is where both Facebook Messenger and WhatsApp could go. The question is, which route will they take?
There are two options here, and I’d argue they are mutually exclusive.
1. The first and most obvious strategy, given Facebook’s business model, would be monetizing via ads. This would be a big mistake.
Advertising is the shittiest business model. Everyone hates advertising and the LTV (lifetime value of a customer) is among the lowest of any business — there is little upside. That said, it is also easy and could be bundled quickly with Facebook’s existing ad engine.
2. Build out the platform; focus on being WeChat. We have already established the massive value WeChat has built in the Chinese market. But outside of China, WeChat is a nobody.
That means WhatsApp could become the de facto mobile app/experience, owning every mobile interaction, but that is a much longer shot.
Here the big challenge is cultural norms.
Western consumers, unlike their Asian counterparts, are not used to living life via a messaging app. While the opportunity is huge, changing user perception of WhatsApp into anything other than messaging will take significant time (and marketing).
Additionally, while China is an almost completely cashless society, and mobile payments are the norm, the West isn’t there yet. For WhatsApp or Messenger to own this space, significant infrastructure changes would need to occur.
But damn it anyways, that is how you own the world—by making big bets.
By diversifying out of an ads-only business model, Facebook would significantly reduce its risk and position itself to own (possibly) the next paradigm of UI.
Regardless of Facebook’s direction with WhatsApp and Messenger, Zuckerberg should focus on mobile payments as the next big frontier.
And it appears he is. Rumors are circulating that Facebook may be looking to (or starting to) implement Litecoin for P2P payments. This would be a landmark moment not just for Facebook but for cryptocurrency, bringing decentralized, non-governmental payments to the masses.
If this is the case, Facebook could set itself up as the dominant P2P payment system. Here is why.
The banking and financial services infrastructure is old, outdated, and expensive. Even newer, leaner companies like Paypal charge $0.30 + 2.9% on every transaction they process. And Venmo is starting to charge as well.
And while these may seem tiny, especially compared to traditional banking, cryptocurrencies unlock a new dimension of money, which approaches 0% fees with no middlemen or hoops to jump through.
As we have seen, the peer-to-peer payments market is exploding, forecasted to reach $86B in 2018 in the US alone. And with global mobile payments expected to exceed $930B, this opportunity dwarfs the digital advertising space.
To date, however, Facebook has failed to capitalize on its user base. With just $180M in mobile payments revenue in Q4 of 2017, Facebook’s P2P payments team needs an overhaul. Here, I’d recommend bringing in a proven outsider or even acquiring a team (more on this in our acquisitions section).
Competing with YouTube
While Google hides YouTube’s actual revenue numbers, Credit Suisse believes that in 2015, Youtube and Google Play accounted for ~15% of Google’s revenue (up from 4% in 2010), forecasted to reach 24% by 2020.
For Google, a company that made $75.54B in 2015, that would equate to ~$11.8B. And as video grows, expect to see this continue climbing.
This must be a massive temptation for Facebook, a company with 100 million hours of video views per day as of Jan. 2016.
To compete, Facebook’s biggest challenge is its user behavior. People don’t go to Facebook to watch videos; they go to check their Feed. For videos, people go straight to YouTube.
Plus according to YouTube’s product chief, 70% of viewing time comes from their AI recommendation engine. Essentially, that means people go to YouTube for one thing, but spend a large majority on other related or interesting content.
To combat YouTube, Facebook needs:
- a standalone platform (obviously linked on Facebook)
- to make video more social.
The first is easy enough, although incredibly surprising they haven’t tried this. So let’s look at the latter option.
Rather than creating a YouTube clone, Facebook should sneakily build a friends-and-family video site. Imagine being able to filter results based on creator: family, friends, friends of friends, or other. Grandparents would kill for the ability to see every video of their grandkids.
And parents are interested in their kids’ hobbies and interests too, and the lives of their friends.
Because of Facebook’s social graph, Facebook Video could create a more personal video platform with better searchability/discoverability than Facebook’s existing treadmill feed.
As Facebook Video grows, it would only make sense to start stealing YouTube’s market of outward-facing creators, which, given enough traction, would work; creators want the maximum audience possible.
And unlike YouTube’s anonymity, which provides certain advantages and disadvantages, Facebook Video’s personal touch would theoretically cut down on much of the negativity, hate, and trolling so prevalent on YouTube; friends and family actually see the shit you post.
