A Date With Facebook

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About: Facebook, Inc. (FB)
by: Patrick Kroneman
Summary

Adding further monetization options are welcome for Facebook.

Facebook has the best data to go into the dating space.

Use of personal data comes at a sensitive time.

The social network's network effect will be boosted further.

Bundling and integrating all the apps of the business makes it harder to separate parts.

Last week Facebook (FB) announced that it's launching Facebook Dating in the US. Competitors InterActiveCorp (IAC) and Match Group (MTCH) saw their shares tumble on the news. The step into dating makes for a logical use of Facebook's data and networks. I believe that it could boost growth, but there are worrying factors to take into account.

The news

Via its newsroom, Facebook let the world know that its dating function went live. Unlike Messenger, Instagram and WhatsApp, it isn't a separate application, but integrated into Facebook itself. Here is what Facebook says about this integration:

Today, we’re launching Facebook Dating in the US. We’re also giving people the ability to integrate their Instagram posts directly into their Facebook Dating profile and giving people the ability to add Instagram followers to their Secret Crush lists, in addition to Facebook friends. By the end of the year, we’ll make it possible to add Facebook and Instagram Stories to your Dating profile too. - Facebook Newsroom

But Facebook clearly underlines the separation of data and states that the dating profile will be separate from one's regular Facebook profile as well. Given the last year and a half, it should come as no surprise that these delicate data sets are being highlighted. To further to do Facebook issued a privacy statement along with the news.

For those who are looking to use the function or just want to measure its usability against the competition, here's how it works:

Starting today, you can choose to opt into Facebook Dating and create a Dating profile (separate from your main profile) if you’re 18 years or older and have downloaded the most recent version of Facebook. You will be suggested to others who have also opted in. People are suggested based on your preferences, interests and other things you do on Facebook. Facebook Dating isn’t about swiping or having to wait for someone to like you to get a first chance at reaching out. If you are interested in someone, you can comment directly on their profile or tap on the Like button to let them know. If you aren’t interested, you can pass on them. Facebook Dating allows you to match with friends of friends and/or people not in your friend circle. Facebook Dating won’t match you with friends, unless you choose to use Secret Crush and you both add each other to your list. All of your Dating activity will stay in Facebook Dating. It won’t be shared to the rest of Facebook. - Facebook Newsroom

Business impact

Depending on how Facebook is looking to monetize its dating feature is important to think of when looking at the financials. As of the latest financial statement this is what Facebook's revenue breakdown looks like:

Source: Facebook 2019 Q2 Earnings Report

Practically all of the revenue comes from advertising with the remainder coming from payments and other fees. Given that Facebook implements its dating function within its main app, it seems that Facebook is sticking to an advertisement based business model for it. Compare this to the latest figures to those of the Match Group and you can see something entirely different:

Source: Match Group 2019 Q2 Investor Presentation

Match Group states direct revenue as following:

Direct Revenue - is revenue that is received directly from end users of our products and includes both subscription and à la carte revenue. - Match Group 2019 Q2 Earnings Report

The indirect part or just MUSD 11 is mainly advertisement. So this revenue breakdown is almost exactly the opposite of that of Facebook. Given this reliance on a subscription based model, it looks like Facebook value proposition for those searching for love is that it's free. Having deep pockets and its huge amounts of data, Facebook can seriously profit from this move. Adding Facebook Dating as another revenue stream will help reduce the reliance on Instagram for revenue growth.

For Facebook Dating to be a success not much extra is needed in the sense of capex. Since most people who will use the dating function are already using the social networks of Facebook, the threshold for them to do so is very low. They don't even have to go to the App Store or Play Store. Besides, Facebook has huge amounts of data via both Facebook and Instagram. Not necessary data that will get the company in conflict with the law, but the kind of data that makes it easier to make matches more likely. If one has a romantic interest in a person and you visit their profile and like their pictures, Facebook does take note. Combining all those visits and likes, makes Cupid's job or in this case Facebook's job much easier. Given that Facebook has the most popular social media networks on the planet, means that it has the most comprehensive data to go into this business. The MAU numbers speak for themselves:

Source: Facebook 2019 Q2 Earnings Presentation

Rising risks

The fact that Facebook launches Dating now, while at a crucial point in time for the company, is remarkable. 2018 was a year full of scandal and hurt for Facebook. Even looking at the last few weeks makes it clear that Facebook is, along with other Big Tech names, still in the crosshairs of the regulators. Last Friday the New York State Attorney launched a probe into Facebook and the day before that the EU announced it was looking into Libra. One might question if it's smart to start with such a feature now. Despite all the claims that Facebook makes about safeguarding privacy and personal information, regulators are more than likely to scrutinize those statements. But if you want to use data then what better use is there than to let people find love through it? At least you could score some PR points.

A breakup would be the single most damaging thing for the web of social media networks that is Facebook. This would greatly reduce the network effect and thus the company's moat. Since there are such calls, this is a tail risk to be taken into account. However for the foreseeable future, I think it's unlikely to come to this.

Given that Facebook is busy integrating its businesses and now with the addition of Dating the network effect is prone to be expanded as people will likely to be triggered to spend more time on Facebook's apps. Interconnecting pictures and profiles will help a lot in achieving this. Furthermore it will be harder to separate businesses once they are intertwined as a Gordian Knot.

Conclusion

The newly added function Facebook Dating will likely boost growth due to the added network effect and a greater time spent within Facebook's ecosystem. Given Facebook's dominance in the sphere the sell off of competitors is warranted. Normally, these are all good things, but perhaps this is not one such time. Facebook might want more, but all signs say that regulators want less. As a shareholder I love growth. Only not at this time for Facebook. I think further integration, optimizing current operations and staying beneath the radar might be a better path for now. Thus I'm not adding to my position, but keeping the shares that I've got.

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.