Dear "Friend" Zuckerberg -- Is Facebook Betting the House on Online Gambling?

By BA McKenna - August 10, 2012 | Tickers: AMZN, AAPL, FB, GOOG, MSFT | 0 Comments

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This is the second of an ongoing series of articles written in a "Dear CEO..." format. The first was "Dear CEO Mayer -- A Wish List from a User," written to Yahoo's new CEO Marissa Mayer. 

Dear Friend Zuck,

I figured why write an article about Facebook (NASDAQ: FB) when I can write directly to its CEO?

First, I hope it’s OK that I call you Zuck? Your signature hoodie cries out “casual.” As for Friend -- well, if people consider the ex-wife-of-the-second cousin-of-the-barber a “friend,“ then surely writing a personal letter to you makes us the best of buddies.

I think it would behoove you to face the music about a few things (think like a hoodie and chill, Zuck, not about the IPO -- I'm sure you're sick of that topic, too). And I'm wondering how far into online gambling you plan to go? 

Show Me the Moat!

You surely must know there is typically no (or little) moat in a business model that generates the bulk of its revenue from advertising?

Let's face it, the public is fickle. Swooning over MySpace one day -- all eyes, and clicks, for Facebook the next. What makes you think the public won’t tire of FB when The Next Big Thing comes its way? No offense, but FB is not Apple (NASDAQ: AAPL). Apple develops innovative products that people love. No, sorry Zuck, most people don’t love FB – heck, a fair number of users don’t even like it. Some consider it the price they pay for sharing or viewing pics of kids and/or vacations or not being the odd person out in their circles.

Additionally, communication media is constantly evolving, so one can't bank on its medium being dominant forever. You -- not to mention Microsoft's (NASDAQ: MSFT) Balmer -- know all too well there's a significant transitioning to accessing the internet from mobile devices rather than from computers. The explosive growth over the past year in using mobile devices to access FB is shown in the chart below. The iPhone's introduction and immediate success was largely the impetus for this transition. The iPhone was introduced in 2007, so the importance of being well-positioned for mobile display ads shouldn't have caught the prepared by surprise. FB was -- and is still -- not well-positioned for mobile ads.

FB User Data as of June 2012

Dial M for Misguided

I heard you were seriously considering coming out with a smartphone? I hope you've hung up on this plan.

The reasons why this was and is a misguided idea include:

• Apple and Samsung dominate the market -- and others, such as Amazon (NASDAQ: AMZN), are jumping or considering jumping in. FB would be more than a day late to the party.
• It cries “FB is an Apple copycat, too” –  who wants a product that says “I am an imitation?”
• There appears no synergy between your gazillion users and smartphones. What compelling reason could you provide to FB users to choose a FB phone over an iPhone or a Samsung phone using Google’s (NASDAQ: GOOG) Android operating system?   

Click J for Jackpot?

It seems clear that Facebook views online gambling as the answer to its "how do we monetize our 955 million users?" woes.

As per articles on August 7 in the UK's The Guardian and several other outlets, online gambling giant Gamesys launched a version of online gambling Bingo -- aptly named Bingo Friendzy -- in the UK on FB's platform. Gamesys also plans to roll-out virtual slot machine gambling in the coming weeks to months.

FB confirmed the reports with this statement: 

"Real money gaming is a popular and well-regulated activity in the UK and we are allowing a partner to offer their games to adult users on the Facebook platform in a safe and controlled manner."

Wise of your reps not to not say what kind of cut FB will get from the revenue. I'd guess it would be in the same general range as the 30% cut you get from your gaming partner Zynga? 

As for Zynga, you needed to do what you needed to do. Wise to go with a gambling giant for your initial foray into gambling. Besides, FB's relationship with Zynga has been mutually beneficial. Gaming revenues, from such popular games as Zynga's FarmVille and Mafia Wars, accounted for 16% of FB's total revenue in 2Q 2012. And the lion's share of Zynga's revenue comes from its FB partnership. 

I understand Zynga will be rolling out online gambling poker to UK FB users in 2013. So, it looks like you're taking care of it pretty well.

You better make sure your controls are tight, Zuck. Your site has a lot of young users -- so there's sure to be concern from parents about their underaged kids accessing the gambling.

Sure, this plan could be FB's "Jackpot." Though, at this stage, I'd not bet the Farm (Ville) on it.  

Fellow Fool Blogger DeWayne Reeves just wrote an in-depth piece on this topic, including: (1) the in-the-gray legality issue of online gambling in the US; and (2) stats on the size of the potential market. So I'm not going to reinvent the (roulette) wheel here. I think you will LIKE his piece, so check it out. 

What Happened to “The Customer Comes First?”

I understand this fall FB plans to force all users to use its Timeline feature. Zuck, tell me it aint so?!

Many people don't like that feature. But that's actually not the point -- strong-arm tactics build resentment, not goodwill. FB has already had a good number of negative PR issues, including:

• Making it difficult for users to delete accounts until relatively recently
• IPO fiasco
• FB's confirmation (last week) that there are over 83 million fake users/accounts 

It would be foolish -- small f -- to make a change that will likely cause some resentment, especially so soon after the IPO and fake users fiascoes. Ask yourself, Zuck, is there enough upside to more than compensate for the downside? I realize you're selling the Timeline push as a way to make the user experience more consistent across the site. That may be true, but surely another reason is that Timeline allows for the collection of more specific user data. Don't fix what's not broken, Zuck. 

The foray into gambling also means you need to build-up "extra" goodwill, as this will result in some degree of public backlash. 

Yes, Zuck, online gambling could be HUGE for FB. However, I'd still caution all but the most risk-tolerant investors to steer clear of FB stock until they see some inroads into monetizing users.  

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