The future of VR
While Facebook’s acquisition of Oculus was exciting and all, it isn’t game-changing. In a gold rush, it is always better to sell shovels.
So let’s say VR becomes the next big thing. Facebook is toast. They don’t have experience manufacturing, marketing, or delivering consumer hardware. Heck, the Oculus Rift was almost four years late.
A billion times better play would be to build the operating system of VR. Facebook has the talent and money to dedicate itself to paradigm shifts. And while I’d love to see the evil empire fail, if they are smart, they are investing big in the software powering virtual reality.
Facebook is perfectly suited to be the platform that powers VR start-ups. And building on that last concept of a Video platform, Facebook could do the same for VR.
While it isn’t guaranteed, most forms of content have large aggregators/discovery platforms: Medium for blogs, YouTube for videos, Pinterest for random things you don’t need. Odds are VR experiences will be no different.
Rather than tying themselves to Oculus’ hardware division or creating a closed garden (which Facebook usually does), Oculus and/or FacebookVR should seek to become the YouTube/Amazon/Google Search of virtual reality.
If VR turns out as many experts are expecting, whoever owns the infrastructure will inherit the world.
Wild card—Facebook cryptocurrency
I am a big believer in crypto and foresee blockchain’s inherent incentive structures and flywheel effects as one of the few big threats to Facebook’s dominance.
Because of this and the power of cryptocurrencies to create massive network effects and network value, I could foresee Facebook working to employ their own cryptocurrency, especially with the global crypto market cap exceeding $600B.
While completely counterintuitive, a FBcoin could potentially fix many of Facebook’s largest problems: fake news, hate, political backlash, and misaligned shareholder/user goals.
The biggest problem with Facebook (and Google) is that they are advertising-based businesses. Because Facebook makes its money on impressions and attention, driving advertising dollars becomes more and more user-hostile over time.
From a purely economic standpoint, today’s advertising model means Zuck wants users on Facebook as close to 24 hours a day as possible. Obviously, this is not sustainable, and studies show social media usage (especially Facebook) has an overall negative impact on happiness. In the long term this is not sustainable for Facebook; the more you use Facebook, the worse you feel.
Russian election hacking and hate-based targeting aside, Facebook could have serious problems on its hands if more and more users churn, which appears to be the case. Why else would Facebook actively try to reduce user addiction?
FBcoin could fix this by having users pay for tokens to replace advertising and use them to access Facebook’s functionality as its primary business model. Users who create great content, moderate spam/hate, or add new users to the network are rewarded, and businesses use tokens to access additional functionality like increasing visibility, getting feedback on a product, or even influencer marketing efforts.
Because Facebook’s business would no longer be based on eyeballs and engagement, Facebook could instead optimize for user happiness, focusing on building better communities and individuals rather than tearing them down.
Note: This is probably wishful thinking but, in my opinion, worth exploring for a giant like Facebook, especially if Zuck actually cares about humanity as he often claims.
Other Factors to Consider
Over the past ten years, Zuckerberg and Sheryl Sandberg have proven again and again to be one of the most dynamic duos in tech history (other than Bezos and Bezos).
From aggressive and thus far incredibly successful acquisitions (Instagram, WhatsApp, etc …) to a complete overhaul—Facebook’s revenue increased from $272 per year to over $10B per quarter—Facebook is kicking ass and set up to succeed.
And it never hurts when your CEO is willing to ruthlessly copy or kill any competitor. By taking threat after threat seriously, remaining paranoid, and planning for future disruptions, Facebook’s doing a damn good job setting itself up for smooth sailing.
Facebook has (had) one of the strongest network effects of all time. There is no value in a social network without your friends and family. And every user added to the system makes the system that much more robust and valuable for every single user (to an extent).
The problem with leaving Facebook (or Instagram or WhatsApp) is losing your “connection” to the outside world.
Leaving literally means missing out on the lives of your loved ones (at least to some extent). That keeps people hooked even when they might leave. And that makes disrupting Facebook (or Instagram) damn near impossible—which is great for them.
Facebook’s Biggest Threats
Net negative user happiness → churn
Non-diversified business model
Facebook’s revenue is more than 98% advertising. Having all your eggs in one basket is always a terrifying proposition. And, as described previously, advertising has several inherent weaknesses, making it misaligned with user interests.
This could create big problems for Facebook going forward if either public sentiment towards Facebook/advertising changes or politicians place greater restrictions (or bans) on digital advertising.
And of these, public sentiment is arguably not that important. Politicians have power; the public is helpless. So unless users start voting with their feet and leaving Facebook and its other services, Facebook shouldn’t be that worried.
