Markman Capital Insight

Gotta like Facebook's master plan

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Keep it simple stupid. That’s business adage that has stood the test of time. Facebook (FB) knows this well. Its business is so incredibly simple. It lures you inside with freebees, keeps you there with the comforts of home and other goodies, entices you to bring your friends along because hey, the more the merrier. Then it monetizes your experience. Simple.

Facebook reported blow-out earnings last month that had Wall Street analysts and pundits  falling over each other with headline grabbing superlatives . Smashing, Blowout, Shattering and the always satisfying, You Can’t Be Serious Man! Quite a contrast from the ridicule and scorn visited upon Apple and Microsoft earnings.

It’s hard to blame analysts for their enthusiasm. Revenues increased 52% year over year to $5.38 billion with $5.2 billion coming from advertising. Earnings were $1.51 billion, nearly triple last year’s result of $509 million. Monthly average users climbed to 1.65 billion, which is remarkable given there are just about 7 billion people on the entire planet and many don’t have Internet access. And, despite Facebook continually warning about future spending, profit margins actually increased from to 55% from 52%. The business basically doubled in size from two years ago, when it was already huge.

This is what Facebook does so well. It lures users and then finds ways to make money. It started with just keeping in touch or making contact with old friends. Sign up, punch in some personal data like where you live and went to school, what clubs you belong to and you’ll soon see some familiar (but older) faces from your past like your college buddy Bob.

Then Facebook adapted. When the novelty of reading friends' opinions on low-carb diets wore off, Facebook stepped it up a notch and made photo sharing a bigger part of the experience. Then you could browse shared photos of pets and new cars, vacations, weddings and graduation ceremonies. You got a chance to peer into the lives of friends without actually having to make physical contact. Hit the Like button or type up a well wish and you were good to go. Genius.

When the attraction of photos started to wear off Facebook moved onto the next big free service, news sharing. What better way to keep up to speed with news important to you than to have it curated by your friends? But while you enjoying the free services and sort of keeping in touch with Bob, Facebook was collecting your personal information and clicks and likes and using artificial intelligence to analyze your photos. All of that demographic data is gold to advertisers and they can’t find it anywhere else so cheaply. So, quarter after quarter, advertising revenue at Facebook is growing by leaps and bounds.

Not only is there no end in sight, Facebook hasn’t even really begun to exploit its assets. It has two mobile applications, Messenger and WhatsApp, with monthly average user audiences in the 1 billion range that are not being monetized at all despite their fertile trove of demographic data. And then there is News. Facebook began trialing an Instant Articles feature last year whereby publishers load content directly to Facebook servers under a licensing agreement. This service is wildly popular with users because the articles load, well, instantly. It’s also popular with publishers. Many have reported fantastic engagement and they can sell very highly targeted, lucrative ads directly or use Facebook as an agent.

The latest big thing, chatbots, were announced at the annual developer conference in March. Like News, Facebook is encouraging businesses to bring a portion of their enterprise inside the network. The big idea here is to have companies provide customer services like selling tickets, buying food and sending money using artificially intelligent chatbots. Facebook earns a fee only when the company engages one of its users. All of these services, Messenger, WhatsApp, Instant Articles and Chatbots are terrific ideas with massive yet untapped potential because they build on Facebook’s incredibly simple model: Build, entice, develop community, monetize.

One can only be awed by the beauty of this plan. It’s just so simple. Facebook builds great services that people are drawn to because they’re easy to use and apparently free. As you become engaged, Facebook adds lots of goodies to make you your stay more pleasant and encourage you to invite your friends inside. In the background, it is working hard to data-mine everything you do and put together packages advertisers find irresistible. Slowly it starts to monetize your stay. In the end, even if you become less comfortable you’re kind of trapped because that’s where all your friends are.

That’s the plan, smart and simple. And that is why Facebook will eclipse Apple and Google as the largest company in the country by market capitalization at some point in the next year or two.