FB - Facebook

[vinod1]

One type of regulation that could made a dent in FB's business is the following:

 

Change the default setting for all users to be reduced functionality with minimal use of personal data.

 

So an example, may be, that FB can only use your age, sex, and city for doing targeted advertising by default. Obviously, with such high level targeting, your attention is of very little value to FB's advertising business. In exchange, FB may only offer you reduced functionality by default.

 

Say, you can use your FB, only 10 mins a day by default. For additional functionality, you have to explicitly opt-in to allow FB to use additional data for more personalized targeting. However, regulation again get FB here by requiring FB to show you all the opt-in choices with easy to understand checkboxes. When users go through these explicit choices, system 2 kicks-in and, may be, a lot of users may decide that 10 mins a day may be good enough for them, given how much data FB really needs from you.

 

Another way to think about this is that a lot of the addictive usage and engagement comes from FB's ability to appeal to our system one thinking. Any regulation that forces FB to let users pause and think may cause a real damage to engagement over the long-term.

 

Two questions: (1) how motivated are regulators globally to enforce such harsh measures?  (2) if they are motivated to do something like this, are the possible outcomes drastic to the business? 

 

Thoughts?

 

I think majority of the users would be willing to share data.

 

1. Look at the impact of cambridge analytica episode on actual users. We need to see in next couple of quarters but so far seems limited.

 

2. Look at sales of home assistant devices from Amazon and Google. They are in living room hearing you continuously. I think the market is now at 30 million households and going up pretty fast. Users are fully aware in this case.

 

3. Look at other schemes where users are willing to share a lot of data for a small prize.

 

But the user willingness to keep sharing data is the key factor that one needs to keep an eye on.

 

Vinod

 

I agree that users are willing to share data today. How much of our willingness to share data comes from default settings and appeal to system one thinking. Question is if regulations force platforms to allow system two thinking of users to kick-in, will we be willing to do the same.

 

I think even with default settings and a questionnaire to answer, it would be difficult to get system 2 to kick in.

 

If people do not care really all that much about digital privacy and FB is going to take away (FB limiting functionality in some way if users do not share some data) something they do care about (a lot of the FB functionality), it would seem to me to be a system 1 decision for most people.

 

Especially when FB can now say "We do not share your individual information with anyone, it would only be used to help us identify relevant content for you" or something along those lines.

 

We do see that already with apps and some video games. Dont accept terms at first, then you try it out and it does not work, you go back and accept all the terms. If all that stands between a very addictive behavior that people are used to are going to be a few clicks of FB terms, do you think people would stop and ponder about the terms?

 

Think about warning labels on tobacco products.

 

Vinod

[Guest longinvestor]

One type of regulation that could made a dent in FB's business is the following:

 

Change the default setting for all users to be reduced functionality with minimal use of personal data.

 

So an example, may be, that FB can only use your age, sex, and city for doing targeted advertising by default. Obviously, with such high level targeting, your attention is of very little value to FB's advertising business. In exchange, FB may only offer you reduced functionality by default.

 

Say, you can use your FB, only 10 mins a day by default. For additional functionality, you have to explicitly opt-in to allow FB to use additional data for more personalized targeting. However, regulation again get FB here by requiring FB to show you all the opt-in choices with easy to understand checkboxes. When users go through these explicit choices, system 2 kicks-in and, may be, a lot of users may decide that 10 mins a day may be good enough for them, given how much data FB really needs from you.

 

Another way to think about this is that a lot of the addictive usage and engagement comes from FB's ability to appeal to our system one thinking. Any regulation that forces FB to let users pause and think may cause a real damage to engagement over the long-term.

 

Two questions: (1) how motivated are regulators globally to enforce such harsh measures?  (2) if they are motivated to do something like this, are the possible outcomes drastic to the business? 

 

Thoughts?

I believe that your prescription is quite likely to play out. And I believe that it could well be broader than that. It is quite a silly assumption that society won’t mind being advertised to, as the default. Well heeled users of the internet are ready, now, to pay for a walled garden internet.

 

Not much different from the cloud services that businesses seem to be embracing. And I believe, as I understood Steve Jobs ‘s vision was exactly that. Your data is your data. Period.

[Gardener]

One type of regulation that could made a dent in FB's business is the following:

 

Change the default setting for all users to be reduced functionality with minimal use of personal data.

 

So an example, may be, that FB can only use your age, sex, and city for doing targeted advertising by default. Obviously, with such high level targeting, your attention is of very little value to FB's advertising business. In exchange, FB may only offer you reduced functionality by default.

 

Say, you can use your FB, only 10 mins a day by default. For additional functionality, you have to explicitly opt-in to allow FB to use additional data for more personalized targeting. However, regulation again get FB here by requiring FB to show you all the opt-in choices with easy to understand checkboxes. When users go through these explicit choices, system 2 kicks-in and, may be, a lot of users may decide that 10 mins a day may be good enough for them, given how much data FB really needs from you.

 

Another way to think about this is that a lot of the addictive usage and engagement comes from FB's ability to appeal to our system one thinking. Any regulation that forces FB to let users pause and think may cause a real damage to engagement over the long-term.

 

Two questions: (1) how motivated are regulators globally to enforce such harsh measures?  (2) if they are motivated to do something like this, are the possible outcomes drastic to the business? 

 

Thoughts?

I believe that your prescription is quite likely to play out. And I believe that it could well be broader than that. It is quite a silly assumption that society won’t mind being advertised to, as the default. Well heeled users of the internet are ready, now, to pay for a walled garden internet.

 

Not much different from the cloud services that businesses seem to be embracing. And I believe, as I understood Steve Jobs ‘s vision was exactly that. Your data is your data. Period.

 

I actually don't think mass regulation is likely to play out in the future. There are tons of businesses that could be crushed if the government steps in and takes drastic steps, yet the likeliness of getting crushed by regulation is rather minimal for most companies imo. Apart from some (minor) taxes on Coca-Cola for instance, the government still allows selling it. It's not like we expect Coca-Cola to let you sign a huge disclaimer or something before you can buy a drink.

 

People are smart enough to know and understand the deal: you use Facebook, they use your data. Almost all people I know simply don't care.

