Of the five American technology giants that are now spoken about in the same breath ( Google, Apple, Facebook, Amazon and Microsoft), I believe that it is Facebook that has the brightest future. A rigorous defence of this claim would require a proper assessment of the strengths, weaknesses and addressable market opportunities in front of all five companies, and I will do that in subsequent posts. For now, I find it really funny that most people view Facebook as nothing more than a passing fad or a silly pastime, unworthy of being spoken in the same breath as Amazon, Google, Microsoft and Apple. Here’s why I think they are all wrong.
The Product perspective
Facebook and the internet is a match made in heaven.
The advent of the internet has been one of the most cataclysmic events in social, economic and business history. Well, in simple English, the internet has made it (practically) free to distribute anything, to anyone, anywhere on the planet. And - here is the important part - to reach anyone, anywhere on the planet, you must have their address, a reference that identifies them uniquely - that’s where Facebook comes in.
Facebook is Yellow Pages for the internet (for humans and businesses and everything in between). It is a more reliable reference of a person’s real identity than email addresses and it provides richer information than phone numbers. By having the best reference of every human being’s real identity, it naturally becomes the best distribution channel for any internet-based consumer business. Facebook has already surpassed Google as the best distribution channel for media publishers. It can very well become the best bet for mom-and-pop and brick-and-mortar stores trying to stay afloat in the internet age. For practically every business that sells real or virtual products for individual users over the internet, the problem of reaching these users can be best solved by Facebook.
And the best part (more on this later) is that Facebook’s value is derived not from the internet and the online world, but from its knowledge of our relationships in the real world. By inducing us to voluntarily share information about our lives on the internet, Facebook has built a bridge between the internet and the real world, and now, it has enough information to be valuable even without the internet.
“Mobile” puts communication and messaging at the heart of everything we do, and that’s fantastic for Facebook
The best way to understand the “mobile” and “app” revolution is to see mobile phones as communication devices. We use our phones primarily to communicate (calling/messaging etc). The most important and most frequently used app is usually the communication/messaging app, and therefore, this app is the most likely candidate to become a container for all the other apps. This is great news for Facebook - which is first and foremost, a communication utility and owns two bumper apps in messaging - Messenger and Whatsapp.
Different types of communication
There are different ways to look at communication (synchronous - face2face/phone or video call, vs asynchronous - messaging/email), (private - chat/call vs public - Facebook post), (rhetorical - blog post vs conversational - chat/messaging) (personal vs professional) and all of them are useful.
Different types of mobile communication
However, to understand mobile communication, I believe the best way to understand is - Human to human communication and Human to machine communication.
Human to Human communication - Chat, Calling, emails etc.
Human to machine communication - Calling a cab, Buying a flight ticket, Buying clothing online etc.
Machine to human communication - consuming content - reading articles, watching videos, sending a promotional offer etc.
If you see, this definition of communication subsumes almost everything that we use a mobile phone for. The impending takeover of mobile phones by messaging apps is great news for Facebook.
The Chinese (weChat) were the first to introduce payments, bookings and e-commerce within the main communication app. The simple logic for why this works is based on frequency and time spent. Since you anyway spend most of your time on the messaging app, it can be used to serve up other distractions as well. The converse will not work. An app with low time spent and low frequency of usage cannot be used to bundle other services.
Facebook has followed weChat’s lead with Messenger and Whatsapp, and the way I see it, Messenger and Whatsapp will become the dominant container on mobile phones allowing us to consume all other services.
The sharing economy ultimately belongs to
Uber, AirBnB, Facebook. Period.
Facebook can easily pull the rug beneath all companies in the “sharing economy”. Companies like Airbnb and Uber have no physical assets, they provide an empty shell of trust inside which value is exchanged between individuals. To put it simply, Uber and AirBnB are helping us by answering the following two questions
- Question One: Are the supplier S1 and Buyer B1 - real, genuine and trustworthy persons?
- Question Two: Is the product quality and price provided by supplier S1 acceptable to buyer B1? Will the buyer B1 behave responsibly?
To answer Question One, Uber and AirBnB go to great lengths to verify the person’s identity and background. To answer Question Two, they provide ratings and reviews. Question One (and not Question Two) is the only true barrier to getting started in the sharing economy.
Now stop and think about Facebook for a moment. It has done the best job in the world, ever, of answering Question One - of verifying people’s identity. Over the next few years, as people’s facebook profiles become richer and more informative, Facebook will find it trivial to start an AirBnB or Uber service. The commission that AirBnB/Uber takes - the heart and soul of their business model, will be undercut by Facebook Messenger and Whatsapp allowing people to get in touch with each other directly, for free.
Already I’ve heard anecdotes of people using Whatsapp groups for car-pooling - they bypass Uber, Ola, Meru etc. These are groups of 80-90 people who don’t really know each other - who coordinate pickups and drops using Whatsapp and their own vehicles. Similarly, AirBnB also faces a revenue leakage if the two sides can find out enough about each other without going through AirBnB. This is the future - one in which Uber and the darlings of the sharing economy are disrupted - Facebook will make it happen when the time is right.
