Why Small Businesses Need to Know Facebook
October 1, 2015
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Facebook is the “leader in the clubhouse” among the large US players in the ecosystem game.

To start, the original Facebook disclosed over 1.3 billion monthly active users (MAUs) in its most recent quarterly earnings statement (3Q 2104).  VentureBeat breaks down the numbers, but the headline follows:

  • 1.35 billion MAUs (14% growth year-over-year)
  • 1.12 billion mobile MAUs (29% growth year-over-year)
  • 864 million daily active users (DAUs) (19% growth year-over-year)
  • 703 mobile DAUs (39% growth year-over-year)

The absolute number of users on a monthly and daily basis are enormous.  Upon going public, analysts were concerned with the growth rate, and in particular mobile usage.  Facebook has addressed and rectified these concerns.

As the VentureBeat article articulates:

This is important for two reasons. First, Facebook’s growth rate has been slowing for a while, which shouldn’t be surprising given its size. Second, two thirds of the company’s revenue now comes from mobile, which only further emphasizes that the social network has managed to successfully transform itself into a mobile-first business.

An ecosystem is only supported by its component parts.  In the technology landscape, the number of users is critical to develop a large user base.  At times, due to the law of large numbers, the absolute amount of participants will lead to declining growth rates.  This will not make analysts happy, but Facebook has transitioned from acquiring and engaging users to monetizing utilization.

This action obviously angered some users, but look at the revenue growth rates?  The Facebook business model works.  In the Q3 2014 shareholder report, Facebook grew earnings per share by 76% over Q3 2013 (and 120% over the 9 month period 2014 v 2013).

In the lead, Mark Zuckerberg indicates:

“This has been a good quarter with strong results…We continue to focus on serving our community well and continue to invest in connecting the world over the next decade.”

And now, Facebook is looking to provide additional services (or tweaks to the NewsFeed) to engage monthly active users (MAUs), which falls under “serving our community” in the statement above.

Under the “invest in connecting the world” heading, then Facebook continues to look out for the next Facebook and avoid disruption.  The following are potential megatrends that could disrupt Facebook and Facebook has taken pro-active actions to incorporate the trends into the Facebook umbrella (which adds them to the ecosystem).

  • Payments
  • Messaging
  • Alternative/Virtual Reality
  • Publishing

PAYMENTS

Many commentators look at payments as the next big thing.  And it is.  However, traditional public market investors are looking at payments from the wrong angle (in our opinion).  Payments is hard and low margin.  Payments is a shitty business model.

But facilitating commerce is essential to keeping users engaged (or locked in) with the underlying system.

As noted, Facebook still has a staggering amount of MAUs, so partnering with Stripe, Braintree, PayPal, Visa, Mastercard, or anyone allows users to purchase products straight from the NewsFeed.  Does Facebook make a dent in the overall revenue numbers or profits?  Probably not.

Do merchants continue to advertise on Facebook products?  Yes.

Do merchants increase mobile sales via Facebook?  Yes.

Can artists sell prints over Instagram?  Yes

Can friends settled debts through Messenger and/or WhatsApp?  Yes.

Does Facebook have to learn payments and fraud protection?  No.

There is a lot of talk about Facebook hiring David Marcus from PayPal to run Facebook Messanger, and it seems inherently unlikely that he is not involved in any sort of payments type project.  So much of the “social” business model is “borrowed” from Asian companies (see Line, WeChat) and commerce (in Asia, it is mainly selling stickers) is a large part of the revenue model.

It makes too much sense not to be.  Commerce allows friends to virtually shop (I can show my friend clothes, get the Ok, then make the purchase).  How many people have taken a pictures of something, send it via text to their best friend, then waited for approval and made the in-store purchase?

Integrated with Facebook, someone can request feedback from a larger group before making the purchase decision.

How many Facebook posts from friends are seeking recommendations for anything?  Through commerce and payments, now those selections can be made directly from theplatform.

I can ask a question, seek recommendations, research the options and make the purchase all without leaving my chair.

That is an ecosystem.  And that is why Facebook is the leader in the clubhouse.

MESSAGING

Facebook Messenger is mostly used in the US and replaced the internal chat tool previously provided by Facebook.  As noted in Payments, messaging apps provide constant, real-time communication between friends.  The development of the messaging tools may be a cultural shift in the way teenagers communicate.

