Tag Archives: facebook

(Revised) Facebook Continues to Make Moves

On Monday April 14th, Facebook announced that it wants to now become a money transfer business on top of everything else. Whether or not this has been in talks for over a year within the company, this is another move for Facebook to potentially take over the world. What’s next? Will Facebook attempt to create a new currency?

“Such a business would draw on Facebook’s extensive user base and existing mobile reach, but analysts are warning that success could depend on establishing a new level of user trust. Launching such a service extends what is perceived as the normal reach of social network companies and furthers the business concept of a ‘one-stop shop’ for online money and communication needs,” proclaims a Forbes article.

Companies like PayPal, Western Union and Moneygram are leaning on the support that they have always had as a trusted operation with millions of customers already. However, this move by Facebook makes a lot of business sense. They can eventually become a reliable financial utility and it would only help Facebook’s profits grow even more. With the advantage of its user base, Facebook will still need to gain trust in order to make this new plunge a success.

According to the Huffington Post, “the company is close to obtaining approval from the Central Bank of Ireland to start a service that would allow users to store money on Facebook and use it to pay and exchange with others.”

Facebook has also talked with companies like TransferWise, Moni Technologies, and Azimo, three London start-ups that offer online and mobile international money transfer services.  While there does not seem to be much more information out to the public, it will be interesting to see the different traits Facebook will have with their money system compared to what Google has to offer with Google Wallet, which is mentioned to be in a revamping stage. Apple has also said in January that their interest in mobile payments was a reason for creating the Touch ID fingerprint sensor in the new iPhone 5s.

Should we be concerned about these new markets that are being broken in to? The answer is yes. The reason for this is because “global mobile transactions are expected to grow at an average 35 percent per year between 2012 and 2017, according to a report by research firm Gartner. The June 2013 report forecast a $721 billion market with more than 450 million users by 2017.” As Google Wallet has been in the picture, Facebook’s commitment to expand by creating their money transfer service is a great possibility at this point.

An article on venture beat talks about how Facebook shows it will take over the rest of the world in 2014. Along with many other aspects within the company, they wanted to become the world leader in the mobile market. “The company now considers itself a 100 percent mobile platform—and it’s paving the way for 100 percent mobile revenue, too,” and “watch the entire mobile web achieve rapid acceleration as Facebook open-sources more tools for building perfect mobile websites.”

With Facebook’s own perfect mobile website, this may give them an edge to gain consumers to use their financial utilites in the future. Facebook is truly changing the rules of the game. While Google may have their search engine power, they lack the social media aspect with Google+. As the number of mobile active users continues to increase for Facebook, they are really taking a chance to break the barrier with this service. But with the advantage in this situation, Facebook will potentially allow the money service to be a common use among everyone in the world one day.

Facebook Continues to Make Moves

Just this afternoon (Monday, April 14th), Facebook announced that it wants to make its own money now. Whether or not this has been in talks for over a year within the company, this is just another move for Facebook to potentially take over the world. What’s next? Will Google, Apple, and Amazon create their own currency too?

According to the Huffington Post, “the company is close to obtaining approval from the Central Bank of Ireland to start a service that would allow users to store money on Facebook and use it to pay and exchange with others.”

Facebook has also talked with companies like TransferWise, Moni Technologies, and Azimo, three London start-ups that offer online and mobile international money transfer services.  While there does not seem to be much more information out to the public, it will be interesting to see the different traits Facebook will have with their money system compared to what Google has to offer with Google Wallet, which is mentioned to be in a revamping stage. Apple has also said in January that their interest in mobile payments was a reason for creating the Touch ID fingerprint sensor in the new iPhone 5s.

Should we be concerned about these new markets that are being broken in to? The answer is yes. The reason for this is because “global mobile transactions are expected to grow at an average 35 percent per year between 2012 and 2017, according to a report by research firm Gartner. The June 2013 report forecast a $721 billion market with more than 450 million users by 2017.” As Google Wallet has been in the picture, Facebook’s commitment to expand by creating their own money is a great possibility at this point.

An article on venture beat talks about how Facebook shows it will take over the rest of the world in 2014. Along with many other aspects within the company, they wanted to become the world leader in the mobile market. “The company now considers itself a 100 percent mobile platform—and it’s paving the way for 100 percent mobile revenue, too.” And “watch the entire mobile web achieve rapid acceleration as Facebook open-sources more tools for building perfect mobile websites.”

