Why I’m more bullish on Facebook than Google

This is mostly a Facebook earnings post in disguise – part of my series on major tech companies’ earnings. Google reports this afternoon and it’s my hope to get this out before their results hit the wires. I did a big deck full of charts and comparisons for Facebook for subscribers – sign up or read more about that offering here.

Google and Facebook are the two largest online advertising businesses in the US, and as such face similar market conditions. But they’re coming from very different places, while managing the challenges in very different ways. I maintain that the best way to look at Facebook’s growth potential (and Twitter’s, incidentally) is through three key metrics:

  • User growth: measured in growth in monthly active users (MAUs) year on year
  • Engagement: growth in DAUs as a % of MAUs
  • Monetization: growth in average revenue per user.

The chart below summarizes the state of affairs with regard to Facebook according to these three metrics:

Facebook core growth leversAs you can see, two of the three look very healthy over the longer term, with engagement growing steadily and monetization increasing rapidly. User growth has slowed a little from past rates, but Facebook still adds over 150 million new MAUs every year, and the number’s actually begun to tick up slightly. Engagement stalled a bit this past quarter, as DAUs appeared to plateau at 64%. That was driven by slight declines in Asia and the Rest of World segment, along with flat numbers elsewhere. But it’s a one-quarter phenomenon for now, so we shouldn’t get overly worked up about it. We’ll see what happens next quarter. Engagement is, at any rate, merely a means to an end, as one of two drivers of monetization, which is doing fine. In short, Facebook’s core levers for growth are going well.

At the same time,  this can’t go on forever:

  • Facebook’s user growth can’t keep going at the same rate forever – almost all services eventually start reaching saturation of the addressable market, and with 60% penetration of the total population and 75% penetration of the mobile population in the US and Canada, it’s already bumping up against a ceiling in some regions. Elsewhere, notably in Asia, penetration remains low, but isn’t growing rapidly either.
  • Engagement can’t keep going up forever either – some users will always be occasional rather than regular visitors to Facebook’s properties, and they can only spend so much time on the core Facebook experience in a day.
  • Monetization will start to slow eventually too – both the limits to overall ad spend and increasing competition from other companies in mobile advertising generally and app-install ads specifically will start to eat into Facebook’s growth prospects.

I believe Facebook is aware of all these things, which is why it’s invested in several new businesses, among them WhatsApp and Instagram in the messaging/photo sharing space and Oculus Rift in the interfaces business. It’s also broken Facebook Messenger out as a separate service, which has been controversial but seems to have paid off in spades. Here are the user numbers for the three messaging apps:

Facebook messaging MAUsNone of these is generating significant revenue today, but as Mark Zuckerberg said on yesterday’s earnings call, they all have potential to to do so in future, and Facebook will be very careful about turning the profit spigot on for each of them in the meantime. In other words, Facebook has invested for the future, and has several products waiting in the wings which can start to generate additional revenue (mostly through advertising though potentially through payments or other streams) when they’re needed to shore up overall growth.

Perhaps the most heartening thing about Facebook, though, is that it’s been so clear about two things: the strategy behind these products, and the metrics associated with them. The underlying drivers behind both Facebook’s business today and its business tomorrow are clear for all to see, and we’ve just looked at them. You can draw different conclusions about where those trends might be going longer term, but at least you’re looking at the same data Facebook is looking at as an outsider, and especially as an investor.

This is where Google comes in. I’ve written elsewhere, and especially in a couple of recent pieces on Techpinions, about the fundamental risks to Google’s business in the near term. But I’m more worried than anything else about the fact that Google (a) doesn’t provide good enough transparency into the drivers of its current business, and (b) hasn’t articulated a clear vision for how and when its equivalent investments for the future will pay off. It is neither providing outsiders (including investors) with the understanding they need of how its current business will develop, nor is it telling a compelling story about how its business will evolve over time.

Meanwhile, there are significant headwinds coming up for Google: despite its efforts to shore up its control of Android, it’s arguably in greater danger than ever of losing control over this core platform. Between Chinese OEMs, Amazon and Samsung each customizing the platform to meet their own needs, Cyanogen threatening to take it away, and Microsoft investing in Cyanogen, there are several threats to Google’s ability to continue to control and drive revenue through Android. Internet growth is slowing worldwide, and the new users who come online will have and command far less spending power, while gravitating towards local alternatives and app rather than web models in their usage. Google really doesn’t seem to have an answer for any of these. So far, their earnings are holding up (we’ll see what happens today), but I think it’s only a matter of time before these cracks begin to show.

For those interested, below is a screenshot of the Facebook deck, with some of the metrics described above and many others. Again, click here to find out more or to sign up.Facebook deck overview

  • obarthelemy

    I’m not sure I understand what you’re saying about the threats the GMS-Android:
    – Cyanogen live on Google’s goodwill. The minute they lose access to the Playstore and Google’s services (which Google can cut at any time; for example CM blinked Google told them to stop doing resizable windows because it breaks compatibility), their appeal almost completely vanishes.
    – Amazon don’t seem to be succeeding outside of “dump the hardware, try to make money on apps and media”. This Xmas, they were offering a $100-$150 bribe (in free apps, devs must be delighted…) to sign up to their appstore… Is their share, or even their sales, even growing ?
    – Samsung are actually rolling back customizations and own-content, and their relationship with Google seems quite good, lots of Samsung tweaks are being integrated to Google’s Android.
    I think Google Android’s main issue is absence from China. That a huge market they’re absent from, but once you take that out, I have no info on non-Google Android growing faster than Google’s ?