Other ways to reduce the risk are, of course, acquisitions, which we will talk about next.
GDPR—Data protection laws
Unlike in the US, in the EU, individuals and policymakers care about consumer safety (especially when it comes to data). The General Data Protection Regulation (GDPR) going into effect May 25, 2018, will change the way businesses (especially those like Facebook and Google) deal with consumer information.
Designed to protect consumers from issues like the Equifax hack and incredibly personal Facebook ads, GDPR is meant to give European citizens control over their own data. And because in our increasingly connected world, nearly every site and business interacts with at least a few Europeans (regardless of where they live), GDPR will affect every major corporation.
I know what you’re thinking; it’s just another silly regulation, right? Well, unfortunately for companies like Facebook and Google, GDPR’s bite is worse than its bark.
GDPR fines can go up to 20 million euros or 4% of annual global turnover, whichever is higher. For a company like Facebook with a 2016 run rate of $27.6B, that would be over $1.1B in fines (and increasing every year). That isn’t something to scoff at.
And while unlikely to be enacted in other regions, imagine if the US, Europe, India, and China all decided to levy 4% fines—suddenly it adds up pretty fast. Plus dealing with the EU is always a crap shoot. You never know when European regulators will change their stance, increase fines, or even make regulations more restrictive.
Regulators, part 2
“Personally I think the idea that fake news on Facebook, which is a very small amount of the content, influenced the election in any way—I think is a pretty crazy idea. Voters make decisions based on their lived experience.”—Mark Zuckerberg
Need I say more? Governments around the world realized Facebook’s power and control over their respective populations exceeds even their own. When you threaten the people in power, bad things generally happen to you. The question is, can governments even stop Facebook?
In summary, governments are pretty powerless to act. To attack/cripple Facebook, they would need to ban and/or destroy it, ripping apart the lives (and businesses) of billions. 250 billion photos forgotten, countless companies snuffed out of existence, advertisers angry as hell, consumers pissed and rebelling.
Politicians are powerful as long as they stay in power. How long would that last after banning Facebook, Instagram, and WhatsApp?
That said, you never know. And there will be fallout here. The only question is how much, where, and when?
Many consumers are questioning the power and security of companies with their personal (often financial) data and wondering why they don’t participate in the upside.
This is partially why cryptocurrencies are so interesting.
Imagine if, as an early adopter of Facebook, you’d gotten even a small piece of the upside. Today Facebook is worth $522B; I wonder what your share would be worth …
News and social sites built on blockchain technology are gaining adoption for this very reason. By incentivizing users to create content and onboard friends, sites like Steemit and DTube (part of Steemit) (similar to Medium and Youtube respectively), create decentralized applications (dApps) where users are the drivers and receivers of economic rewards.
There is no advertising; there is no data collection. Instead, every user owns and participates in the network.
The implications of crypto-economics could very well create disruptive competitors to many of today’s biggest corporations. While displacing an incumbent (particularly one with network effects) is incredibly challenging, a token/crypto economy can hack the system, creating inherent economic and societal drivers and network effects. It will be very interesting to see how this pans out, especially for Facebook.
According to Bloomberg, of the tech giants, Facebook has one of the smallest percentages (23.2%) of cash hidden or held overseas. Sitting on $32.3B, Facebook has a bit of a war chest.
I’d argue for spending a large portion to build the future of the business.
Hey, Zuck, here is who to buy and why.
Note: Given Facebook’s massive user base and ease of rollout, they have a lot of quality options. Also note that these are in no particular order.
Facebook has played around with e-commerce and local marketplaces since October of 2015. To date, they have achieved nothing of import.
At this point, Facebook needs to either get serious or give up. Both are acceptable, though I’d argue getting serious and acquiring a player in the space could supercharge their efforts and provide healthy diversification for their business.
And with the global e-commerce market forecasted to exceed $4.47T by 2021, this could represent a new, lucrative non-advertising-based vertical for Facebook to sink its claws in.
There are a few options here, with the most important criteria being to avoid direct competition with Amazon at all costs.
Two particularly interesting businesses for Facebook to acquire are Shopify and Etsy.
1. Shopify is the anti-Amazon, the standalone platform that e-commerce businesses are built on. And while the $11.4B would be a big bet for Facebook, Shopify is the #2 e-commerce solution worldwide, powering over 500,000 merchants and around the globe. With 100,000 merchants in 2014, Shopify already spanned 150 countries. I can only imagine that number has grown, giving Facebook an e-commerce entry into virtually the entire world.