With Facebook’s own perfect mobile website, this may give them an edge to gain consumers to use their money in the future. Facebook is truly changing the rules of the game. While Google may have their search engine power, they lack the social media aspect with Google+. As the number of mobile active users continues to increase for Facebook, they are really taking a chance to break the barrier with its’ own money. But with the advantage in this situation, Facebook will potentially allow their own money to be a common use among everyone in the world one day.

[REVISED] Why Google Will Live and Facebook Will Die

Give me a good reason why Facebook spent 19 billion for a 55-employee company with 450 million monthly users, 2 billion for a virtual reality headset that’s never been shipped and 3 billion trying to acquire a mobile app company that only let’s you stare at a picture for 10 seconds.

If you separate facebook.com the website from Facebook the company, the reason behind all these ridiculous moves should not be hard to see. Let me explain.

Like I said in my other blog post, facebook.com is no longer a pure social network, it’s a giant ad board. To maintain its revenue stream, Facebook uses all its resorts to keep on fine-tuning its ad engine and keep on spamming all its users to get a better click-through rate. Little effort was spent on improving user experience. We, the users, are annoyed. And for that reason, facebook.com is not cool anymore.

“I’m 13 and none of my friends use facebook.” True story.

To steal some wisdom from Burton G Malkiel’s book “A random Walk Down Wall Street”, where he explained the two traditional asset valuation approaches: the firm foundation theory and the castle-in-the-air theory, I’d like to relate Google’s success and Facebook’s fatal destiny to the two theories.

Google based its value on a firm foundation. As a search engine, google.com is the entrance to the Internet. It has the ability to control (on a certain level) the distribution of information, much like Walmart in the real world. People can’t navigate the Internet as smoothly without Google. As a result, Google’s price is set on its intrinsic value.

Facebook, in contrast, is more like a castle in the air. Unlike Google, facebook.com is not a necessity. People can still keep in touch with friends and stay in sync with news without social networks. Facebook was successful not because facebook.com was the prettiest face on the newspaper, but because it was the mostly favored face (A Random Walk Down Wall Street, Page 32). It gained traction when it was cool. Now that facebook.com has lost its “cool” factor, people will stop using it and divert to other “cooler” products shall there be any. The story of how Snapchat beats facebook.com is one great example. In short, most, if not all, of Facebook’s market value relies on the “coolness” of its products.

Facebook is definitely not unaware of that. Hence there came the biggest acquisitions of startups of all time. Through buying Instagram, WhatsApp, Oculus VR and many other companies on this list, Facebook is pouring money out to be cool, because the only way to keep this castle from collapsing is to keep it staying in the air.

Now why Facebook will die and Google will live? Consider Malkiel’s opinion about the Internet Bubble and the market’s response to irrationality: “the market at times can be irrational… But eventually, true value is recognized by the market, and this is the main lesson investors must heed.”

Although Facebook lives in the air thanks to the love from the Internet users, overtime, the market will come back to rational and recognize Facebook’s true value. Facebook can keep on buying all the trending companies to stay afloat, but if it couldn’t find a core value proposition solid enough to build a firm foundation upon, it will fail eventually.

Google, on the other hand, as the central hub of the world’s information, has laid a foundation firm enough to sustain itself. Now with the unbeatable advantages on what it knows about the world and how it interacts with the world through technologies, Google is going to continue its successful stories in the future.

(Revised) Facebook’s Next Acquisition; a Prediction

Screen Shot 2014-04-06 at 2.56.41 PM

The above screenshot is from an interactive infographic that can be found in a Tech Crunch article, Visualizing 15 Years of Acquisitions by Apple, Google, Yahoo, Amazon, and Facebook. For perspective, that huge blue bubble in the bottom corner is the much talked about 19 Billion dollar WhatsApp acquisition by Facebook earlier this year. Scrolling through some of these acquisitions, I recognized many names including Tumblr, Instagram, and Youtube, among others. This got me thinking about some of the apps or web services that I have used or heard about that may be next on the list of companies to be acquired by one of these tech giants, given their seemingly unquenchable thirst to buy up these smaller web services and apps.

