The power of the platform and the rise of Facebook

Tim Samway explains why Facebook’s ability to play an increasing role in our lives makes it a business able to sustainably grow its earnings over the long-term.

According to Facebook, the average user spends 50 minutes a day on Facebook, Instagram, and its Messenger platforms. This may sound like a relatively small amount of time, but actually, it’s huge. 

Out of 24 hours in a day, the average person spends almost nine sleeping, which means that of the 15 hours left, almost one is spent on Facebook. And if 50 minutes is the average, you can be pretty sure that plenty of the two billion active Facebook users are spending a whole lot more. 

And when we add to the picture the fact that the average Facebook user has 150 friends, over 1.3 billion people use Facebook daily for more than 55 minutes, and 15 per cent of users look at Facebook more than 50 times per day – it makes Facebook a powerful force to be reckoned with. 

There’s no question that the seemingly inexorable rise of platforms like Facebook is having a transformative effect not only on the way we interact socially, but on commerce and industry. 

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And more importantly still, these platforms are changing the way we consume media, and what we consume. The networks created by platforms like Facebook have the power not just to continue to disrupt, but also to significantly influence the lives of their users. 

Facebook owns your time – and influences what you spend it on.

Facebook owns the time you spend on it because it isn’t just a social network anymore, it’s also the way its two billion users consume media. That’s not to say it has replaced existing forms of communication, but it does package up, in an accessible and digestible form, all major traditional forms of media. – TV, print, and radio. 

Yet this packaging up is far less significant than the fact that it also curates what you consume. Depending on what you have watched, been interested in, or clicked on in the past, Facebook can serve you up stories which it thinks you will be interested in. 

And it does it well – it measures every click and every view to refine what to send next time. And with the rise of artificial intelligence, Facebook’s ability to deliver up content that is popular and relevant to you is growing. Facebook, or more precisely, the Facebook robot, is about to become your best friend.

And the bottom line is that Facebook is potentially more in control of what you see and what you watch than any single media company, or government. Yet there are no media laws to exert control over what is presented to users, and it’s a fine line between being a platform and being a publisher.

Although the fact that Facebook, Microsoft, Twitter, and YouTube recently launched a partnership aimed at combating terrorists online is an indication of their recognition of the responsibility which their position as publisher imposes.

But what about Facebook’s revenue model?

Facebook may be the ultimate disruptor. But does that make it a good investment? Will it continue to grow and be the most powerful way we communicate with each other online? 

Facebook’s revenue model isn’t immediately obvious. People and businesses communicate via messages, photos and videos – but the key value metric for a social network is engagement, not users. So why is engagement important?

Engagement is important, because it correlates strongly with advertising effectiveness. And engagement is all down to time spent online – which is why the 50 minutes a day metric is important and powerful – for the purposes of Facebook’s ability to charge for advertising, it’s a lot. 

Time spent on Facebook is good for Facebook as a business for a number of reasons. It increases the number of impressions (items people have looked at) which Facebook can sell to advertisers. And secondly, the more time you spend on Facebook, the more Facebook knows about you, and the better able it is to target advertising to you. 

At the same time, recent research showed that over three quarters of us make purchase decisions based on recommendations by friends, family and/or bloggers. If we combine this statistic with the fact that Facebook reaches up to 26.6 per cent of the global population – and can specifically target groups of people with particular characteristics – it’s a powerful advertising medium.

Yet at the same time, a surprisingly small number of businesses currently advertise on Facebook. Around 70 million businesses have pages on Facebook (roughly half of the total number of businesses globally) yet only five million advertise, and spend a relatively small average of $7,000. 

The global advertising market is estimated to be around US$550 billion ($696.5 billion), and growing at around four per cent per annum. Of this, US$205 billion is spent on the internet, yet only US$34 billion of that on Facebook. In other words, Facebook currently controls only seven per cent of the global advertising market.

In our view however, this rate is about to rise. Over the next few years, we may not spend more time consuming media, but we will consume more of our media online. And because the internet offers advertisers the best targeting techniques, we also expect that the advertising growth rate will accelerate as well. And that Facebook’s share of global advertising will rise in line with the share of media viewing time.

So if advertising revenue is likely to rise, and this is combined with even a small increase in profit margin, it paints a positive picture of a strong and growing business.

Suppliers shouldn’t underestimate the possibilities of Facebook either

It’s important to note that suppliers to Facebook users, often in the form of software writers, have also been quick to piggyback on the success of the platform. 

Take an active wear retailer with stores across Australia, for example. Each of the stores may have its own Facebook page – but at the same time, as a national business with retail outlets all over Australia, there needs to be some cohesion and consistency in what is being said and done, and some ability to promote goods and services across the country.

This is where software developers have been clever. They offer programs which work with Facebook and allow businesses (or individuals) to manage multiple Facebook pages. In this way goods and services can be promoted consistently across the country, and if there is a spokesperson for the brand, for example, this person can be seen to be responding to comments and questions on multiple pages. 

And the statistics Facebook can provide based on analysis of users can be instrumental in helping businesses understand and target their ideal customer.

The bottom line?

There’s no question that Facebook has changed the way we interact with each other and businesses forever. 

It has also changed the way we consume media, and more importantly, what we consume. 

But does this make it a good investment? In our view, yes. Its revenues are growing, they are sustainable, predictable and its business model is strong. Which is why it remains a key holding in our portfolio.

Tim Samway is managing director of Hyperion Asset Management.