Written by our Director of Equity Advisory, Jeremy McKeown, the HyperNormalTimes provides in-depth and considered long-term commentary on major macroeconomic and market-shaping themes.

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December 12, 2020

The Feds come for Facebook, but all is not lost & Bob sells up

Feds turn up for FaceBook-

Finally Facebook faces the FTC and 40 state prosecutors becoming the second of the Big Tech names to be subjected to legal attempts to curb their power. Interestingly the approach seems to be based on an all or nothing shot focusing on the abuse of power FB wielded when acquiring Instagram and and WhatsApp, 8 and 6 years ago. The argument is based around the pretty powerful self incriminating evidence that FB saw both companies as significant threats to their audience growth at a critical stage of the company’s development. By buying them FB removed competitors and consolidated its own growth trajectory. There is also a secondary focus on FB acting to prevent competing platforms from accessing its network, a common Silicon Valley strategy. Interestingly there doesn’t seem to be much focus on FB perverting the truth, perpetuating fake news, allowing political interference and the various implications of this type of allegation made by commentators and competitors over the years. The main ambition is for the prosecutors to force FB to sell or de-merge Instagram and WhatsApp.

It wasn't me Guv -

The FB defence is looks pretty clear. First is around proof of the counterfactual. If Instagram and Whatsapp had not been bought by FB, would they have grown to the scale and significance they are today? What if instead of Facebook buying Instagram, Twitter had bought it, instead of buying Vine, which it did and subsequently closed down? (Who remembers that one)?

Its how you sell 'em -

If you can remember that far back in internet time, Twitter and FB in the 2012-14 period were considered equals in the nascent social media market. However, it is only in the last few months that the Twitter share price has recovered to its IPO level from 2013. In the same time period FB has increased in value 6 fold. This disparity in performance is not due to disparities in user growth, these are broadly comparable. It is all about the monetisation of user growth. The reason that every traditional media organisation dislikes FB is that it has (along with Google) re-invented the concept of advertising.

Not all bad -

To describe what these companies have done to advertising as disruption misses the enormity of its impact. In buying Instagram, FB was able to apply to its young and growing user base the world’s most efficient piece of advertising technology devised to date. Facebook is such a compelling advertising proposition that it today has nearly  5 times as many advertisers as the NY Times has subscribers. Many of the 9 million businesses that use FB to develop awareness, brand and sell direct to consumer would not exist if it wasn’t for FB’s ability to understand and interact with its own 2.7bn users. Indeed, the repeated attempts of the large brands to boycott FB, or competing news organisations to highlight the unsavoury content on its platforms, have never dented the relentless ability of FB to provide a compelling return to its advertisers. In bypassing the established media channels, FB (and other social media sites) have dis-intermediated the centralised control of the message.

How does it help me? -

However, as a FB shareholder I am not really concerned about the rights and wrongs of this case, or indeed what the outcome is. What I must decide is what the impact might be on the FB investment case and valuation under the various alternative futures. I am pretty sure that FB will vigorously defend itself. This case is likely to take many years to contest. Over this time FB can continue its strategy of knitting together its properties. A FB executive was quoted this week as saying FB and Instagram are our store fronts and WhatsApp will be the cash register. In January the digital currency formerly known as Libra will be launched as Diem. I think this points to a future monetisation of WhatsApp that takes it firmly into the growing inter section of social media and money. Square’s CashApp is a rapidly growing network already manoeuvring effectively into this space (interestingly sharing its CEO with Twitter).

Breaking up is not so bad -

If the FTC succeeds in its pursuit of a FB break up, then the analogue is the 1982 break up of AT&T when it was distributed in the form of shares in the Baby Bells. This decade long legal wrangle ended up as one of the most lucrative corporate break ups in US corporate history. it also resulted in multiple unintended consequences and ironically most of the seven spin-offs have subsequently reformed under the AT&T banner, and interestingly AT&T is still trying to pivot back to its leadership position, this time by turning its prestigious Warner Bros Studios into a streaming bundle to retain more of its flighty but valuable mobile customers. (While I haven’t looked at this in detail from AT&T’s perspective, I suspect this bold move might just be a shrewd strategic move). An independent WhatsApp is a particularly appealing prospect, watch out Zoom, Slack, mobile operators and payment platforms. But generally the prospect of FB’s platforms being set free to experiment and innovate with their respective strategic variants is an exciting and I suspect a valuable one.

Spending more time with my lawyers -

If FB wins it can carry on, but by this time it will probably find that its inability to acquire the current crop of competing platforms currently emerging in the gaming and fin-tech spaces will have done more to weaken its competitive position than any specific redress the FTC might have. The analogue here is the decade long pursuit of Microsoft (which failed in its attempt to break up the PC operating system monopolist) but also prevented it from buying Amazon, FB, or Google while they were so preoccupied with their general counsel and the DoJ. (Surely it must have had a look at Amazon at $5 a share in 2002). This highlights the interesting second order effect of this period of heightened regulatory preoccupation of Big Tech which is now upon us. Just as the FAANGS were able to escape the clutches of a preoccupied Microsoft, the next wave of platforms will be able to reach their own escape velocities and take flight. Tik Tok, Roblox, and even Pinterest, but also others that are yet to emerge in enhanced and virtual reality.

Just like 1999 -

There is more reason to think back to the late 1990s period this week as the IPO mania on NASDAQ is starting to emulate the heights of the dotcom boom. Tempting as it is to say this is froth on the top of an unsustainable bull market, I would only offer that investors have taken an equally bullish view of one of several, hard to distinguish stay at home delivery stocks (DoorDash) as it has with a singularly unique open-up stock that has defined its own global hospitality platform (Airbnb). Evidence if it was needed that we are currently in an Everything Trade and not just a Vaccine Trade. Evidence if it was needed that the world is awash with liquidity looking for a home that can outrun the prospect of the inflation that is heading our way.

Blowing in the Wind -

With nominal interest rates threatening to turn sharply negative and the Central Bank printing presses worldwide working extra shifts, the prospect of damagingly negative real interest rates is staring us in the face. One increasingly popular way to combat this impact is the manufacture of bond proxy collectives of alternative, real assets. Wind farms, healthcare properties, toll roads and mobile phone masts are just a few of these assets that are being assembled to try and deliver bond like returns. The latest fad now includes song publishing rights, where values are becoming seriously tempting, even for Bob Dylan, who this week sold the publishing rights to his legendary song catalogue for $300m. I have no idea whether $300m is a good price for Bob or not, he might be in need of the cash as he hasn’t been touring for a few months. But at the estimated 0.3 cent per stream it is the equivalent of 100 billion Spotify streams. Interesting that Bob has decided to sell just as AT&T and its subsidiary TimeWarner have taken the decision that their movie content is worth more as promotional collateral than a cinema draw. We are probably just as awash with media content as we are with cash.

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