 

What I can see happening is more regulation and control on the "right to be forgotten", i.e. when you delete your profile FB confirms that they delete your data.

[rishig]

One type of regulation that could made a dent in FB's business is the following:

 

Change the default setting for all users to be reduced functionality with minimal use of personal data.

 

So an example, may be, that FB can only use your age, sex, and city for doing targeted advertising by default. Obviously, with such high level targeting, your attention is of very little value to FB's advertising business. In exchange, FB may only offer you reduced functionality by default.

 

Say, you can use your FB, only 10 mins a day by default. For additional functionality, you have to explicitly opt-in to allow FB to use additional data for more personalized targeting. However, regulation again get FB here by requiring FB to show you all the opt-in choices with easy to understand checkboxes. When users go through these explicit choices, system 2 kicks-in and, may be, a lot of users may decide that 10 mins a day may be good enough for them, given how much data FB really needs from you.

 

Another way to think about this is that a lot of the addictive usage and engagement comes from FB's ability to appeal to our system one thinking. Any regulation that forces FB to let users pause and think may cause a real damage to engagement over the long-term.

 

Two questions: (1) how motivated are regulators globally to enforce such harsh measures?  (2) if they are motivated to do something like this, are the possible outcomes drastic to the business? 

 

Thoughts?

 

I think majority of the users would be willing to share data.

 

1. Look at the impact of cambridge analytica episode on actual users. We need to see in next couple of quarters but so far seems limited.

 

2. Look at sales of home assistant devices from Amazon and Google. They are in living room hearing you continuously. I think the market is now at 30 million households and going up pretty fast. Users are fully aware in this case.

 

3. Look at other schemes where users are willing to share a lot of data for a small prize.

 

But the user willingness to keep sharing data is the key factor that one needs to keep an eye on.

 

Vinod

 

I agree that users are willing to share data today. How much of our willingness to share data comes from default settings and appeal to system one thinking. Question is if regulations force platforms to allow system two thinking of users to kick-in, will we be willing to do the same.

 

I think even with default settings and a questionnaire to answer, it would be difficult to get system 2 to kick in.

 

If people do not care really all that much about digital privacy and FB is going to take away (FB limiting functionality in some way if users do not share some data) something they do care about (a lot of the FB functionality), it would seem to me to be a system 1 decision for most people.

 

Especially when FB can now say "We do not share your individual information with anyone, it would only be used to help us identify relevant content for you" or something along those lines.

 

We do see that already with apps and some video games. Dont accept terms at first, then you try it out and it does not work, you go back and accept all the terms. If all that stands between a very addictive behavior that people are used to are going to be a few clicks of FB terms, do you think people would stop and ponder about the terms?

 

Think about warning labels on tobacco products.

 

Vinod

 

Fair point. I agree with you. I have been thinking of regulations that would cause a meaningful damage to user engagement and I really don't know if there is anything short of shutting down.

 

Thanks

[glorysk87]

It's absolutely mind blowing that so many people here (and everywhere else) are so tunnel-visioned on recent events and the potential for regulation of Facebook, yet no one is actually discussing the core business trends.

 

Take regulation, cambridge analytica, user privacy, etc all out of the picture, and look at the core business.

 

1) The company has put up extremly high growth numbers over the past few years. First, via increasing ad loads. Second, via increasing pricing. This is a trend that is not sustainable, and sooner rather than later will impact advertiser ROIs negatively. This is antithetical to the typical idea of a "quality business" like Amazon or Google, who typically extract cost advantages from their scale and then pass that on to the customer in the form of lower pricing. Instead, Facebook extracts growth at the expense of their customers rather than passing the benefits along.

 

2) Engagement rates are the absolute most important metric to measure the health of the Facebook platform. Facebook wants users to engage as frequently as possible, and to increase their engagements over time. Engagement drives everything - the audience size, the effectiveness of their ad targeting algos, etc. Engagement declined last quarter for the first time ever, both in the sense of DAUs/MAUs and in the sense of total minutes per user on the platform, and indications are that trend is continuing.

 

3) Consensus estimates appear WAY too high. The global digital advertising market is expected to grow 13% to $198B this year. FB is estimated to grow their advertising revenues 37% from $39.9B to $54.6B. So consensus estimates expect Facebook to capture 60% to 70% of ALL incremental digital spend across the entire world AFTER they've spent two years first maxing out their ad loads and then pushing pricing to a tipping point. (h/t @fullysynergized for tweeting some of those metrics out). That seems ridiculous to me, especially because you now have Amazon ramping their advertising platform off a very low base, and over 75% of advertisers currently spend ZERO dollars on Amazon's advertising platform. I'm extremely skeptical they'll be able to come anywhere close to consensus numbers, unless they find a way to self-inflict more damage to their competitive position simply for the sake of growth.

 

I have no position in FB - but considering the above, I just find it pretty unbelievable that people are so myopically focused on the cambridge analytica stuff and using it as air cover to justify being max long FB - yet no one seems to be actually looking at the core business.

[Guest longinvestor]

It's absolutely mind blowing that so many people here (and everywhere else) are so tunnel-visioned on recent events and the potential for regulation of Facebook, yet no one is actually discussing the core business trends.

 

Take regulation, cambridge analytica, user privacy, etc all out of the picture, and look at the core business.

 

1) The company has put up extremly high growth numbers over the past few years. First, via increasing ad loads. Second, via increasing pricing. This is a trend that is not sustainable, and sooner rather than later will impact advertiser ROIs negatively. This is antithetical to the typical idea of a "quality business" like Amazon or Google, who typically extract cost advantages from their scale and then pass that on to the customer in the form of lower pricing. Instead, Facebook extracts growth at the expense of their customers rather than passing the benefits along.

 

2) Engagement rates are the absolute most important metric to measure the health of the Facebook platform. Facebook wants users to engage as frequently as possible, and to increase their engagements over time. Engagement drives everything - the audience size, the effectiveness of their ad targeting algos, etc. Engagement declined last quarter for the first time ever, both in the sense of DAUs/MAUs and in the sense of total minutes per user on the platform, and indications are that trend is continuing.