Email is dead to many Millennials and Generation Y, but the need to share and collaborate is as alive as ever.  The shift to controlled, private messages has lead to the success of SnapChat, but Facebook (along with attempts to acquire SnapChat) broke out Messenger and acquired WhatsApp.

At the time of the acquisition, media pundits ridiculed the $19 billion price tag, however, this was misplaced.  Messaging apps had a rough market value of price per user and WhatsApp happened to have 500 million users.  Facebook paid the rough market value and has been rewarded.  WhatsApp has now amassed 700 million users (only taking four months to grow from 600 million to 700 million users).

Benedict Evans recently provided insight into the “state of messaging” and provided the following chart, which shows WhatsApp sends more messages than the global SMS market.

whatsapp_messages_graph

Overall, Evans indicates that messaging is under development, but there are leaders in different geographies.  Messenger and WhatsApp command most of the global usage, but other players exist in Asia (more on these companies in a later post).

From an ecosystem perspective, messaging is a clear need, and Facebook provides two of the major players likely to contain continued success.  Messaging may not currently be “revenue generating” but that will change over time as additional features are included into the applications.  Once again, Facebook is in a dominant position.

Alternative/Virtual Reality

Facebook also received much press after its acquisition of Oculus VR.  Again, the alternative and/or virtual reality world is in its infancy.  The most obvious use cases are currently virtual assistants such as Siri.

However, as GeekWire reports, VR has the ability to disrupt communication methods over time:

On why Mark Zuckerberg thinks VR is a new platform: “I can actually tell you why Facebook acquired Oculus because Mark (Zuckerberg) has been pretty clear about this: He believes that every decade or so, and those are his numbers, a new platform comes along, and he believes that this is a new platform. That this will revolutionize the way people interact with a lot of things.”

To some, the acquisition of Oculus may look like a shift in priorities.  But Zuckerberg and Facebook have been consistent in the company’s mission to connect the world.  If VR improves world connectivity, then it is exactly the type of market segment that Facebook should explore.  It shows commitment to the overall mission and not optimizing R&D to meet the short-term expectations of Wall Street.

If Facebook continues to focus on long-term objectives, then the company will offer services that keep its massive user base engaged.

One of the possible avenues to leverage AI is discovery.  Facebook already uses algorithms to produce what it assumes will be relevant to users in the NewsFeed.  The development of AI will only increase the relevance of the NewsFeed, which is important to provide engaging content.

Of course, if the algorithm continues its push towards spam, then this could backfire and turn off users from the main NewsFeed, which is currently driving the majority of revenues through advertising.

PUBLISHING (AND DISTRIBUTION)

Although the Facebook NewsFeed is gradually turning to spam, it does provide a large opportunity for small business.  Facebook is a publishing and distribution platform with incredible reach.

The Facebook for Business products enable technical novices easy to use tools to target specific niche audiences based on user profiles.  This is a huge improvement over other publishing platforms because businesses can set price points and actively manage advertising campaigns.  Additionally, over the same platform, businesses can engage in customer service and (ultimately) commerce.

Previously, there have been content publishers, such as Upworthy, that have looked to game the NewsFeed system and receive better than normal organic growth.  The same thing occurs with Google and Search, so this is a risk/reward decision, where organic traffic may cease due to changes in the underlying platform.  From a business perspective, if this is a known risk, then there should be some alternative plans under development.

Facebook continues to explore methods to promote new publishing techniques in order to provide new content to users.  This is a critical point to understanding ecosystem effects.  The company must provide a variety of services to keep users actively engaged.  As micro-entrepreneurship grows (see Etsy), and the rise of small shops continue to leverage Facebook for distribution and sales, then that increases engagement.

My friend is a photographer that focuses sales and marketing through her personal and business page.  As a business owner, then she leverages her social graph to promote her business.  In the small business world, Facebook provides simple tools that mirror engrained behaviors from its users.  Another friend follows the same process to promote her yoga studio.

Overall, Facebook is the leader in the clubhouse and in prime position to “win” the next ecosystem.  Facebook has a large user base that produces revenue growth and attacks new opportunities to fight off potential disruption.  Facebook conducts its business through a well-defined filter of connecting the world, which is important to recognize they are focused on their core mission.


Of note, I am long FB.