Facebook Isn't A Social Network, It's A Business Emporium

| About: Facebook (FB)

Summary

After listening to Facebook's 4Q15 earnings conference call it became crystal clear to me that the company doesn't run a social network but rather a business emporium.

While many of their products are front facing to users such as WhatsApp and Instagram there is a business-to-business back-end.

Facebook will be a business-to-customer portal for users and a business emporium to those businesses seeking direct engagement of potential customers.

I've been letting the dust settle from Facebook's (NASDAQ:FB) 4Q15 earnings report before opining on the company and their future. I've read the bullish and bearish articles since earnings and many of them have rehashed a lot of the same points from the last year or two - user growth has continued, revenue growth is still there, or the company is moat-less and appears fraudulent regarding users and clicks. There is no lack of opinion on Facebook but the problem is these perspectives don't recognize Facebook for what it is - or rather - for what it is becoming.

The early Facebook website was built as a way to connect with your friends and colleagues in college. If anyone remembers those first years you needed to have a college email address in order to be connected to a "network." From there you saw everyone else who also was part of that network and you conducted your social interactions. Eventually the website grew from a college directory to an all-accepting worldwide social network.

Connecting people from around the world who share who they are and what they like allows Facebook to have a database of very specific and actionable information. This opens the door for businesses to target - through advertising - an audience who they think is their market. But, this is on the same level of rehash as the bullish and bearish examples I started with.

Since strategically acquiring several companies - indifferent of your agreement of the word strategic - Facebook has created and continues to create several roads that lead to the same city. In fact, with the amount of users and engagement I'll go so far as to call them highways.

These highways are in the form of Facebook itself, Messenger, Instagram, and WhatsApp. What do all of these highways have in common? To start they are all free to use. Of course, that isn't much of a differentiation to other apps or social media websites so we must dig deeper.

What is different is that Facebook targets not the user for their revenue but the ones looking to spend money to make money. This target is of course businesses and organizations. Now at first look this is still a very non-differentiating factor. Twitter (NYSE:TWTR) targets businesses, too, and so do many other popular apps and networks.

What Facebook does better than any other is bring in businesses and that is because Facebook is the biggest network in the world - not just Facebook the social media website but Facebook the company. Let's break that down for a quick moment:

  • Facebook: 1.59B Monthly active users (MAUs)
  • WhatsApp: 1B MAUs
  • Messenger: 800M MAUs
  • Instagram: 400M MAUs

That's a collective total of 3.79B monthly active users on all of Facebook's platforms. For those worried about spam and fraudulent accounts we can even cut this number in half (1.9B users) and Facebook is still the largest network in the world. Now naturally, and without any hesitation of doubt, there is overlap in these users. But why exactly does that matter? Overlap means that Facebook "owns" these users' time during their day, regardless of what medium they use.

Comparatively, Twitter has 320M MAUs and LinkedIn (NYSE:LNKD) has 100M MAUs (400M cumulative users). Pinterest similarly has a little over 100M MAUs also. Facebook has quite the lead on any of these other social websites.

But I don't actually want to dwell on this because this isn't where Facebook dominates. Facebook is actually even better at making relationships and partnerships with businesses than it is with gaining users. This is what really matters to bringing in revenue and, as I'll get to soon, new inroads to other opportunities. Let's make another comparison with the amount of advertisers these social media websites have:

  • Facebook: 2.5M active advertisers
  • Twitter: 100,000 active advertisers

What's interesting is that I could not find any other social media websites data of active advertisers. Google (NASDAQ:GOOG)(NASDAQ:GOOGL) has over 4M active advertisers but has been in existence and using advertising longer while also primarily being a search engine as opposed to a social media site.

What these numbers show is that Facebook is dominant in not only its category but is consistently creeping up to one of the most dominant online players altogether. This year-old chart makes me think about how quickly Facebook is catching up and becoming a marketer's top choice. In fact, Facebook has increased their advertisers by 300% in less than three years.

So what, then? Basically I have shown that Facebook is dependent on businesses and their advertising for revenue. That much is definitely true. But do you think that's all Facebook will do with the amount of users and amount of business relationships it has?

Why should businesses take Facebook seriously and think that there is more Facebook can do for them? There's one really good reason: Facebook has the best targeting and return on investment than any other website.

There is a basis for why this is true and it's summed up in this thought: "paid search helps prospective customers find your business, while paid social helps your business find prospective customers." This is the difference between Google and Facebook. Going back to what I said at the beginning of this article, Facebook has such an enormous amount of users and data on those users that it allows businesses to target some of the most granular demographics in order to develop a sell-through of their products. This is something that Twitter can't compete with and is something Facebook is closing in on with Google everyday.

