Apr 29, 2012
With the long-awaited Facebook (NYSE:$FB) IPO imminent a lot of the discussion has been centered on what feels like an obscene valuation. There has been so much focus on the capitalization numbers, i.e. the size of the IPO, that little attention has been paid to the potential. As with so many large American brands now the opportunity for them is not continued growth in America or, in Facebook’s case, leveraging their North American saturation into revenue growth.
The growth prospects are in Asia. In their 1st quarter financial statement, Facebook’s results were disappointing in terms of rising expenditures, including the $1 billion in stock paid for Instagram, as well as North American advertising revenue. Of course, in the same report the revenue growth coming out of Asia was exceptional. But, while advertising revenue was, at best, mixed, direct payment through Facebook Credits rose substantially, from less than 6% of revenues in 2010 to nearly 18% in 2011 and growth in that area is likely to continue to rise as the nature of computer gaming changes.
From Homepage to Platform
If there is one thing that Facebook has that former social media sites like Myspace did not have is stickiness. Facebook has a significant portion of their user base that pretty much only uses Facebook. It’s more than their personal homepage; it is their platform from which they interact with the internet.
And it is the platform that holds the key to understanding Facebook’s potential. It goes beyond the opportunity to shove an advertisement in someone’s face. That is something that Facebook users, at least in the U.S., have been hostile to and has been the reason why the company has been loath to continue pushing that revenue model.
So, looking at the growth of direct payments as a fraction of revenue, to me, is where the value proposition on Facebook starts. And even though Zynga (NASDAQ:$ZNGA) is looking to diversify away from Facebook they are still and will continue to be tied to Facebook’s hip. Now, add in their connections to both Netflix (NASDAQ:$NFLX) and Spotify and the payment model potential should be clearer.
Brand loyalty? Check. Portal to the web? Check. Gaming platform? Check. Content provider? Incoming. Facebook has all of these things. Now let’s add a couple of billion of people in the Pacific Rim.
Unlocking Southeast Asia’s Treasures
The growth potential for the Asian portion of Facebook’s user base to expand has barely been tapped yet. Previously markets like Japan and Vietnam used Yahoo 360 (NASDAQ:$YHOO) as their social media platform but with the reorganization of Yahoo, it became a casualty and those users have been moving to Facebook.
Currently there are approximately 3.5 million Facebook users in Vietnam, 4.6% of the population and 15% of those on line. Usage has grown 27% in the past six months. Even in places like Japan and South Korea the potential growth for Facebook is tremendous. By comparison the numbers in the U.S. are similar to Malaysia’s with half the population having accounts which comprised just over 65% of the internet-connected population.
Note how strong the adoption rate for Facebook is in places like Indonesia, Thailand and The Philippines. Their economies continuing to raise higher percentages of their population into the middle class one bodes very well for Facebook’s potential. India is another market that has not even begun to be tapped by Facebook.
One has to assume that at one point China’s great firewall will drop. It is clear that Facebook wants access to the market as they discussed it at length in their latest SEC filing. Moreover, China wants to own a stake in Facebook. So, the issue is essentially being negotiated. There are issues in Vietnam as well as only certain providers have access to Facebook and there has been discussions about taxing domestic internet related revenue from them and Google(NASDAQ:$GOOG). Mark Zuckerberg’s recent vacation during the Christmas holiday was seen as an attempt to smooth relations here.
Regardless of the restrictions, these people are gaining their web citizenship, which transcends physical borders, via Facebook. This is as powerful a development in the virtual world as cross-border oil pipelines are in the physical one.
The Game’s the Thing!
In internet gaming there is a divide, philosophically, between gamers over F2P (Free-to-Play with micro payments) and Subscription models. The preference in North America is the subscription, especially among massively multiplayer online gamers, ie. World of Warcraft (WoW). It is associated, rightly or wrongly, with the quality of the title. In Asia, the term “Korean Grinder” is a pejorative used by Americans to describe games that thrive via micro-payments which generate staggering revenues per player that not even WoW can match. The subscription model for online gaming is failing for a variety of reasons.
Where does Facebook fit in? Facebook games are built on the micro-payment model Asians prefer. Put two and two together and that’s where I think Facebook’s revenue will continue to grow from. A large, mostly untapped population using a payment model for gaming and content streaming that they prefer equals a huge potential revenue source.
Moreover, Facebook games appeal to non-traditional gamers. They are designed is to minimize time per interaction with the game, doing a few small tasks regularly, rather than setting aside huge blocks of time traditional computer games require; micro-games with micro-transactions brought to a rapidly expanding, young middle class from one integrated platform.
The RMT Ticket Counter
Gaming is just a metaphor for the entire direct payment model. Premium content providers are finding that for them to be able to monetize effectively their services it will not be through passive advertising. The money will have to come from some form of direct payment, either recurring small subscription fees or pay per view. The upcoming content being produced and distributed specifically for Netflix is going to be the first big test of this. HBO did this in the cable space starting in the 1980’s with their original programming. Can the same things be replicated via streaming content online?
My bet is absolutely yes it will and Facebook will be there to act as the middle man.