Zuckerberg's Vision For Facebook, And How It's Getting There

  • During the Facebook Q&A, Mark highlights key points on how his team views their service, and how they will continue to improve upon it.
  • Many of the recent changes to Facebook were strategic in nature and have correspondingly improved qualitative and financial metrics.
  • Facebook prices its ads at a premium, and continues to scale the business model globally, which gives the business a compelling growth trajectory.

Zuckerberg's Vision For Facebook, And How It's Getting There

I have high conviction that Facebook’s (NASDAQ:FB) management team is capable of navigating its own business environment with meaningful execution on new products, and will continue to roll out the core service of its newsfeed and messenger globally. This will translate into high rates of revenue and earnings growth for Facebook, which will justify the high valuation that it enjoys in comparison to market indices.

After watching Mark Zuckerberg's open Q&A, I came away with additional insight on how the organization is structured, and what aspects of Facebook's design are prioritized over others. Of those priorities, Mark Zuckerberg asserted that he wanted "to build the perfect personalized newspaper for people in the world."

Mark has stressed throughout the Q&A that organic reach of pages declined in order to give users a better experience. The average user may only read 100 status messages a day, and in order to offer the most relevant content to that narrow attention span, Facebook implemented an algorithm that ranks user-generated content, and content specific to a person higher. By doing this Facebook remains a relevant destination for consuming content pertaining to a users network of friends. This keeps Facebook "sticky," and maintains the utilitarian aspect of the social network.

Mark also mentioned that its change to move over users from Facebook to Facebook Messenger was done to improve the overall user experience. Loading up the Facebook app, and clicking on the inbox section takes extra time, so making the experience more spontaneous will help with the overall engagement of users on Facebook Messenger. In other words, this change makes Facebook Messenger more useful, and increases the likelihood of it being used.

Strategically speaking Facebook Messenger has a fairly impressive installed base, and when combined with WhatsApp, Facebook has more users on its various services than competing applications (WeChat, Line, SnapChat). This reduces the likelihood of Facebook becoming overly dependent on WhatsApp for user acquisition, and gives Facebook a more compelling user interface when it comes to wearable devices.

Several months ago Facebook Messenger had 200 million MAUs (monthly active users), but according to a recent blog post, Facebook messenger has 500 million users or MAUs.

Facebook User base
Source: Facebook Earnings Q3 2014

Mark believes that the service should be extremely functional. This doesn't mean cool, or hipster. It just needs to work and by focusing on functionality, and adding useful features over time, Mark's team has been able to increase daily and monthly active users significantly.

Quoted from Mark Zuckerberg:

My goal was never really to make Facebook cool. I am not a cool person. And I've never really tried to be cool! Facebook should be useful and always there, like a utility. You go home, you turn on the lights, right? You're probably not like, Yeah, electricity! It just needs to work. My goal is that the ability to connect and communicate should be that. It just should work.

Zuckerberg believes that the service is more of a utility, and like electricity, it's not going to give off really cool vibes. So instead, Facebook will continue to make changes where it needs to, and offer unique features or services where appropriate to keep the platform relevant, and useful to its users.

Facebook operates more like a monopoly (very limited competition), and similar to a utility is able to price its service at a premium. Currently, Facebook ARPU is better than Twitter. Facebook trailing twelve month figures is $8.78, in comparison Twitter's is $4.41, and Yahoo's is $4.63 (approximate). In other words, Facebook's ad pricing is twice that of competing websites. And, while the service is free for users, companies who want to advertise end up paying significantly more.

Needless to say, Facebook's potential market is the world (7 billion potential people), which is significantly larger than the current 1.35 billion users on Facebook's platform. Albeit there are limitations to this potential market as economics, regulation, and other barriers of entry do exist. But beyond user growth, and incremental improvements in ad pricing, there's also Instagram and WhatsApp which are sticky apps in nature, driving users to share and engage more. Both of these applications have the potential to drive Facebook revenue growth significantly, as they're extremely popular applications with significant monetization potential.

When combining all of the qualitative and quantitative aspects of the business, I believe that Facebook is a compelling investment opportunity. Sure, Facebook valuations may be a little stretched, but the future growth trajectory is still compelling.

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