But don't take my word for it - there have been studies that have put Facebook and Twitter head-to-head. One of which shows that Facebook beats out Twitter on most metrics, including active users, bidding prices and costs, reach, average engagement, traffic referrals, and mobile optimization. The only thing Twitter beat Facebook on is average click-through rates. This was attributed mostly to Twitter having less ads compared to Facebook so users click on the ones they do see. However, this may be to the advantage of businesses/advertisers because Facebook obviously has not hurt its user growth judging by its 1.59B users and growing, allowing businesses to reach more people with more ads.

Now that I've shown Facebook has the users, the business and brand adoption as well as the ability to effectively give those businesses what they need, it leads me to the point I've been getting at. That point is Facebook is solidifying itself as the way for businesses to connect with customers - both the ones they have as well as the ones they don't yet have. As I said earlier, businesses are the ones spending the money to make money. Facebook is not a social network, it's a business emporium.

The reason why this is still the beginning for Facebook and its income is because advertising is just the on-ramp to this next highway. In fact, I believe the recent changes for WhatsApp to no longer charge a subscription fee is going to benefit everyone - the user first but also Facebook, its businesses and ultimately the investor. These changes also will include Facebook evolving Messenger into a business-to-user platform as it makes it more and more useful to use (Payments is just a start and M is another good step). Another meaningful example along these lines is Live which is now available to all iPhone users in the US.

The reason I believe this is because Mark Zuckerberg stated something on the fourth quarter conference call that made a light bulb go off in my head:

"We think this is an important step (making it free) towards creating an even more ubiquitous product without affecting our plans for building WhatsApp into important business in the coming years. Later this year, we'll be testing new ways for people to use WhatsApp to communicate with businesses and organizations that they want to hear from." (emphasis mine)

I believe Facebook will use WhatsApp to connect businesses directly to users and allow the user to never leave the Facebook compound. Businesses will require less overhead as they will operate directly on the platform that Facebook uses this for - WhatsApp and Messenger as obvious initial choices. It won't be commission, it won't be subscriptions, it will be a partnership just like they have established with their social advertising. The user, again, gets the ability to access the business' service for free. The only thing the user will pay for of course is the provided service from that business.

Naturally some may be skeptical. Why would businesses want to partner with Facebook when they have their own website to direct people to? There is a pretty simple explanation - the work is already done. There's no need to reinvent the wheel and work tirelessly for people to find your business' website directly. Facebook already has the people you want and so it becomes a matter of putting your name where they already are.

Valuation

I would now be remiss not to mention valuation at this point. I have seen many comments that have said Facebook is well overvalued or is "valued for perfection for the next "X" years." This simply is not true. The reason why Facebook is valued the way it has been valued is due to the expansion the company has yet to tap into. Much of which has to do with what I've explained above - it will be a business-to-customer (user) portal and a business emporium to those seeking direct engagement of potential customers. Advertising shows the effectiveness of how Facebook can work for businesses. Once Facebook has those relationships these other doors will open at the right time.

Secondly, Facebook doesn't partake in hardware as its main or even secondary driver of revenue (obviously Oculus is hardware but a very minor player at this point). Seemingly I'm making a direct correlation to Apple (NASDAQ:AAPL) which is dominantly a hardware player and suffers the effects of dealing with hardware margins and selling physical products. Facebook's products are free to the ones that matter. The ones that pay for Facebook's products are looking to make more money. The many comparisons I see between market caps such as Apple and Facebook are simply not on the same baseball field. Apple deals in hardware and a portion in services while Facebook deals digitally on 99% of its fronts and, as I've said, gives away its products for free.

Therefore, Facebook should not be compared to hardware types of companies. Facebook's margins, its ability to expand those margins, and the ability to expand its overall business are what make the market cap what it is today.

Conclusion

Facebook is currently an advertising social media company, that much is true. But the market doesn't work on what is current, it looks forward to what the company will become and how its bottom line will be fed. For now advertising and marketing will be a driver for some time. This gives Facebook the opportunity to work on this connection of businesses to users.

Mark Zuckerberg has already said this much is true and by the end of the year WhatsApp will be testing this new on-ramp. It is clear the company is going to capitalize on its established relationships with its revenue makers - I mean advertisers - to create this new vein in the highway system.

As one revenue stream continues to ramp (advertising) other revenue streams (business-to-customer connections) will come online and contribute much more than what it is now. Facebook is not simply a collection of social networks, it's continually building itself into a bigger and bigger business emporium.

Disclosure: I am/we are long FB.

I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.