Facebook – The obvious move

Integration benefit overshadowed by AI.

• After a long 4½ year wait, Facebook is finally integrating its Digital Life services that will enable it to meaningfully improve the service that offers as well as well as the targeting that it applies to its advertisements.
• It will also make the company more opaque and difficult to break-apart from a regulatory standpoint.
• Facebook’s three landmark services are WhatsApp, Messenger, and Instagram all of which have already accumulated a massive user base.
• RFM research has long concluded that when Digital Life are integrated within an ecosystem, the understanding and insights that can be drawn are much better than analysing usage patterns from the services in isolation.
• This allows the ecosystem to offer a deeper and richer service but also allows more accurate targeting of advertisements.
• Contrary to many commentators, I have long been of the opinion that more targeted advertisements are less intrusive and less annoying to the recipients.
• This is because the content of advertisements is more likely to to be both relevant to users and much more interesting.
• This is what will underpin a higher click-through rate giving the inventory a much higher price at the point of sale and better revenue per user for the ecosystem.
• Integration is one of the reasons why Google is the benchmark for Internet monetisation by advertising and I think this move makes complete business sense for Facebook.
• This is likely to be a back-end integration meaning that the apps themselves will remain intact but should become interoperable with each other.
• This will provide a better service for users but will depend on Facebook being able to amalgamate the WhatsApp, Messenger and Instagram logins for individual users.
• Assuming that this is already underway at Facebook, I would expect to see a revenue benefit in 2020 but this will still be overshadowed by the medium-term issues.
• The chief of these is AI which results in Facebook having to manually check all the data being uploaded onto its platform requiring an army of humans to do the job.
• This is the main reason why the medium-term will see a 1000bp decline in operating margins and quite possibly declining earnings.
• This is not the backdrop against which one should hold a highly rated Internet stock and so I am still waiting for the right time to get back into Facebook.
• This may come in 2020 but I can be patient.