Facebook & Microsoft – Hand in glove.

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I think Facebook could buy some or all of Microsoft’s consumer assets.

• Microsoft and Facebook are jointly building an undersea cable highlighting the increasing computability between these two companies.
• The MAREA cable will be 6,600km long extending from Virginia Beach, USA to Bilbao, Spain and will be capable of carrying 160Tbps.
• The cable will be managed by Telxius and will have an “open” design meaning that the equipment that sits on each end can be supplied by any vendor and can be more easily upgraded.
• This is yet another statement of intent by the ecosystem providers to reduce the cost of the Internet in order to increase the accessibility of their services globally.
• This was most forcibly declared by Facebook at its developer conference where it announced that it would release designs for network equipment and software for anyone to access for free (see here).
• This will have the effect of further commoditising network equipment and is very bad news for Ericsson, Huawei, Nokia, Cisco and so on.
• Both Facebook and Microsoft have nothing to lose and much to gain from ensuring that the price to provide Internet access continues to decline.
• The cable will enable Facebook and Microsoft services to work with greater reliability and lower latency which is exactly what they need to make them increasingly sticky and more valuable to users.
• Microsoft still owns a 1.6% stake in Facebook which combined with this new project highlights how compatible these two companies have become.
• Facebook has the intention to become by far the biggest consumer ecosystem of them all while Microsoft appears to be edging away from the consumer and is increasingly dominating the enterprise.
• If I look at their respective Digital Life pies there is also a good fit as Facebook is very strong in Social Networking and Instant Messaging while Microsoft has good assets in Gaming, Search and Browsing.
• Consequently, I think that should Microsoft decide to bite the bullet on consumer, Facebook would represent a natural place for many of those assets to find a home.
• While Microsoft is not the best in AI, it is far better than Facebook, and sharing or acquiring that expertise would move Facebook meaningfully forward.
• Even in Gaming where Facebook is already present with Oculus, the fit as good and it has already been announced that the VR headset will be able to be powered by the Xbox.
• While the rationale for Facebook to take some of Microsoft’s consumer assets is good, to make it really work will require flawless execution.
• These assets would have to be fully integrated with each other as well as into Facebook’s existing offering for the real value to be created.
• This is something that has eluded Microsoft for many years, and for me, this would represent the key risk of Facebook taking on some or all of Microsoft’s consumer assets. .
• Microsoft is adamant that it remains committed to its consumer ecosystem but all the evidence is pointing to the contrary as I see the company increasingly focused on the prosumer and the enterprise (see here).
• I suspect that this issue is uppermost in Microsoft’s mind as it plans for its next fiscal year (beginning July) and I think that the timing from Facebook’s perspective is also right.
• I suspect that in the short term, Microsoft shares would rise and Facebook’s would fall from such a transaction, but I think Facebook is in a much better position to derive far more value from these assets than Microsoft is.
• I continue to like Microsoft and Samsung for the short-term and Apple for long-term, income based investors.
• I am still worried about expectations for Facebook being too high in H2 2016, but once that is out of the way, Facebook could represent a very interesting opportunity.