    • Cyanogen could switch to an Amazon-like model, where they use the code but manage their own store – and they’ve already announced plans for their own App Store, which is critical for this model to succeed. So I wouldn’t count that out. If the code’s the same, it’d be trivially easy for developers to put their apps in both stores. If Microsoft were to really back it, then it would obviously attract a lot more attention than at present too.

      You’re right about Amazon, as I said in a recent post here. But I see them being more useful as an example of what could be done than as a threat in their own right.

      Samsung continues to be frenemies with Google – not convinced there’s a total detente there, and Samsung is still talking about Tizen as an alternative OS, which would solve the lack of control problem from Google’s standpoint, but instead put a big dent in Android numbers.

      The other thing I didn’t mention, of course, was Apple’s resurgence. Google makes huge amounts of money from iPhones, but is being slowly squeezed out through things like Apple Maps, YouTube, Siri and Spotlight powered by Bing, and so on. And of course there’s one big card still to play there if Apple really wanted to (not convinced they will) – Safari.

      • obarthelemy

        I’m utterly unclear about why everybody’s saying that forking Android and having your own store is a key to differentiation hence success. Forking Android means:
        1- extra work on the OS. Assuming you want to stay abreast of GMS-Android, there are hundreds of new APIs and features in each new GMS package, on top of AOSP updates to backport.
        2- a lot of extra work on the Cloud side. Customers have come to expect Maps, Google Now, Google Voice… that’s GMS, so forkers have got to supply their own and make them if not identical at least similar, or completely forgo these features. That’s major work and ongoing expense.
        3- a few thousands of fun negotiations to recruit apps and content, with thousand of one-man shops and tens of multinationals.
        And that’s just to duplicate what GMS offers for free to every OEM. *Then* forkers have to innovate on top of those major efforts and expenses. Why not save the trouble and focus on the innovating part straight away ?

        Let’s not forget GMS-Android lets OEMs do pretty much whatever they want, as long as they don’t break Playstore compatibility: Samsung do Pen, multi-windows, KNOX, their own apps, their own app and content store… you’ve got GMS laptops, desktops, projectors, consoles, weird tablets from 5″ foldable to 40″+ wall-mounted… Sure, you’ve also got to carry Google’s app suite, which means you’re competiting against them on your very devices’ screen. But forkers compete with those anyway, on competitors’ devices.
        And if your best innovation already is offered by Google, how much of an innovation is it ?

        In the end, I think the very mantra “you’ve got to get out of GMS” shows a lack of ideas. If your best innovation is to spend a few tens of millions on duplicating Google stuff, you might as well keep the money and buy bigger batteries with it.

        • See this story from today, in the context of our discussion:


          Shows exactly how the combination of Apple resurgent and non-GMS / AOSP versions of Android can hurt Google.

          I think what Cyanogen is doing is likely going to appeal most strongly to the original Android users – the tinkerers and hackers, but not the mainstream. But if Microsoft were to embrace it, it would bring tons of Microsoft assets which could in most cases be very adequate replacements for GMS.

          • obarthelemy

            Sometimes I wonder if analysts’ job is FUBARED by PR people afterwards, or if there are no real analysts to start with: their own figures say AOSP sales are down, yet their text is “Android One initiative has slowed forked Android growth”. Sales going down is not “slowing growth”, it’s “negative growth” at best, or “contraction”. Talk about manufacturing a talking point !

            Apple are indeed ever strengthening their position at the high end. Looking at the Android portfolio, I’m starting to wonder if Google should not go there with a Nexus-like initiative. They probably don’t want to step on too many toes and are trying to leave the high-margin high-end to OEMs, but if those keep fumbling the ball…

            As for CyanoSoft (or MicroGen ?) this goes back to the “is Windows Phone required” discussion. MS sure could put Cortana, Bing, Bing Maps, Office 360 + Exchange and a Metro-like UI on Android (actually, they can do it right now for all GMS Android, no need for forking), but then what rationale is left for Windows Phone ? Maybe back-end admin tools, but once you’ve split the vanishingly small share of MS-interested customers between CyanoSoft and true WP, you’ve mostly dis-incentivized yet a bit more devs to worry about true WP ? Also, all of those MS services can technically be run on GMS Android right now, so the assumption is that MS would benefit more from grabing the sliver of customers who’d rather have MS stuff on an Android phone – but no Google stuff nor true WP, mind you -, rather than making MS stuff available to all Android customers ? What weird setup could possibly make that reasoning hold water ?

          • I think the biggest counterargument to what you are saying is Microsoft’s strategic need to control the platforms they bet on. They could own and fully control a fork and determine the degree to which they want it to stay compatible with core Android. On Android itself, they’re always at the mercy of Google and whatever future changes it might make to core/GMS Android. There are definitely pros and cons to each approach, but that’s a pretty significant one to going pure Android.

          • obarthelemy

            But that’s what AOSP is for: as a fallback if GMS no longer works for you. Going to AOSP straight off the bat because one day, maybe, GMS will no longer suit/welcome you is like buying clothes in all sizes because one day , maybe, you’ll get thinner or fatter… and having to renounce most clothes in the process, for budget and size availability reasons.

          • obarthelemy

            Back to the Apple issue, I think the basic truth is that you can’t be high-end and low-end at the same time. If I were Samsung I’d buy out Sony Mobile and make them the no-nonsense, non-geeky, aluminum-clad, iPhone-aping brand. With only premium models, launched in september. I’d probably spec it and price it above the iPhone too, and co-brand it to death (where’s my Vuittonphone ?). Vertu still hasn’t gone bankrupt…