2. Etsy (market cap $2.38B) is an established, growing handmade craft and design marketplace with 1.9 million active sellers, 31.7 million active buyers, and over 45 million products on the site. In contrast, Amazon is almost 100% manufactured products and thus a very different segment of the market for both buyers and sellers.
Acquiring either could have profound impacts for both Facebook and the acquiree. In addition to making it much easier for Shopify/Etsy sellers to integrate catalogs and buy Facebook and Instagram ads, Facebook could do a lot more.
Given Facebook’s massive user base, building either standalone stores (not the current crappy Facebook stores) directly into the platform or building a robust search-and-discovery-style marketplace, Facebook could help eCommerce companies fight Amazon and actually win—and be handsomely rewarded, either through platform fees (think 5% of sales price, which is 10% less than Amazon’s fees) or appreciation of their assets.
These benefits would be greatly intensified in developing mobile-first countries, where Facebook Lite could act as the onramp to online shopping, empowering both consumers and sellers (only applicable to Shopify currently).
Streaming music service
It is surprising how little Facebook has done with audio. Specifically, a low-cost (or ad monetized) streaming music service could be hugely profitable. How many billions of people have Facebook on their phones?
Unlike video (below), music presents much easier and likely more lucrative acquisition opportunities. Pandora, the most used music streaming service (free version), has a market cap of only $1.13B. That is chump change for Facebook.
The other interesting player here would be SoundCloud, the streaming service that nearly goes bankrupt every few months. As Soundcloud clearly hasn’t figured out monetization, this could be an interesting plug and play with Facebook’s existing user base (if it employs a proper monetization model, i.e., subscription fees or advertising).
SoundCloud has raised $467M to date. They aren’t worth that now (thanks to a failing, always at the brink of bankruptcy business). An acquisition could pay back investors and set Facebook up for success.
I have never understood why Facebook didn’t dedicate more resources to video. Either as a platform or as a standalone streaming service (a la Netflix), Facebook’s user base and ease of video integration would seem like an idiot-proof upsell.
To date, they have failed to make a play. And with the traction of Netflix, valued at $94B and the efforts by Amazon, Apple, and YouTube Red, can Facebook catch up?
Of course not!
And while the market for quality video content is constantly increasing, Facebook would need to build (or buy) a YouTube-like competitor to play in this space.
Unfortunately, there is no one to buy except DailyMotion. And DailyMotion’s audience of mainly millennial young men wouldn’t jive with the Facebook Video vision outlined above.
The most realistic scenario (described above) would be Facebook building their own “social” video platform and paying smaller film studios and YouTubers to join the platform. By bringing content from several genres (and hopefully stealing YouTuber followings), Facebook could further seed Facebook Video with both long- and short-form video entertainment.
If Facebook was willing to put a sufficient budget to produce free content, they could effectively attack both Netflix and Youtube in a single swoop—later monetizing via ads or subscriptions, depending on the quality and extent of their content.
We discussed the implications of Facebook as a true P2P company previously. And while Facebook has been working on this for quite some time, if it doesn’t go through with the Litecoin/cryptocurrency option, it should consider an acquisition, even if only for expertise in an acqui-hire (for experience integrating into WhatsApp and Facebook Messenger).
For Facebook specifically, given their massive geographic reach, multiple acquisitions should be considered to cover different regions, acquiring both customer bases and teams with local experience.
Plus, by owning multiple entities, Facebook could over time merge/evolve them all into Facebook payments (to be embedded in both Facebook Messenger and WhatsApp), connecting users from all services across the globe.
Note: Facebook should avoid China. They would get clobbered there.
Europe and Asia
TransferWise is the market leader in Europe (with a strong presence in Asia/Singapore as well). With over £500M in transfers per month (as of May 2015), TransferWise is doing serious volume and is a major contender in the space. They just raised $280M at a $1.6B valuation, something Facebook could easily overpay to acquire it to power their own payment system.
Africa and India
Easy choice, M-Pesa. M-Pesa’s parent company Safaricom is the fourth most valuable brand in Africa (thanks to M-Pesa) with a $680M valuation. M-Pesa has a lot going for it. With over 30 million users and six billion transactions in 2016, they have empowered the unbanked to own their economic future.
Given Facebook Lite’s massive success in Africa (often zero-rated by many mobile carriers), Facebook has achieved astonishing growth on the continent, with over 170 million users (70% of the population with internet).