 

3) Consensus estimates appear WAY too high. The global digital advertising market is expected to grow 13% to $198B this year. FB is estimated to grow their advertising revenues 37% from $39.9B to $54.6B. So consensus estimates expect Facebook to capture 60% to 70% of ALL incremental digital spend across the entire world AFTER they've spent two years first maxing out their ad loads and then pushing pricing to a tipping point. (h/t @fullysynergized for tweeting some of those metrics out). That seems ridiculous to me, especially because you now have Amazon ramping their advertising platform off a very low base, and over 75% of advertisers currently spend ZERO dollars on Amazon's advertising platform. I'm extremely skeptical they'll be able to come anywhere close to consensus numbers, unless they find a way to self-inflict more damage to their competitive position simply for the sake of growth.

 

I have no position in FB - but considering the above, I just find it pretty unbelievable that people are so myopically focused on the cambridge analytica stuff and using it as air cover to justify being max long FB - yet no one seems to be actually looking at the core business.

The global ad business is around $500 billion.

 

What no one is talking about the effectiveness of the ads. Meaning target customers actually becoming customers. For example some mention here about WhatsApp as a potential monetizing route. The vast majority of people using Whatsapp likely never will buy anything advertised to them. If another “free” platform emerges that is where they’ll move to.

[Liberty]

It's absolutely mind blowing that so many people here (and everywhere else) are so tunnel-visioned on recent events and the potential for regulation of Facebook, yet no one is actually discussing the core business trends.

 

Take regulation, cambridge analytica, user privacy, etc all out of the picture, and look at the core business.

 

1) The company has put up extremly high growth numbers over the past few years. First, via increasing ad loads. Second, via increasing pricing. This is a trend that is not sustainable, and sooner rather than later will impact advertiser ROIs negatively. This is antithetical to the typical idea of a "quality business" like Amazon or Google, who typically extract cost advantages from their scale and then pass that on to the customer in the form of lower pricing. Instead, Facebook extracts growth at the expense of their customers rather than passing the benefits along.

 

As FB's ad tech improves, ROIs improve too. Through the auction mechanism , when inventory supply doesn't go up, prices do (FB doesn't set prices, it uses the same kind of auction as Google does). But it's possible for prices to go up slower than ROIs and to still have an improving competitive position. You can't judge from pricing alone. In the end, the only thing that matters to advertisers is ROI, and it seems to be doing well there:

 

 

 

2) Engagement rates are the absolute most important metric to measure the health of the Facebook platform. Facebook wants users to engage as frequently as possible, and to increase their engagements over time. Engagement drives everything - the audience size, the effectiveness of their ad targeting algos, etc. Engagement declined last quarter for the first time ever, both in the sense of DAUs/MAUs and in the sense of total minutes per user on the platform, and indications are that trend is continuing.

 

They changed their algo to favor certain kind of interactions over others (friends & family over videos). Of course videos will give you more time on the platform, but the quality of the engagement is lower.

 

3) Consensus estimates appear WAY too high. The global digital advertising market is expected to grow 13% to $198B this year. FB is estimated to grow their advertising revenues 37% from $39.9B to $54.6B. So consensus estimates expect Facebook to capture 60% to 70% of ALL incremental digital spend across the entire world AFTER they've spent two years first maxing out their ad loads and then pushing pricing to a tipping point. (h/t @fullysynergized for tweeting some of those metrics out). That seems ridiculous to me, especially because you now have Amazon ramping their advertising platform off a very low base, and over 75% of advertisers currently spend ZERO dollars on Amazon's advertising platform. I'm extremely skeptical they'll be able to come anywhere close to consensus numbers, unless they find a way to self-inflict more damage to their competitive position simply for the sake of growth.

 

I think the advertising pie is being expanded by a lot of these moves. A lot of small businesses that might not have advertised on TV or in print can now advertise on platforms like FB and Google, and now Amazon. It's the whole advertising pie, globally, that you have to look at, don't split between digital and non-digital. It's all competing together, and it's clear who's out-competing who. ARPUs are very low outside NA and Europe, and I think they'll keep going up at a decent clip at the global middle class keeps emerging and advertising in those regions become more sophisticated.

 

On top of that, how are you valuing Instagram, Whatsapp, and Messenger?

[Liberty]

https://www.cnbc.com/2018/04/09/congress-released-mark-zuckerbergs-prepared-testimony-ahead-of-wednesdays-hearing.html

[Gardener]

It's absolutely mind blowing that so many people here (and everywhere else) are so tunnel-visioned on recent events and the potential for regulation of Facebook, yet no one is actually discussing the core business trends.

 

Take regulation, cambridge analytica, user privacy, etc all out of the picture, and look at the core business.

 

1) The company has put up extremly high growth numbers over the past few years. First, via increasing ad loads. Second, via increasing pricing. This is a trend that is not sustainable, and sooner rather than later will impact advertiser ROIs negatively. This is antithetical to the typical idea of a "quality business" like Amazon or Google, who typically extract cost advantages from their scale and then pass that on to the customer in the form of lower pricing. Instead, Facebook extracts growth at the expense of their customers rather than passing the benefits along.

 

2) Engagement rates are the absolute most important metric to measure the health of the Facebook platform. Facebook wants users to engage as frequently as possible, and to increase their engagements over time. Engagement drives everything - the audience size, the effectiveness of their ad targeting algos, etc. Engagement declined last quarter for the first time ever, both in the sense of DAUs/MAUs and in the sense of total minutes per user on the platform, and indications are that trend is continuing.

 

3) Consensus estimates appear WAY too high. The global digital advertising market is expected to grow 13% to $198B this year. FB is estimated to grow their advertising revenues 37% from $39.9B to $54.6B. So consensus estimates expect Facebook to capture 60% to 70% of ALL incremental digital spend across the entire world AFTER they've spent two years first maxing out their ad loads and then pushing pricing to a tipping point. (h/t @fullysynergized for tweeting some of those metrics out). That seems ridiculous to me, especially because you now have Amazon ramping their advertising platform off a very low base, and over 75% of advertisers currently spend ZERO dollars on Amazon's advertising platform. I'm extremely skeptical they'll be able to come anywhere close to consensus numbers, unless they find a way to self-inflict more damage to their competitive position simply for the sake of growth.