The first that came to mind was the new Cyber dust app (currently only available for iPhone but their website promises an android version soon). The messaging company is somewhere in between text messaging and snapchat. The basic idea is that once you send someone any message or image, it disappears 30 seconds after they open it. Given snapchat’s popularity, I can see this app getting similar levels of attention. While they are too new to have published any data on number of users or anything like that, I can see them growing quickly.

I am sure that any of the companies included in the info-graphic above (Apple, Yahoo, Amazon, Facebook and Google) would be interested in acquiring this company, I would expect Facebook to make an offer if my prediction on the app’s user base growth is correct. Facebook had offered three billion dollars in cash for snapchat late last year, so they have an interest in this “disappearing digital footprint” fad. Given heightened privacy concerns of many mobile users, these kinds of apps are very popular. Since snapchat rejected Facebook’s offer, I wouldn’t be surprised if Facebook is quick to make an offer to purchase cyber dust.

The service, whose tagline is “Every spoken word isn’t recorded. Why should your texts be?” is owned by Shark Tank’s famous Mark Cuban, who says he doesn’t think it will replace texting, only supplement it but that Cyber dust does allow you to stay in control of your messages. With standard texting, you lose control as soon as you hit send. While there are some obvious sketchy uses for cyber dust that come to mind, I have used it to send my login information for my Netflix account to my brother. While that isn’t the most sensitive information out there, I don’t really want him to tell all his friends at school and have 300 high school freshmen using my Netflix account. Cyber dust prevents him from leaving that information on his phone when he takes it to school. Other more innocent uses for the app that come to mind are coordinating some kind of surprise birthday party or complaining about your boss to coworkers.

While there are a lot of “what ifs” about Cyber dust’s growth, I think that my prediction is a reasonable one. I don’t know much about Mark Cuban’s goals for holding onto or selling the service, so whether or not cyber dust is actually sold if an offer is made is another discussion entirely.

REVISED: Facebook’s WhatsApp Deal is No Value Investment and That’s Ok

Last month Facebook announced that it was acquiring the messaging application WhatsApp for a whopping $19 billion. While the deal has been picked apart over the last several weeks by financial commentators, I wanted to revisit it in light of our reading of A Random Walk Down Wall Street. Malkiel spends the entire first half of the book introducing (and subsequently arguing against their validity) the castles in the air and firm foundation valuation perspectives – how would the WhatsApp deal look when viewed through the two valuation lenses that Malkiel describes?

Interestingly enough, one of my favorite bloggers – corporate valuation expert Aswath Damodaran a Finance professor at NYU – provides an analysis that presents a perspective that echos some of the principles Malkiel presents in his book. Damodaran presents the two valuation viewpoints:

There is the pricing process, where the price of an asset (stock, bond or real estate) is set by demand and supply, with all the factors (rational, irrational or just behavioral) that go with this process. The other is the value process where we attempt to attach a value to an asset based upon its fundamentals: cash flows, growth and risk. For shorthand, I will call those who play the pricing game “traders” and those who play the value game “investors”, with no moral judgments attached to either.

The trader perspective is a castle in the air approach and the investor perspective is the firm foundation theory. Professor Damodaran goes on to say that from the investors/firm foundation perspective the deal is almost impossible to justify. From a traditional discounted cash flow valuation perspective:

To justify a $19 billion value for a company in equity markets today, you would need that company to generate about $1.5 billion in after-tax income in steady state.

WhatsApp is currently making no where near this amount – according to the WSJ’s MoneyBeat blog they are making just barely $20 million in revenue annually. They charge $1 to users after the first year, which according to Damodaran, would require them to have over 2.5 billion users in order to reach the break even net income (they current have almost 500 million). They could also raise the price to about $5 or begin selling ads, but either of these moves would risk slowing the growth of their user base and turning away already loyal customers. On fundamental analysis grounds, this is a trade that hardly makes sense.

The only way this deal makes sense is looking through a castles in the air lens. According to Damodaran’s terminology this is a “trader’s” acquisition – Mark Zuckerburg in this case is the trader buying companies. Facebook acquired Instagram for $1 billion over a year ago, offered Snapchat $3 billion (which the rapidly growing start up rejected), and just last month announced this $19 billion acquisition. Zuckerburg and company appear to see acquisitions as their best growth strategy considering growth in Facebook’s own platform has slowed around around 1 billion users. Because the company is looking for outside social networks to integrate into its own, it might make sense for Facebook to pay a premium price in order to bring new users into its ecosystem.