The Revenues perspective
Facebook has one major advantage in brand advertising over Google
In the digital world, there are broadly two types of marketing - (a) Direct Response marketing - this is about passing on relevant information to the customer looking for a product - it’s transactional and aimed at making an immediate sale. (b) Brand marketing - this is the subtle process of influencing the customer to have a positive feeling about your product - this is aimed at building awareness about your product and manipulating emotions to build affinity towards your product. It’s not really aimed at making a sale right away.
Can you guess which market is bigger?
Direct response marketing - which is dominated by Google online - is worth $50 bn per year.
Brand marketing, on the other hand, is worth $500 bn per year - and a lot of it is spent on television commercials - by FMCG and other consumer brands. This spending will slowly shift online, and Facebook, will be the bigger beneficiary.
As brand marketing moves into the online world, Facebook (where emotions are manipulated) is a more natural fit than any of Google’s products (Search/Gmail etc). Sure, skeptics will point out that Youtube is a great fit from Google - to which I partially agree, but then - the videos may be uploaded on Youtube, but Facebook is where they will be shared and distributed, Facebook is where they will go viral, and Facebook is where the conversation will happen - with real people. In other words, distribution of online brand advertising will be dominated by Facebook. Brand advertising dollars will then predominantly go to Facebook.
Changes wrought by mobile behaviour work to Facebook’s advantage
On the web, Google was a better marketing proposition than Facebook because browsing on web was mostly intent based - we were looking for something specific and Google benefited by knowing exactly what that was.
Browsing on mobile is different - “Mobile” has greatly increased the amount of time that we have for devoting to the internet. As a result, our browsing is not really intent-based - we are mostly just trying to kill time. Given this fact, a product that can absorb the maximum free time of people, where people tend to naturally gravitate to, while browsing on mobile, is good place to advertise. Facebook has stepped into this void effectively with its immersive product that absorbs most of our free time.
Facebook marketing on mobile works pretty well for most products that are high-frequency consumer purchases (e.g. - FMCG products). It’s only for low frequency purchases - (e.g. loans, insurance, dentist, lawyer, car, laptop and high-involvement products), that Google continues to retain a big advantage. The mobile shift, thus, has allowed FB to gain ground on Google.
In short, my estimate for Facebook’s addressable market opportunity for revenues includes sizeable chunks of the following markets (brand advertising, direct response advertising, local-store-e-commerce/advertising, and sharing economy).
The crystal-ball-gazing perspective - Facebook’s moat looks super-defensible
Google’s moat arises out of its exceptional ability to analyse all the textual information on the web. If all the information were no longer stored in web pages, or (more problematically) if the information were not available on the internet, Google will be in trouble and will have to start afresh. That’s why Google is threatened by mobile (which is more full of apps and walled gardens), and it will be threatened if the internet is replaced by any other medium.
Facebook’s moat, on the other hand, arises out of its knowledge of people’s real world relationships. Facebook’s moat doesn’t depend on the internet anymore - because it has already created a bridge between the internet and our real identity, and figured out enough valuable information about our real world relationships. Therefore, FB will find it easier to adjust to platform shifts than Google. If the internet were to be replaced by any other communication medium, Facebook, of all the companies, will find it easy to adjust.
- Facebook is just a fad - No it is not. The need to communicate is a basic need since primeval times, and any product that enables this need cannot be called a fad. See user engagement metrics on graphs below if you disagree.
- Facebook is just for fun - it is useless for work - Again wrong - Many a time it is easier to reach people through their Facebook profile than their LinkedIn profile (because Facebook is what they check regularly). It is also possible to create groups to exchange useful information and buy/sell products.
- Facebook is not useful for business/advertising - Wrong - because it is useful for brand advertising, as well as for advertising on high-frequency purchases. It is constantly innovating to create good solutions for direct response advertising, and low-frequency purchases as well.
Scenarios in which Facebook may suffer.
- A new intelligent species comes online, dwarfing the human population that is already on FB (i.e. network effect which makes FB the best social network, is rendered irrelevant).
- Need for people-to-people communication is eliminated by intelligent machines.
These scenarios look quite unlikely. Of course, it’s possible that another company may unlock a much bigger market opportunity and eclipse Facebook - (e.g. - a new kind of energy source is discovered - and a single company has full control over extracting the energy and supplying it to the world). In short though, it looks like Facebook will be around for a really long time, and, given its dominance in relevant markets now, it may soon become the most valuable company in the world in the coming decade. It looks like it’s Facebook, and not Apple or Google that’s the biggest winner from the mobile era.
What else can explain a valuation of over $300 bn for a company less than 10,000 employees, $17 bn in annual revenues and $3.7 bn in profits?