 

I have no position in FB - but considering the above, I just find it pretty unbelievable that people are so myopically focused on the cambridge analytica stuff and using it as air cover to justify being max long FB - yet no one seems to be actually looking at the core business.

The global ad business is around $500 billion.

 

What no one is talking about the effectiveness of the ads. Meaning target customers actually becoming customers. For example some mention here about WhatsApp as a potential monetizing route. The vast majority of people using Whatsapp likely never will buy anything advertised to them. If another “free” platform emerges that is where they’ll move to.

 

Just on the point of Whatsapp as 'sticky', no I don't think customers will just leave to another platform. Even my parents are slowly moving away from 'normal' text messaging and towards Whatsapp. This is huge! We will still be using Whatsapp for a very long time...

[rohitc99]

It's absolutely mind blowing that so many people here (and everywhere else) are so tunnel-visioned on recent events and the potential for regulation of Facebook, yet no one is actually discussing the core business trends.

 

Take regulation, cambridge analytica, user privacy, etc all out of the picture, and look at the core business.

 

1) The company has put up extremly high growth numbers over the past few years. First, via increasing ad loads. Second, via increasing pricing. This is a trend that is not sustainable, and sooner rather than later will impact advertiser ROIs negatively. This is antithetical to the typical idea of a "quality business" like Amazon or Google, who typically extract cost advantages from their scale and then pass that on to the customer in the form of lower pricing. Instead, Facebook extracts growth at the expense of their customers rather than passing the benefits along.

 

2) Engagement rates are the absolute most important metric to measure the health of the Facebook platform. Facebook wants users to engage as frequently as possible, and to increase their engagements over time. Engagement drives everything - the audience size, the effectiveness of their ad targeting algos, etc. Engagement declined last quarter for the first time ever, both in the sense of DAUs/MAUs and in the sense of total minutes per user on the platform, and indications are that trend is continuing.

 

3) Consensus estimates appear WAY too high. The global digital advertising market is expected to grow 13% to $198B this year. FB is estimated to grow their advertising revenues 37% from $39.9B to $54.6B. So consensus estimates expect Facebook to capture 60% to 70% of ALL incremental digital spend across the entire world AFTER they've spent two years first maxing out their ad loads and then pushing pricing to a tipping point. (h/t @fullysynergized for tweeting some of those metrics out). That seems ridiculous to me, especially because you now have Amazon ramping their advertising platform off a very low base, and over 75% of advertisers currently spend ZERO dollars on Amazon's advertising platform. I'm extremely skeptical they'll be able to come anywhere close to consensus numbers, unless they find a way to self-inflict more damage to their competitive position simply for the sake of growth.

 

I have no position in FB - but considering the above, I just find it pretty unbelievable that people are so myopically focused on the cambridge analytica stuff and using it as air cover to justify being max long FB - yet no one seems to be actually looking at the core business.

The global ad business is around $500 billion.

 

What no one is talking about the effectiveness of the ads. Meaning target customers actually becoming customers. For example some mention here about WhatsApp as a potential monetizing route. The vast majority of people using Whatsapp likely never will buy anything advertised to them. If another “free” platform emerges that is where they’ll move to.

 

Just on the point of Whatsapp as 'sticky', no I don't think customers will just leave to another platform. Even my parents are slowly moving away from 'normal' text messaging and towards Whatsapp. This is huge! We will still be using Whatsapp for a very long time...

 

In NA, we under-estimate how embedded whatsapp is. in india its a defacto communication channel now. its used to make calls with data rates dropping ( 10 dollars for 80 Gb), conduct business etc. I use it to keep in touch with family and friends. i cannot think of what will make everyone move to something else for some time. the penetration for whatsapp is only increasing with mobile penetration going up

[cameronfen]

It's absolutely mind blowing that so many people here (and everywhere else) are so tunnel-visioned on recent events and the potential for regulation of Facebook, yet no one is actually discussing the core business trends.

 

Take regulation, cambridge analytica, user privacy, etc all out of the picture, and look at the core business.

 

1) The company has put up extremly high growth numbers over the past few years. First, via increasing ad loads. Second, via increasing pricing. This is a trend that is not sustainable, and sooner rather than later will impact advertiser ROIs negatively. This is antithetical to the typical idea of a "quality business" like Amazon or Google, who typically extract cost advantages from their scale and then pass that on to the customer in the form of lower pricing. Instead, Facebook extracts growth at the expense of their customers rather than passing the benefits along.

 

2) Engagement rates are the absolute most important metric to measure the health of the Facebook platform. Facebook wants users to engage as frequently as possible, and to increase their engagements over time. Engagement drives everything - the audience size, the effectiveness of their ad targeting algos, etc. Engagement declined last quarter for the first time ever, both in the sense of DAUs/MAUs and in the sense of total minutes per user on the platform, and indications are that trend is continuing.

 

3) Consensus estimates appear WAY too high. The global digital advertising market is expected to grow 13% to $198B this year. FB is estimated to grow their advertising revenues 37% from $39.9B to $54.6B. So consensus estimates expect Facebook to capture 60% to 70% of ALL incremental digital spend across the entire world AFTER they've spent two years first maxing out their ad loads and then pushing pricing to a tipping point. (h/t @fullysynergized for tweeting some of those metrics out). That seems ridiculous to me, especially because you now have Amazon ramping their advertising platform off a very low base, and over 75% of advertisers currently spend ZERO dollars on Amazon's advertising platform. I'm extremely skeptical they'll be able to come anywhere close to consensus numbers, unless they find a way to self-inflict more damage to their competitive position simply for the sake of growth.

 

I have no position in FB - but considering the above, I just find it pretty unbelievable that people are so myopically focused on the cambridge analytica stuff and using it as air cover to justify being max long FB - yet no one seems to be actually looking at the core business.

The global ad business is around $500 billion.

 

What no one is talking about the effectiveness of the ads. Meaning target customers actually becoming customers. For example some mention here about WhatsApp as a potential monetizing route. The vast majority of people using Whatsapp likely never will buy anything advertised to them. If another “free” platform emerges that is where they’ll move to.

