Facebook And Twitter Accept A Gift From Sprint

Aug. 5.14 | About: Facebook (FB)


Sprint's new plan is great for investors in Facebook and Twitter.

The new plan may create subtle but very profitable changes in how people use their phones.

People that don’t sign up for the plan will still get to view more Facebook advertisements.

While Sprint's (NYSE:S) brand Virgin Mobile is getting all the press coverage, Facebook (NASDAQ:FB) and Twitter (NYSE:TWTR) are making the money. When Virgin Mobile announced the introduction of plans for only 7 dollars per month, it confirmed Sprint's plan to offer lower price points. Those plans can be upgraded to add the app of your choice for only five dollars more. Net Neutrality activists are up in arms, but this isn't an article about Net Neutrality. As investors, we want to know what this deal means for Facebook and Twitter. Clearly, this isn't a large percent of their users, but they may be loud when it counts. Every new customer on "Virgin Mobile Custom" may be a free brand ambassador for Facebook or Twitter.

If you haven't heard about the terms of the deal Facebook and Twitter struck with Sprint, it's because they didn't have to strike a deal. According to Mr. Draper's comments in the WSJ, neither firm is paying Sprint. Now the first objection has to be:

Why would anyone that wasn't an avid user of Facebook or Twitter sign up for this plan?

If the price doesn't bring new users in, this plan still provides a boost to Facebook and Twitter. Even if the only customers for "Virgin Mobile Custom" are people that already use Facebook and Twitter, this changes how they use the services. Phones with limited texting are the ideal product for these companies. Since the applications are free and allow users to connect with each other, communication is free as long as the communication goes through that app. Remember how well Facebook was doing with monetizing phone use? This article, by an unrelated author, spells it out. Okay, so maybe people that can only afford this cheap plan aren't the customers that advertisers are hoping to reach. Not a problem.

The beautiful thing about Facebook and Twitter, depending on where you are sitting, is that they are social companies. They spread and accumulate users by people encouraging their friends to join them. Even if only a few people sign up, they will be free marketers. The statement goes like this, "Oh, I don't have text messaging. I have Facebook chat. Add me." Parents wishing to reach their children, who could hit the 20 text limit in a couple minutes, will need to send their messages through Facebook or Twitter as well. So we have new sign ups from parents and new sign ups from peer pressure. If these customers don't exert peer pressure, they won't be able to talk to their friends. They are signing up to bear this burden of spreading the brand. As far as Facebook and Twitter are concerned, this is a no lose scenario.

It isn't just new customers though. It expands on use from existing customers. When anyone on this plan wants to send or receive a message, they will want to use Facebook or Twitter. Previously, checking your text messages did not create money for anyone. Now, for many people, those messages will be inside an app. Remember, it isn't just Virgin Mobile customers that have to open the app to get a message. Any friend they contact will need to get on the app to respond.

The benefits for Facebook and Twitter extend beyond the surge of new users and increasing activity from existing users. Even if another company wanted to compete with these two, they would need both an attractive platform for the user and the ability to get their app included. The barriers were already extremely high, but the increased involvement of these companies in our regular life will make them a little bit stronger.

Virgin Mobile has stated that in the future they may consider charging applications for the privilege of being on this list. That seems like a wise thing to do. When they meet the little guys, they may be able to negotiate. How much power will they have negotiating with Facebook? In a sense, this is Pandora's Box. In our estimation, once Virgin Mobile opens it, they may never be able to close it. They will get what Facebook feels they should get and that will be the end of the negotiations. Removing Facebook from the options would damage relations with their customers.

Will Facebook or Twitter make enough money off this for it to matter?

Facebook and Twitter are growth companies. While current income is important, it is the trend that the stock trades on. To justify their market caps, they must continue to grow rapidly. Even if those stocks were producing higher levels of net income, paying it out in dividends wouldn't satisfy investors. The valuation demands growth. Even bears may admit some growth will happen, but they have had a legitimate case that projections can get too optimistic.

Growth in itself isn't enough. How that growth occurs determines how sustainable it is.

One of my favorite authors, and America's foremost economist, Thomas Sowell has addressed the growth of companies and fortunes in clear terms. In his book, Intellectuals and Society he writes, "Despite the verbal virtuosity involved in creating a vivid vision of profits as having been clawed out of the guts of society, neither Steinbeck nor most other intellectuals have bothered to demonstrate how society has been made poorer by the activities of Carnegie, Ford or Rockefeller, for example - all three of whom (and many others) made fortunes by reducing the prices of their products below the prices of competing products. Lower prices made these products affordable to more people, simultaneously increasing those people's standard of living and creating fortunes for sellers who greatly expanded the numbers of their customers. In short, this was a process in which wealth was created, not a process by which some could get rich only by making others poorer." If you'd like a longer version of the excerpt, it is available here.

To exceed the projections analysts have made for Facebook and Twitter, they will need a cheap way to press their product on new users. They needed a tool to expand their user base faster and cheaper. Sprint gave it all to them with a bow on top. If this takes off for Sprint, we could see AT&T and Verizon preparing gifts as well.

Disclosure: The author has no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. The author wrote this article themselves, and it expresses their own opinions. The author is not receiving compensation for it (other than from Seeking Alpha). The author has no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Information in this article represents the opinion of the analyst. All statements are represented as opinions, rather than facts, and should not be construed as advice to buy or sell a security. Ratings of “outperform” and “underperform” reflect the analyst’s estimation of a divergence between the market value for a security and the price that would be appropriate given the potential for risks and returns relative to other securities. The analyst does not know your particular objectives for returns or constraints upon investing. All investors are encouraged to do their own research before making any investment decision.