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Facebook: social network or pervasive global media giant?

Facebook is a fundamentally strong business. It has a sustainable competitive advantage, the ability to grow organically and the capacity to grow earnings over the long term. These are the things we all look for in companies we invest in, but what’s interesting and different about Facebook is the business itself. It has morphed from a channel to keep in touch with friends to a sophisticated social media platform. It has disrupted not only the way we communicate and consume media, but it continues to play a more integral role in our lives.

Facebook reports that the average user spends 50 minutes a day on Facebook, Instagram and its Messenger platforms. Considering the average person spends nine hours sleeping, then about an hour out of the remaining 15 is a lot. And that’s the average. At least 1.3 billion people use Facebook for more than 50 minutes a day and 15% of users look at it more than 50 times a day.

Much of that time may be spent corresponding with friends, but some is also spent consuming media, making Facebook a powerful force to be reckoned with. Facebook is changing and disrupting the way we consume media, and more importantly, what we consume.

Facebook’s power lies in the curation of media

Facebook has not replaced traditional forms of communication, but in a way unheard of in the past, it packages other forms of media, TV, print and radio in an accessible and digestible form. But even that isn’t where Facebook’s real power lies. Far more significant is the fact that Facebook curates what we consume.

Depending on what we have read, watched or listened to in the past, Facebook can serve up the stories it thinks we are most interested in. Every click and every view is measured and analysed to refine what will be sent next time. As artificial intelligence becomes more sophisticated, Facebook’s ability to learn and deliver according to individual tastes will grow exponentially. And all of this content can come from anywhere within its enormous network, not just your friends or even your friends’ friends. It’s a fundamental shift in the way we receive what we see and hear, and the implications are profound.

Facebook may be more in control of what we see, watch and hear than any single media company or government in history, yet it is largely unregulated. There are no media laws to exert control over what is presented to users, and it’s a fine line between being a platform and being a publisher. There’s a blurring of lines, and there’s no going back.

Does disruption translate into profits?

Just because Facebook has disrupted the way we interact and consume media, does it follow that it is a good investment? Will it continue to increase revenues sustainably and produce returns for investors? As more people and businesses use platforms like Facebook to communicate via messages, photos and videos, the network effect means that the platform’s value proposition will increase. Given that engagement, are increased revenues and profits a sure thing?

There’s no such thing as a sure thing when it comes to investing, but in our view, Facebook has the strong fundamentals needed to sustainably increase revenues over the long term.

While engagement may not in itself produce revenue, it correlates strongly with advertising effectiveness, which does generate income. That’s why 50 minutes a day is significant. When combined with Facebook’s ability to reach 26.6% of the global population and target groups of people with certain characteristics, it translates into a strong market position and the ability to charge for advertising.

The more time we spend on Facebook, the larger the number of impressions (items people have looked at) Facebook can sell to advertisers, and the more Facebook knows about you. Which in turn allows advertisers to target you.

At the same time, it’s surprising how few companies currently advertise with Facebook, given its wide reach and power. Around 70 million businesses have pages on Facebook yet only five million advertise, and spend a relatively small average of US$7,000.

However, the global advertising market is estimated at US$550 billion and growing at approximately 4% per annum. Of this, US$205 billion is spent on the internet, yet only US$34 billion of that is spent on Facebook. Facebook currently controls only around 7% of the global advertising market.

In our view, Facebook’s control of global advertising is set to rise. Even if we don’t consume more media in the future, we will certainly consume more of it online. And given that the internet, including Facebook, offers by far the best targeting techniques, the growth in the internet’s share of advertising will also accelerate.

The bottom line is that Facebook’s advertising revenue is likely to rise, and combined with a small increase in profit margin, it paints a picture of a strong and growing business.

Software developers have worked with Facebook to allow businesses and individuals to manage multiple Facebook pages to stay close to local communities and also promote goods and services consistently across the country. Statistics which Facebook can glean from analysis of users can be crucial for businesses seeking to understand and target their ideal customer.

What does it all mean?

Facebook is the ultimate disruptor. It has changed forever the way we interact with each other and businesses. But more importantly, for long-term, fundamentals-based investors, Facebook’s strong business model, competitive advantage and ability to grow revenues organically and sustainably make it an excellent investment.

 

Tim Samway is Managing Director of Hyperion Asset Management. This article contains general information and does not consider the circumstances of any individual.

7 Comments
SMSF Trustee
September 11, 2017

I also think that it's an exaggeration to say that FB has 'changed forever the way we interact with each other and businesses'.

The changes were already in train before FB happened to hit on the right framework to take it to a new level. If anything, email was the disruptor back in the late 1980's/early 1990's when it meant comms could be done quickly and more conveniently than letters and even the telephone. Speaking of which, mobile telephony disrupted comms in a big way well before FB came on the scene and FB has just used technology to take both of these to new places.

And in terms of personal interactions, it may have added ways we can connect, but it hasn't changed the core of good interpersonal relationships, which is to get together. For example, I'm yet to see families who have members in, say, 6 different cities each sitting down at a restaurant in their home city at the same time as the others and having a birthday party via FB messenger video. It may happen in some isolated instances, but people will usually travel to be with their families to celebrate.

And where FB has 'disrupted' such things, the term does become accurate, when you see everyone at the dinner table on their phones communicating with others outside the group. But that's not a nice thing for FB to have done, is it?

FB is a good company, there's no doubt about that. But let's be clear about what it's done and not hype things up.

Andrew Varlamos
September 11, 2017

Great article, thanks Tim. Agree entirely.

PaulU
September 08, 2017

Agree with SMSF. On closer analysis how many "disruptors" around the world are merely rent seekers simply using the "new" medium of communication?

SMSF Trustee
September 08, 2017

OK, so Facebook has taken what TV, radio and print media have been doing for years into new directions by the technology of data gathering and analysis. That sounds like evolution rather than disruption to me.

But wait a minute. Those media have done that as well, through ratings surveys etc. A slower process and more hit and miss, but understanding your customer is not in itself a new activity. Doing it more efficiently is again evolutionary, not revolutionary. So let's not exaggerate what's now being done by FB.

The traditional media could easily have developed FB style approaches, if they'd pursued the right strategies at the right time. So their industry hasn't been 'disrupted', it's just being done better by a new entrant.

This term 'disruptor' has to be the most over-hyped idea going around, doesn't it?

FastEddy
September 07, 2017

Like so many good companies, Coke, McDonalds, etc..
invest in it - but do not consume it. Not so good for you.

hank
September 07, 2017

Difference being that FB just reported quarterly revenues of USD 9.3bn & net income of USD 3.9bn for the quarter ... now lets juxtapose that against , say WOW with EBIT of AUD $2.3bn for FY 17 for context .....

Fundie
September 07, 2017

‘Facebook’ and ‘long term’ should not be used in the same article. Remember Friendster? Remember MySpace?

 

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