 

Just on the point of Whatsapp as 'sticky', no I don't think customers will just leave to another platform. Even my parents are slowly moving away from 'normal' text messaging and towards Whatsapp. This is huge! We will still be using Whatsapp for a very long time...

 

In NA, we under-estimate how embedded whatsapp is. in india its a defacto communication channel now. its used to make calls with data rates dropping ( 10 dollars for 80 Gb), conduct business etc. I use it to keep in touch with family and friends. i cannot think of what will make everyone move to something else for some time. the penetration for whatsapp is only increasing with mobile penetration going up

 

I mentioned Whatsapp before on this thread which may be the post you were referring too.  Whatsapp benefits from the same network effects (i.e. moat) that Facebook have, the more people have Whatsapp the harder it is for you to leave to some other messaging company.  Thus Facebooks Stratagy of increasing users and not monetizing right now is the correct strategy IMO.  Whatsapp already has 50% more MAU than Wechat, and is the dominant player in India and most African/South American countries (along with Facebook Messenger).  No one is going to move from Whatsapp to another service if they start serving monetizing because all your friends are on Whatsapp.  Thus, even if it would be beneficial for everyone to move you have a coordination problem which stops it from happening.  This is the moat for both Facebook and Whatsapp. 

[cameronfen]

It's absolutely mind blowing that so many people here (and everywhere else) are so tunnel-visioned on recent events and the potential for regulation of Facebook, yet no one is actually discussing the core business trends.

 

Take regulation, cambridge analytica, user privacy, etc all out of the picture, and look at the core business.

 

1) The company has put up extremly high growth numbers over the past few years. First, via increasing ad loads. Second, via increasing pricing. This is a trend that is not sustainable, and sooner rather than later will impact advertiser ROIs negatively. This is antithetical to the typical idea of a "quality business" like Amazon or Google, who typically extract cost advantages from their scale and then pass that on to the customer in the form of lower pricing. Instead, Facebook extracts growth at the expense of their customers rather than passing the benefits along.

 

2) Engagement rates are the absolute most important metric to measure the health of the Facebook platform. Facebook wants users to engage as frequently as possible, and to increase their engagements over time. Engagement drives everything - the audience size, the effectiveness of their ad targeting algos, etc. Engagement declined last quarter for the first time ever, both in the sense of DAUs/MAUs and in the sense of total minutes per user on the platform, and indications are that trend is continuing.

 

3) Consensus estimates appear WAY too high. The global digital advertising market is expected to grow 13% to $198B this year. FB is estimated to grow their advertising revenues 37% from $39.9B to $54.6B. So consensus estimates expect Facebook to capture 60% to 70% of ALL incremental digital spend across the entire world AFTER they've spent two years first maxing out their ad loads and then pushing pricing to a tipping point. (h/t @fullysynergized for tweeting some of those metrics out). That seems ridiculous to me, especially because you now have Amazon ramping their advertising platform off a very low base, and over 75% of advertisers currently spend ZERO dollars on Amazon's advertising platform. I'm extremely skeptical they'll be able to come anywhere close to consensus numbers, unless they find a way to self-inflict more damage to their competitive position simply for the sake of growth.

 

I have no position in FB - but considering the above, I just find it pretty unbelievable that people are so myopically focused on the cambridge analytica stuff and using it as air cover to justify being max long FB - yet no one seems to be actually looking at the core business.

 

To respond to all your points for Facebook, it doesn't matter that engagement in US trends down slightly or the global advertising market is going to grow slower than trend, or that monetization will slow growth, what matters is North America has an ARPU of $26, while Europe is at $9, and developing countries are at $2.  All those risks you highlight (all developed country problems) could be mild headwinds (no one I think is saying that ARPU or users will drop more than a couple of percent a year at the worst) but if ARPU and MAU in developing countries (which is the majority of FB users) catches up to Europe or North America over the next 10-20 years, you should make a lot of money even if all those things you say are true. 

[philly value]

It's absolutely mind blowing that so many people here (and everywhere else) are so tunnel-visioned on recent events and the potential for regulation of Facebook, yet no one is actually discussing the core business trends.

 

Take regulation, cambridge analytica, user privacy, etc all out of the picture, and look at the core business.

 

1) The company has put up extremly high growth numbers over the past few years. First, via increasing ad loads. Second, via increasing pricing. This is a trend that is not sustainable, and sooner rather than later will impact advertiser ROIs negatively. This is antithetical to the typical idea of a "quality business" like Amazon or Google, who typically extract cost advantages from their scale and then pass that on to the customer in the form of lower pricing. Instead, Facebook extracts growth at the expense of their customers rather than passing the benefits along.

 

2) Engagement rates are the absolute most important metric to measure the health of the Facebook platform. Facebook wants users to engage as frequently as possible, and to increase their engagements over time. Engagement drives everything - the audience size, the effectiveness of their ad targeting algos, etc. Engagement declined last quarter for the first time ever, both in the sense of DAUs/MAUs and in the sense of total minutes per user on the platform, and indications are that trend is continuing.

 

3) Consensus estimates appear WAY too high. The global digital advertising market is expected to grow 13% to $198B this year. FB is estimated to grow their advertising revenues 37% from $39.9B to $54.6B. So consensus estimates expect Facebook to capture 60% to 70% of ALL incremental digital spend across the entire world AFTER they've spent two years first maxing out their ad loads and then pushing pricing to a tipping point. (h/t @fullysynergized for tweeting some of those metrics out). That seems ridiculous to me, especially because you now have Amazon ramping their advertising platform off a very low base, and over 75% of advertisers currently spend ZERO dollars on Amazon's advertising platform. I'm extremely skeptical they'll be able to come anywhere close to consensus numbers, unless they find a way to self-inflict more damage to their competitive position simply for the sake of growth.

 

I have no position in FB - but considering the above, I just find it pretty unbelievable that people are so myopically focused on the cambridge analytica stuff and using it as air cover to justify being max long FB - yet no one seems to be actually looking at the core business.

