Lion Waiting to Pounce on Gazelle Should It Stumble

Margie is a member of The Motley Fool Blog Network -- entries represent the personal opinion of the blogger and are not formally edited.

When Facebook (NASDAQ: FB) came out with their IPO, founder Mark Zuckerberg was resolute in looking out for the long term viability of Facebook, and announced that he was unconcerned with short term quarterly results and profit reports.

For a variety of reasons, amongst them the fact that many of the stock options doled out to new hires are in the red, or close to it, and a further decline in price might lead to an exodus of hard won engineering talent, there are indications that Zuckerberg is bowing to the pressures of Wall Street and trying to bolster the stock near term.

First there was the addition of gambling to the UK version of the site (bingo and slots), which, as an investor I support as a way to gain passive income from the company in a way that doesn’t lessen the value of the platform, but it certainly doesn’t mesh with the idea of pure social responsibility Zuckerberg promoted.

Now Facebook is in talks to add video advertising to the site. Not just video ads- auto playing video ads. So you log onto Facebook and potentially get hit with an Amex, Nike, alcohol ad, etc.

Look, as a user, I have nothing against Facebook making money. They should and deserve to. The question is, how will their overall user base respond? My guess, not well.

Google (NASDAQ: GOOG) is sitting like a lion in the grass with its Google + platform, waiting for the gazelle to stumble. The lion knows it has no chance of catching the antelope without it making an egregious mistake. So, it sits, slowly building its muscles (platform capabilities/ offerings) waiting, hoping, praying for a mistake. And when one comes, Google will be there with open arms, ready to embrace Facebook’s user base.  

The biggest competitive advantage Facebook has is its ubiquity of use. We all use Facebook because our friends all use Facebook. It’s that simple.

Yes, the technology that Facebook uses and the way they are able to update billions of updates/ friend requests/ serving of ads, seamlessly, in real time, is a technological achievement that merits a standing ovation. Any hack who tells you that ten knit cap wearing tech flunkies could reproduce all that Facebook does in a couple weeks in a rented garage, is repeating nonsense.

This significant barrier to entry is certainly part of Facebook’s economic moat, but Google can, and has made a significant investment of time and money in bridging this gap (and this competition is awesome for users, and one of the greatest treats of living in a market based economy.)

If users are hit with auto-playing ads, and they find them intrusive, as I often do when I am served such ads on a video I didn’t even choose to play, they might start to flee. “Hey, I’m tired of these ads, I’m over here on Google +, trying it out. Come join me,” might be a possible refrain posted on someone’s wall.

That is the last thing Facebook wants. While Facebook does a tremendous amount of A/B testing before rolling out changes to its broader user base, and therefore (if enacted) likely won’t be as distasteful as I imagine, I’m still worried that this might slow down the gazelle.

My Consult

If I am Zuck’s consultant, this is what I say. “Mark, don’t even think about tarnishing your greatest competitive edge! You grew your user base in part by being “cool.” Auto-playing ads are the anti-thesis of this notion, they are annoying. You know what’s cool, something that helps us. The new gifting option you have. You know when our friends’ birthdays are, we might not. Oh man, I forgot to buy her a gift. Facebook to the rescue, and you make money on it. Awesome. Non-intrusive ads in our feeds on products we like, okay, we can put up with that. Your upcoming “Nearby” service that uses our location and our friends’ likes to promote a restaurant we might like, at a potential discount to get us to try it. Heck yes, I’d go for that … Auto-playing ads, no thanks!”

Harvest The Golden Eggs

You own the golden goose Mark. A one billion person user base and growing. Put a protective fence around her, you can experiment, see if there is a certain temperature that might get her to lay more eggs, don’t anger her.

Build that user base, the larger it gets, the greater economies of scale you have, not that they aren’t already monstrous. Develop that social search engine you’ve been talking about, we know it’s coming. Wait until the US legalizes poker, and host the world’s largest multi-table tournament ever. Zynga (NASDAQ: ZNGA) is doing all it can to get ready for this possibility, already set to open their internet casino and poker site catering to the UK. They aren’t you, they don’t have your user base! No one could compete.

Take Away

All Facebook has to do is bring in about an average $50 per user to justify their current valuation. Less as the user base grows. While we don’t know what the video ads will look like exactly, shareholders would be best served with Zuckerberg ramping up profits (and the temperature of the room where the goose sleeps) slowly, slowly, slowly. Unfortunately, in this day and age of "investors" checking their portfolio’s net worth every hour, few people are this patient, and do their best to apply the pressure on Zuck.

Calm down everybody. You too Zuck. Stick with the plan and take it slow. 

margiecfl has long positions in Facebook and Google. The Motley Fool owns shares of Facebook and Google and has the following options: long JAN 2014 $20.00 calls on Facebook. Motley Fool newsletter services recommend Facebook and Google. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy. Is this post wrong? Click here. Think you can do better? Join us and write your own!

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