The other thing to consider is that social networks are a hot trade right now and because the investors have optimistic beliefs about their future potential, they do not trade based on traditional fundamental metrics. Many observers point to valuation per user as a useful comparison metric that the market seems to price companies based on. According to the below chart from the WSJ, this metric makes WhatsApp look somewhat more reasonably priced at around $42 per user.

BN-BP502_WhatsA_G_20140220070328

Damodaran points out – and I agree with him – that if Facebook believes that the market is valuing their firm from a castles in the air perspective based primarily on their number of users, it makes sense to acquire a company with a very large user based (like WhatsApp) for a lower value per user multiple than your own. From this perspective Zuckerberg and company may have made a genius trade. Only time will tell if the trade works out or if social media stocks in the early 21st century will make their way into the chapter on bubbles in some future edition of A Random Walk Down Wall Street.

Facebook-Oculus VR, Synergy and Expected Growth in Earning per Share

Acquisition of Oculus VR by Facebook is worth of $2 billion on 3/25 have made headlines for recent days. Many ask how come Oculus VR, a startup company that has just founded two years ago worth such huge value. Even though Facebook founder and CEO, Mark Zuckerberg gave a reason for the action by saying, “Mobile is the platform of today, and now we’re also getting ready for the platforms of tomorrow. Oculus VR has the chance to create the most social platform ever, and change the way we work, play and communicate,” the fact that Oculus VR has not even made any product no doubt left confusion among many people.

One explanation by Burton G. Malkiel in his book, A Random Walk Down Wall Street: the Time-tested Strategy for Successful Investing might be suitable for this kind of situation. Malkiel explained that in the financial market, investors desire growth in earning per share. In order to achieve that goal, by the mid-1960s, creative entrepreneurs proposed an action so-called synergism. Once two separate companies with earning power of $2 million each form a synergy, the new company emerged form that synergism might earn more than $4 million as the result. This is a creation that is called a conglomerate.

It is interesting to associate Facebook’s action in the acquisition with the term of synergy. Each might expect a gain from this action. Both companies act a mutualistic relationship:  Facebook is building its supremacy in its industry whereas the founders of the Oculus VR still own the business through their holding of Facebook stocks, in addition to cash payment. Zuckerberg was smart enough to make a deal with that scheme. He was expecting to gain from expected growth in earning per share. The fantastic amount of value to exquisite Oculus VR is just a tool to multiply the effect of the synergy, though it is still in question since after the announcement of the deal, Facebook’s shares fell by 6.5 percent.

Oculus VR was also playing a crucial rule in the game. It was not surely an ordinary deal where the seller and the buyer make a deal and the buyer pay for the price. The fact that Oculus VR only received $400 million in cash in addition to 23.1 million shares of Facebook common stock valued at $1.6 million gives a good indication that Oculus VR was also betting for a good luck from the deal.

One quote might be worth to cite from Malkiel’s book, “Part of the genius of the financial market is that if a product is demanded, it is produced.” And the product here is the synergy itself, the product that was intended to create growth in earnings per share of Facebook stocks.

An Overview of Facebook M&A Transactions

These days, Facebook announced that it has reached a definitive agreement to acquire Oculus VR, Inc., the leader in immersive virtual reality technology, for a total of approximately $2 billion. I did a research (screenshot as below) on the Mergers and Acquisitions transactions by Facebook from 2005 – there have been already 46 deals. Facebook has acquired 10 companies with its largest acquisition being the purchase of WhatsApp, paying more than $40 per WhatsApp user.Most of Facebook’s acquisitions have been ‘talent acquisitions‘ and acquired products are often shut-down.

List of mergers and acquisitions by Facebook   Wikipedia  the free encyclopedia

 

In some sense, Facebook has been a good investor. The company is willing to take the risk and also diversify its investments by merging or acquiring companies from various industries. As mentioned in the book A Random Walk Down Wall Street, rebalancing  can reduce investment risk and possibly increase returns (P.369). To understand this technique in Facebook’s case, we know that Facebook is bringing the proportions of its assets devoted to different deals back into the proportions suited to its features, in other words, involving companies of various industries to guarantee its entry to a new market sector so as to strengthen its own future development.