 

Your top down framing of revenue growth makes a lot of sense and is also how I look at it, but I disagree with the #s. I think it is very unlikely world online advertising spend will only grow by 13% in 2018, particularly since we're talking about spend measured in USD and for the first half of the year we are benefiting from a 10%+ depreciation in the USD vs GBP and EUR, and in the second half, benefiting from a smaller but still substantial mid-to-high single digit depreciation in the USD vs GBP/EUR. If for the year we end up seeing a ~10% benefit from FX on the EUR and GBP, and let's say that for the world ad market spend is ~25% Europe as it was for FB in 2017, then that is a 2.5% bump, which is meaningful. That means that in order for online ad growth to be 13% in USD, it needs to be ~10% in local currencies.

 

We've seen accelerating transition of spend online (% of total ad spend that goes online each year), and are only at ~40% right now. There will eventually be a limit, but advertiser discussion of relative returns on ad spend suggest to me that that transition is not nearly complete yet. Further, the UK is an example of a market that is further ahead of the U.S./world on the transition of spend to digital, so you can study that for another sanity check.

 

The world ad market in constant FX will likely grow something on the order of ~3% or so, so keep that in mind when considering the 10%. If we go from 40% penetration to 44% penetration (slightly less penetration growth than in '17, which would be a reversal of the trend FWIW) and growth is 3% constant FX, that'd get us to ~3% + (44/40 = 10.0%) = 13.3% + 2.5% FX = 15.8%, or ~16%.

 

Facebook has been taking ~50% of incremental digital ad spend, so ~$200bn * 16% = $32bn growth * ~50% = $16 billion of Facebook revenue growth, slightly more than consensus.

 

You can disagree +/- a bit, and I agree Amazon is a risk, but I think the consensus #s are very reasonable, and FWIW in the past have proven consistently conservative. As have "consensus" high-level predictions for digital ad growth, such as the 13% you mention.

 

Engagement is extremely important, but so is advertiser return on spend. If advertiser return on spend is very high on Facebook, they increase ad dollars allocated to Facebook, and even if ad load is constant and engagement flat, the price per ad will rise so supply equals demand. It is market-determined pricing. As long as advertisers continue to feel return on spend is strong, which per my checks they do, I will not be concerned.

 

Also, keep in mind that while Facebook engagement has slowed quite a bit, Instagram trends remain very positive, and Instagram is a very important part of the business.

[siddharth18]

1) The company has put up extremly high growth numbers over the past few years. First, via increasing ad loads. Second, via increasing pricing. This is a trend that is not sustainable, and sooner rather than later will impact advertiser ROIs negatively. This is antithetical to the typical idea of a "quality business" like Amazon or Google, who typically extract cost advantages from their scale and then pass that on to the customer in the form of lower pricing. Instead, Facebook extracts growth at the expense of their customers rather than passing the benefits along.

 

Fair point regarding ad load. But you're misunderstanding "increasing pricing." You have to understand that FB ad prices are not set by FB, they're set by demand. And demand is set by the advertisers' ROI.

 

The nature of ad auction means that as more and more advertisers enter the ecosystem, the more each advertiser (in general) has to pay in order to outbid the other advertisers. In fact, as ad platforms like Adwords and FB Ads grow, advertisers over the years have had to increase their bids simply to keep their volume stable. Think about that for a moment. This means that (assuming same product and sales funnel), the advertisers must sacrifice their ROI just to buy the same number of clicks. What does this mean? It means that all the monetary benefits from the advertising accrue to the ad platform simply because advertisers keep outbidding each other.

 

Let me give you a simple example.

 

For the keyword "car insurance" in Google, imagine there's only 1 advertiser bidding on this term in US. What will he pay? Likely $0.01 since that's the lowest allowed bid on Adwords and there's no competitors. After spending some money, this advertiser realizes each visit originating from the ad with keyword "car insurance" brings in an incremental profit of $10. This is obviously amazing since he's capturing most of the incremental profit ($9.99 in this case and only has to share $0.01 with Google).

 

Then imagine an identical competitor with identical economics also decides to advertise on Google. He understands search advertising is extremely profitable and is happy to outbid the first advertiser by bidding $0.02. He's hence outbidding the original advertiser and captures all the traffic. His incremental profit is now $9.98 per click.

 

The first advertiser then realizes he's being outbid by his competitor and decides he'll increase his bid to $0.03 because he'd rather profit $9.97 rather than lose all the traffic and not profit at all. This increased bidding war goes on and on until both players successively increase their bids until such point that most of the incremental profit per click accrues to the ad platform (Google) in the form of increased click prices simply because the bidding war in online ad ecosystem is a race to the bottom for the advertisers.

 

This dynamic intensifies as more and more advertisers join the bidding pool and the more they optimize their funnel the wring out more revenue from each click. This underlines the fact that as ad platforms become more efficient, all the incremental benefits are passed back to ad platforms in the form of increased ad prices without meaningful benefits to any advertiser in particular. For example, if inflation or lax regulations increase profitability of insurers, their profit per customer will increase. This will increase their ability to pay more per customer acquisition/click. But since EVERYONE's profitability goes up, EVERYONE will increase their bid prices but no particular advertiser will capture any incremental benefits from inflation or lax regulations. The only entity to benefit is the ad platform.

 

 

Hence, the overall revenue per user gets a boost from these 3 things:

1. Increased competition (more advertisers entering the game)

2. Increased efficiencies/conversion rate from click to sale (this involves landing page optimization, funnel optimization which drives more sales from same number of clicks).

3. Increased prevalence of eCommerce (more users get comfortable purchasing online).

 

Also, read this: https://www.wired.com/2015/09/facebook-doesnt-make-much-money-couldon-purpose/

[Broeb22]

Related to Siddharth's point, I have heard complaints from business owners with Facebook pages that they are being "forced" to advertise (for products, events, etc.), even if they could promote themselves adequately based on their own organic traffic.

 

Does anyone have first-hand experience of this type of tactic from Facebook?

 

If this is occurring, does it seem like FB is too aggressively monetizing its user base, and putting people in a position where they would be more than happy to switch to another platform if one were to arise? I guess at the end of the day, all businesses go where the most users/eyeballs are, so as long as FB's policies don't begin to push out users, the businesses advertising will cry foul but still ultimately pay for the ads.

 

I'm just bringing this point up because Siddharth made it sound so simple and clean and easy, and that this is all about simple supply and demand. Based on some anecdotes I've heard, maybe Facebook has the ability (and perhaps willingness) to exploit its users and force small advertisers to advertise.