Note: As of December 2016, there were over one million M-Pesa users in India. Expect this number to rapidly grow now that the Reserve Bank of India approved M-Pesa to establish a payments bank.
Finding worthwhile acquisition targets in other regions is challenging at this point due to competition. However, by beginning with the areas outlined above, inherent network effects would form due to travel, overseas trade, and expats. This combined with a rollout in Facebook Messenger and WhatsApp would likely be enough of a catalyst to capture the other markets without the need for acquisition (other than China, of course).
And, as may or may not be obvious at this point, by owning the user and their funds/finances, Facebook would then become the bank of the world, at least for the underbanked.
This creates many other huge business opportunities.
Wild card 1—a P2P lending company
Piggybacking off the previous payments platform, loans seem a logical next step. And as the global P2P lending market is estimated to reach $1T by 2025, this could be a very interesting opportunity for Facebook, the company that kind of owns the world.
While acquiring a P2P payments company could help in the lending department, it isn’t necessary. Facebook could easily add lending to its existing operations. It is probably better to buy (rather than build) due to complexity, market opportunity, and the experience required to succeed.
Like the mobile payments space, there are different players in each region (and different regulations). As such, it would make sense to acquire multiple companies.
Given that P2P lending is more complex (and more challenging to plug in to Facebook’s existing infrastructure) than P2P payments, acquiring a single lending platform initially makes the most sense. After rolling this out and testing it via Facebook’s platform for scalability, they could proceed to either expand or acquire new players in each region.
Unfortunately, I’m not an expert in the P2P lending space, so way more due diligence and research would be needed to find a good value/culture/brand fit.
Wild card 2—Airbnb
Holy shit. You heard it hear first.
Airbnb’s a 100-times better business than Uber. If I was Facebook, I would find a way to buy it.
Essentially, it boils down to Airbnb being a nearly unassailable business with global network effects, which lead to a downright monopoly on travel accommodations (and soon much more).
The reason this is such an interesting acquisition opportunity is the synergistic benefits.
Note: Unfortunately all stats have different dates (bear with me). Dates will be added in parentheses (month/year).
Airbnb is exploding as a platform. With 150 million users (3/17), 640,000 hosts (11/14) and over four million listings (10/17) and more than 500,000 bookings per night (5/15), it is clear why Airbnb is killing it.
But compared with Facebook’s two billion MAUs, it suddenly seems tiny, especially considering most Airbnb users aren’t active every month.
What would happen if Facebook suddenly onboarded Airbnb into the Facebook family? How many would list their properties (or spare rooms)? How many would skip the hotel for the authentic Airbnb experience?
Your answer is as good as mine.
But with Facebook’s treasure trove of user data (including Instagram interests and recently viewed images), connecting the dots and advertising Airbnbs (and even flights via an affiliate model) as users are thinking about travel would undoubtedly convert a good deal.
And parents whose kids are moving out, well, suddenly they have a free room. A poke, a prod, and a few free Facebook ads, and Airbnb’s base of hosts (and users) would keep climbing.
But the biggest benefits would be social proof and group bookings. Inviting friends (or family) to split an Airbnb with a simple group chat on Facebook Messenger (or WhatsApp) would increase travel (especially via Airbnb) and create a viral referral loop that pulled more and more users into Airbnb.
In March of 2017, Airbnb closed a $1B growth round at a $31B valuation. For Facebook to make an attractive offer, it would need some serious debt financing.
I know this is a moonshot, but if even a small percentage of Facebook’s user base started using (or hosting on) Airbnb, this could easily cover the cost of the acquisition.
Facebook has a ton going for it, too much to summarize. But it also has many inherent challenges.
If Amazon’s an A and Google’s a B+, Facebook would get a B- on future outlook.
Sure, we grade hard. But for today’s behemoth tech giants, that is a necessary metric. If an A+ means owning the economy and near-infinite defensibility, we need a way to distinguish between our superstars of today to understand the corporations that create tomorrow.
If Facebook had a more diversified business model, this would be a different story but the truth is, at the moment all Zuck’s eggs are in a single basket.
Ten years from now, which companies will control the world? And how will everything have changed?
These are the big questions facing entrepreneurs and investors today. But with chaos comes opportunity, and the next ten years will redefine the world as we know it (and likely the human species).
Will Facebook still dominate communication? Will social media even be a thing? Will Zuckerberg be president or “benevolent” dictator of the world?
Where is this all going?