As I wrote in one of my posts that the acquisition of Facebook and WhatsApp is aiming at increasing the number of Facebook users. But why are so many Internet companies competing for users visiting its Website? Because the number of people visiting the Website is especially important in evaluating the Internet-related companies. This is also explained in the book A Random Walk Down Wall Street. New metrics should be specifically applied to Internet-related companies because this is a unique industry. In the brave new Internet world, sales, revenues and profits were irrelevant. In order to value Internet companies, analysts looked instead at “eyeballs” — the number of people viewing a Web page or visiting a Web site. Particularly important were numbers of “engaged shoppers” — those who spent at least three minutes on a Web site (P.90). In this case, since Facebook is a social network, the time for people staring at the Web page will be quite long (mostly more than three minutes) and thus the “engaged shoppers” become the main group of people that Facebook wants to attract. In fact, Facebook is actually making good use of its “engaged shoppers” – it makes profits from a large amount of promotions on the sides of the page for people to “unintentionally” glimpse.

Above all, it is good to see that Facebook has always been trying to increase the number of its users or open up new business sectors. Internet-related companies like Facebook should never stop innovating as it is a fast-growing and energetic industry.

Why Facebook Will Fall and Google Will Live

Give me one good reason why Facebook spent 19 billion for a 55-employee company with 450 million monthly users, 2 billion for a virtual reality headset that’s never been shipped and 3 billion trying to acquire a mobile app company that only let’s you stare at a picture for 10 seconds.

If you separate facebook.com the website from Facebook the company, the reason behind all these ridiculous moves should not be hard to see. Let me explain.

Like I said in my other blog post, facebook.com is no longer a pure social network, it’s a giant ad board. To maintain its revenue stream, Facebook uses all its resorts to keep on fine-tuning its ad engine and keep on spamming all its users to get a better click-through rate. Little effort was spent on improving user experience. We, the users, are annoyed. And for that reason, facebook.com is not cool anymore.

“I’m 13 and none of my friends use facebook.” True story.

To steal some wisdom from Burton G Malkiel’s book “A random Walk Down Wall Street”, where he explained the two traditional asset valuation approaches: the firm foundation theory and the castle-in-the-air theory, I’d like to relate Google’s success and Facebook’s fatal destiny to the two theories.

Google based its value on a firm foundation. As a search engine, google.com is the entrance to the Internet. It has the ability to control (on a certain level) the distribution of information, much like Walmart in the real world. People can’t navigate the Internet as smoothly without Google. As a result, Google’s price is set on its intrinsic value.

Facebook, in contrast, is more like a castle in the air. Unlike Google, facebook.com is not a necessity. People can still keep in touch with friends and stay in sync with news without social networks. Facebook was successful not because facebook.com was the prettiest face on the newspaper, but because it was the mostly favored face. It gained traction when it was cool. Now that facebook.com has lost its “cool” factor, people will stop using it and divert to other “cooler” products shall there be any. The ongoing story of how Snapchat beats facebook.com is one great example. In short, most, if not all, of Facebook’s market value relies on the “coolness” of its products.

Facebook is definitely not unaware of that. Hence there came the biggest acquisitions of startups of all time. Through buying Instagram, WhatsApp, Oculus VR and many other companies on this list, Facebook is pouring money out to be cool, because the only way to keep this castle from collapsing is to keep it staying in the air.

Now back to the title: why Facebook will die and Google will live? You might argue that both the firm foundation and the castle-in-the-air are asset valuation theories that are not used to predict companies’ future. I concur. But if you consider Malkiel’s opinion about the Internet Bubble and the market’s response to irrationality, you’ll see why Google has a much brighter future than Facebook.

In his book, Malkiel states that, “the market at times can be irrational… But eventually, true value is recognized by the market, and this is the main lesson investors must heed.”

Which company would you invest in now if you were an investor? Maybe both. How about in 5 years? In 10 years? I’ll bet on Google for sure. Reason? Because Google roots on true value, whereas Facebook flies in the air.