 

Disclosure: Long FB

 

[Liberty]

Don Graham post on Zuckerberg:

 

https://m.facebook.com/ppalliser/posts/10156076011846469

[LR1400]

I despise these idiot politicians who run their mouths and do largely nothing. Who are they to tell companies how they need to be run.

 

I’m more pro - Trump than 99% of the people on here but he is also an idiot (obviously). What I really despise is his discussion regarding Amazon and “leveling the playing field”. Did any politician discuss this when Wal Mart was crushing every Mom and Pop in America?

 

If Trump tries to regulate Amazon in some manner, he is nothing more than an anti-capitalist.

 

In my view Facebook will slide through this like all other companies that have had issues with data.

[cameronfen]

1) The company has put up extremly high growth numbers over the past few years. First, via increasing ad loads. Second, via increasing pricing. This is a trend that is not sustainable, and sooner rather than later will impact advertiser ROIs negatively. This is antithetical to the typical idea of a "quality business" like Amazon or Google, who typically extract cost advantages from their scale and then pass that on to the customer in the form of lower pricing. Instead, Facebook extracts growth at the expense of their customers rather than passing the benefits along.

 

Fair point regarding ad load. But you're misunderstanding "increasing pricing." You have to understand that FB ad prices are not set by FB, they're set by demand. And demand is set by the advertisers' ROI.

 

The nature of ad auction means that as more and more advertisers enter the ecosystem, the more each advertiser (in general) has to pay in order to outbid the other advertisers. In fact, as ad platforms like Adwords and FB Ads grow, advertisers over the years have had to increase their bids simply to keep their volume stable. Think about that for a moment. This means that (assuming same product and sales funnel), the advertisers must sacrifice their ROI just to buy the same number of clicks. What does this mean? It means that all the monetary benefits from the advertising accrue to the ad platform simply because advertisers keep outbidding each other.

 

Let me give you a simple example.

 

For the keyword "car insurance" in Google, imagine there's only 1 advertiser bidding on this term in US. What will he pay? Likely $0.01 since that's the lowest allowed bid on Adwords and there's no competitors. After spending some money, this advertiser realizes each visit originating from the ad with keyword "car insurance" brings in an incremental profit of $10. This is obviously amazing since he's capturing most of the incremental profit ($9.99 in this case and only has to share $0.01 with Google).

 

Then imagine an identical competitor with identical economics also decides to advertise on Google. He understands search advertising is extremely profitable and is happy to outbid the first advertiser by bidding $0.02. He's hence outbidding the original advertiser and captures all the traffic. His incremental profit is now $9.98 per click.

 

The first advertiser then realizes he's being outbid by his competitor and decides he'll increase his bid to $0.03 because he'd rather profit $9.97 rather than lose all the traffic and not profit at all. This increased bidding war goes on and on until both players successively increase their bids until such point that most of the incremental profit per click accrues to the ad platform (Google) in the form of increased click prices simply because the bidding war in online ad ecosystem is a race to the bottom for the advertisers.

 

This dynamic intensifies as more and more advertisers join the bidding pool and the more they optimize their funnel the wring out more revenue from each click. This underlines the fact that as ad platforms become more efficient, all the incremental benefits are passed back to ad platforms in the form of increased ad prices without meaningful benefits to any advertiser in particular. For example, if inflation or lax regulations increase profitability of insurers, their profit per customer will increase. This will increase their ability to pay more per customer acquisition/click. But since EVERYONE's profitability goes up, EVERYONE will increase their bid prices but no particular advertiser will capture any incremental benefits from inflation or lax regulations. The only entity to benefit is the ad platform.

 

 

Hence, the overall revenue per user gets a boost from these 3 things:

1. Increased competition (more advertisers entering the game)

2. Increased efficiencies/conversion rate from click to sale (this involves landing page optimization, funnel optimization which drives more sales from same number of clicks).

3. Increased prevalence of eCommerce (more users get comfortable purchasing online).

 

Also, read this: https://www.wired.com/2015/09/facebook-doesnt-make-much-money-couldon-purpose/

 

This is good.  However one point, these auctions are designed so that people bid their actual reservation wage.  For example from a one bidder case, there is a reservation wage so a single bidder can't get an ad for cheap, and if you are the winning bidder, and you outbid the reservation wage, you pay the 2nd highest bid (i.e. the reservation wage for a single bidder), so you have no incentive not to bid as high as you are willing to pay.  So theoretically no matter what anyone does or if you have more bidders, unless the new bidders have a higher maximum wage (which is probably small as there is a large population already bidding), generally you will not get more per ad. 

[cameronfen]

Related to Siddharth's point, I have heard complaints from business owners with Facebook pages that they are being "forced" to advertise (for products, events, etc.), even if they could promote themselves adequately based on their own organic traffic.

 

Does anyone have first-hand experience of this type of tactic from Facebook?

 

If this is occurring, does it seem like FB is too aggressively monetizing its user base, and putting people in a position where they would be more than happy to switch to another platform if one were to arise? I guess at the end of the day, all businesses go where the most users/eyeballs are, so as long as FB's policies don't begin to push out users, the businesses advertising will cry foul but still ultimately pay for the ads.

 

I'm just bringing this point up because Siddharth made it sound so simple and clean and easy, and that this is all about simple supply and demand. Based on some anecdotes I've heard, maybe Facebook has the ability (and perhaps willingness) to exploit its users and force small advertisers to advertise.

 

Disclosure: Long FB

 

I started a couple of organization pages and Facebook doesn't allow people to see you pages posts without changing a setting (which is off by default).  Thus basically no one sees an organization pages without paying for it.  Note you can see group posts which are different than organization pages. 

[Jurgis]

One way FB could be attacked is if people actually get paid by the social network for being a consumer. There are interesting things going on in Blockchain which makes this possible. See the article below

 

https://www.nytimes.com/2018/01/16/magazine/beyond-the-bitcoin-bubble.html

 

This has the added benefit that the data about consumers owned by consumer. But it is doubtful if this ever going to take off.

