Facebook – Smokescreen

Under the rhetoric, very little changes.

• While Zuckerberg’s manifesto (see here) implies that a huge overhaul is on the way, the reality is that very little is going to change.
• This is because a pivot towards becoming a fully private and encrypted communication system looks like suicide as with no data, Facebook would have no advertising to sell.
• The memo or manifesto is 3,200 words long and discusses privacy and encryption at length but underneath it all, very little is going to change:
• The main points are:
  • First, Facebook and Instagram: These are the “public social networks” referred to and which currently generate almost all of Facebook’s revenues.
  • Both will continue to be “very important” meaning that the current monetisation method will continue to persist.
  • In short, this means nothing changes.
  • Second, Messenger and WhatsApp: are the private messaging services being referred to.
  • They are already end-to-end encrypted and currently offer the private interactions, encryption, safety and secure storage that the manifesto claims to be under development.
  • Hence, what is being offered here is interoperability between the two systems (already announced) and the ability to permanently delete messages and media that have previously been sent.
  • Reducing permanence is a new feature of messaging that will allow users to choose what to keep and already exists in Instagram.
• The net result is that the functionality of WhatsApp and Messenger will be improved to offer richer functionality which will bring them closer into line with WeChat, LINE and so on but the core business won’t change.
• Hence, this looks to me to be an attempt at improving its tarnished image with the media and governments rather than users who don’t seem very bothered about privacy on Facebook.
• Despite a year of bad headlines, breaches, leaks and so on, its users are not deserting the platform nor are the advertisers.
• In Q4 18, user numbers were up 9% YoY and revenues were up 30% YoY giving a strong indication that while users may moan about privacy, deep down they do not really care (see here).
• Until there are signs that users are deserting the platform, there will be very little pressure to change the core business which continues to perform strongly.
• The issue remains its AI, which is so bad that Facebook now employs thousands of humans to review the data looking for offensive uploads.
• This will result in a further 500bp drop in operating margins during this year which is likely to keep the valuation under pressure.
• Once this has been fully reflected in the outlook, there will be an opportunity to reassess Facebook.
• I am waiting on the sidelines for now.