Facebook Makes Another Big Move: Oculus

Who would have thought that Facebook would make another major acquisition so soon after the purchase of WhatsApp? Facebook announced on Tuesday afternoon it has reached a deal to acquire Oculus VR for $2 billion. The deal, itself, was comprised of $400 million in cash and 23.1 million shares of Facebook stock. Although Oculus VR Inc. has only been a 20-month-old maker of virtual-reality goggles, they have also become the leaders of the industry; and Facebook saw an opportunity with them. According to the Wall Street Journal, there are many analysts that believe this is a great long term investment such as Doug Anmuth of J.P. Morgan. “We do not expect Oculus to have any impact on Facebook’s near-term revenue,” Anmuth said.

I personally don’t know everything that Facebook has in store with this purchase, but I can assure you it will definitely have an impact on our future. The product that Oculus makes is called the Rift. Currently it is still in its’ infant stages, but many have said it is different from anything they’ve ever experienced in their lives.

“Imagine enjoying a courtside seat at a game, studying in a classroom of students and teachers all over the world or consulting with your doctor face-to-face just by putting on goggles in your home,” said Mark Zuckerberg.

Although Facebook has made purchases like WhatsApp to narrow down their competitors, they are also looking to expand into new fields of business but this very acquisition will take a long time to see results.

Facebook will face many obstacles in the next decade such as trying to convince consumers to adopt to virtual-reality technology. “The technology has long been criticized for triggering motion sickness in users, a challenge that Oculus has said it is working to solve.” But Mr. Zuckerberg remains confident stating “we think people will love using this technology, and we’re making a long- term bet that immersive, virtual and augmented reality will become a part of people’s daily lives.”

Really? Is this what our world is coming to? Will this type of technology change the world and human behavior for the worse if this is able to reach the market in the next 10-15 years? Although I personally believe it would be a great experience to have a Rift, I have some setbacks for the product. Just like smartphones have completely changed the young generation’s soft skill behavior, I don’t want to imagine what the Rift would do either, but hey, why not right? According to the Huffington Post, Zuckerberg went on to state in a Facebook post “Virtual reality was once the dream of science fiction. But the internet was also was a dream, and so were computers and smartphones. The future is coming and we have a chance to build it together.”

Facebook’s Second Blockbuster Acquisition Continues- Can it produce synergy?

In my previous blog post New Paradigm of Social Network Service, I mentioned about Facebook’s $19 billion acquisition of Whatsapp, an instant messaging application. Many people were concerned about this acquisition, as $19 billion is a huge amount while Whatsapp barely generated significant revenue (as it is a free messaging service). Facebook explained that this acquisition is part of Facebook’s vast ambition to connect people across all kinds of devices and modes of communication. Facebook’s effort for its vast ambition continues, as it continues to invest its capital in order to acquire other companies.

According to Wall Street Journal article Facebook to Buy Virtual Reality Firm Oculus for $2 Billion, Facebook made another blockbuster acquisition this year, acquiring Oculus VR Inc., a company that makes virtual-reality goggles. It is interesting to note that Oculus is a relatively new company which is only 20 months. Facebook agreed to pay $400 million cash along with Facebook stock to acquire Oculus. Oculus currently makes headset for video games and yet to generate much revenue just like Whatsapp as company is only twenty months old.

However, Facebook’s CEO Mark Zuckerberg explains (according to Wall Street Journal article Zuckerberg on Oculus: Different Than Anything Ever Experienced that Oculus’ visual headset can bring a new horizon to cyberspace, as it can provide many different environment (classroom, hospital, and even athletic stadium) by just wearing a goggle at home.

After reading A Random Walk Down Wall Street by Burton G. Malkiel, I related Facebook’s multiple acquisition to the boom of conglomerate. The book explains that by mid-1960s, creative entrepreneurs suggested that growth could be created by synergism. The term synergy can be explained as quality of having 2 plus 2 being 5, instead of 4. What Facebook has done so far is pretty similar. Its acquisition of Instagram, Whatsapp, and Oculus could be seen as a formation of Facebook’s conglomerate. Instagram, Whatsapp and Oculus all have one in common. They are relatively new startup companies that have big potential, yet do not produce much profit.

As explained from the book A Random Walk Down Wall Street, I see Facebook is trying to acquire startup companies to produce synergy on its social network service. With Facebook’s continuing acquisition, I believe Facebook’s big goal of “connecting people across all kinds of devices and modes of communication” can be achieved through “synergy” of various companies that are acquired by Facebook. So, let’s wait and see Facebook’s new paradigm of social network service.