 

Vinod

 

WSJ just posted an article related to this:

https://www.wsj.com/articles/a-better-way-to-make-facebook-pay-1523209483

 

Techies have an expression for Facebook’s model. It’s “free as in beer”—in the sense of costing no money. You pay in other ways. I propose a simple fix. Let’s flip the whole thing—make it about property rights, 21st-century style. America was built on property rights. Congress can deliberate for 90 seconds and then pass the Make the Internet Great Again Act. The bill would contain five words: “Users own their private data.” Finis.

 

....

 

What would the world look like under the Make the Internet Great Again Act? If you upload to Facebook photos from your last beach vacation—though please don’t—you still own them. But if I go to your page, zoom in to see whom you’re drinking with, click on a nearby ad, message you about it, or even “Like” it, that information about me should remain private too. I should still own it. Same for whatever I search on Google or buy on Amazon. I control it.

 

Facebook would store this info in a virtual locker, and users would control access. The social network already has this data. It simply needs to corral it into two billion virtual lockers. It’d take an overnight hackathon to implement, really. Each user could then share or not.

 

But if you don’t share, Facebook can’t do its magic and provide a robust News Feed. It will be all cat videos, all the time. Similarly, Google can’t provide pertinent search results, which, like prizes on “The Newlywed Game,” are selected especially for you.

 

You’re going to want to share. Here’s the good news: Facebook is going to pay you to share. Then they’ll turn around and charge you a similar amount to cover the cost of servers, electricity, coders and Mark Zuckerberg’s hoodies. This way they can still show Wall Street the profits it expects. Worth it? Your call.

 

...

 

This is where it gets fun. Facebook would provide a sliding scale for sharing. The more information you deem shareable, the more you earn. In effect, it becomes a revenue-sharing arrangement with advertisers that want to reach you. If you don’t mind the barrage of ads, share away and a virtual wallet inside your virtual locker grows and grows, probably to be spent on new Facebook services like games, music or videos. Real competition in a real marketplace, rather than the charade of today.

 

I do not think this is easy to implement. Each of the board members would end up owning their comments on the CoBF board, as they would with all consumer reporting firms, etc. Might be easy for the big tech but not for others.

 

Vinod

 

This set of ideas have been talked about for ages in the libre tech circles (MIT, Richard Stallman, etc.). IMO beyond the pure idea, there are numerous issues of how to get there and whether it would work from technical, societal and business points of view.

 

I probably don't want to get into detailed discussion about the possibilities and issues, since ultimately the proof is in the pudding: either someone will figure out a working whole based on the principles described or not. But:

 

- When you post on the forum, even if you "own" your posting, you are still sharing it with certain audience. Attaching rights to every post and controlling how it's shared/not shared/scraped/forwarded/etc. is complicated and costly. Likely more costly than the "revenue" of your rights in the first place.

 

...

 

Gotta go. Maybe more later.  8)

[nkp007]

If you don't want your data shared, don't use their services.

 

Or maybe they should have a $9.99 per month subscription plan for "full-privacy". I bet less than 1% of people would take that option. 

[Guest longinvestor]

If you don't want your data shared, don't use their services.

 

Or maybe they should have a $9.99 per month subscription plan for "full-privacy". I bet less than 1% of people would take that option.

 

I will bet that there’s way more than 1% pay for full privacy. I personally will pay more than that if what I get is assurance that advertisers don’t see how I use the internet. Also I despise how my pretty daughter’s picture is on a global billboard. We are being naive talking about advertisers and such while the users of FB etc are sitting ducks. There’s likely far uglier things to happen. To the younger, gullible section of society.

[fuluvu]

Comment from Oakmark fund

Facebook, Inc.

Facebook controls the world's most dominant social networking platforms, Facebook and Instagram. The company's unprecedented global reach and infamous ad-targeting capabilities have made Facebook one of the most sought after and effective advertising platforms ever created. More recently, a considerable amount of negative press has surrounded the company, as has happened occasionally in the past. Facebook's business has repeatedly withstood these historical setbacks, due in part to its superior products, powerful network effect and track record of out-innovating, replicating or acquiring its would-be competitors.

Without ascribing value to the company's non-earning assets, which include messaging platforms WhatsApp and Messenger (among others), Facebook is trading at less than 15x next year's earnings (excluding net cash), a discount to the S&P 500 Index. This is a very attractive valuation for a company that is projected to grow its revenue well in excess of 20% for the foreseeable future. We believe that Facebook's normalized operating margin is substantially higher than what it reports, as the company continues to invest heavily in a variety of growth initiatives.

 

[LounginMKL]

Orrin Hatch: Now, Mr. Zuckerberg, I remember well your first visit to Capitol Hill back in 2010 ... You said back then that Facebook would always be free. Is that still your objective?

 

Zuckerberg: Senator, yes. There will always be a version of Facebook that is free ... We’re committed to doing that.

 

Hatch: Well, if so, how do you sustain a business model in which users don’t pay for your service?

 

Zuck: (Blinks.) Senator, we run ads. (Smirks.)

 

;D

 

https://www.theatlantic.com/technology/archive/2018/04/the-strangest-moments-from-the-zuckerberg-testimony/557672/

[Liberty]

Orrin Hatch: Now, Mr. Zuckerberg, I remember well your first visit to Capitol Hill back in 2010 ... You said back then that Facebook would always be free. Is that still your objective?

 

Zuckerberg: Senator, yes. There will always be a version of Facebook that is free ... We’re committed to doing that.

 

Hatch: Well, if so, how do you sustain a business model in which users don’t pay for your service?

 

Zuck: (Blinks.) Senator, we run ads. (Smirks.)

 

;D

 

https://www.theatlantic.com/technology/archive/2018/04/the-strangest-moments-from-the-zuckerberg-testimony/557672/

 

"Sen: Mr. Zuckerberg, suppose for a second your house was ransacked by thugs, your family was tied up in the basement with socks in their mouths, you try to open the door but there's too much blood on the knob

 

Z: What is your question?

 

Sen: My question is about privacy, sir"

 

 

"Senator: 'Is it or is it not true that Facebook uses deep unsupervised necromancy to alchemize poke data into consumer cloud big digitalia?'

Zuck: 'What now?'"