Facebook – No altruism

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Facebook’s move is about securing the long-term.

  • Facebook’s move to put its users ahead of its shareholder’s is not born from altruism, but instead reflects the need to maintain user loyalty as it transitions to becoming a fully-fledged ecosystem.
  • In the midst of the maelstrom that was CES, Facebook announced that it would overhaul its user experience to prioritise interactions from the user’s friends and groups and less from businesses, brands and media.
  • This also means that the passive types of interaction such as watching videos or reading articles will be de-emphasised in favour of more active types of engagement.
  • Facebook’s own research (which correlates with my own observations) shows that users are far more engaged with content created by users they directly know or groups with which they have a connection.
  • It is these types of interaction that Facebook is aiming to prioritise as it is these that drive the network effect which makes the service so valuable and provides its barrier to competition.
  • Videos and articles do not require interaction from any other user and so I do not think that they really contribute to the stickiness of Facebook’s services.
  • This, combined with user discontent with having their feeds too cluttered up with commercial content that generates revenue for Facebook, is what has lead to this shift.
  • This change is likely to lead to a decline in user time spent as interactions between users takes less time than watching videos, but this does not mean that they are less valuable in the long-term.
  • However, in the immediate term this means that there will be fewer revenue generating posts see by users on Facebook leading to a decline in revenue per user.
  • This, combined with the huge increases in expenses that are coming (see here), is making for a pretty grim outlook for 2018.
  • However, re-focusing on active engagement is likely to have a positive effect on the user experience that it offers and should increase the loyalty of its users.
  • This means that when it comes to rolling out new services such as gaming or services aimed at enhancing the community, willingness to adopt them will be much higher.
  • I have long believed that Facebook’s long-term growth is dependent upon its ability to entice its users to spend more of their Digital Lives within its services.
  • This means it has to increase its coverage of the Digital Life pie from the fairly low 36% that it now has, and having great user loyalty will be a major help in achieving that goal.
  • When that goal is achieved, it is likely to result in a major new burst of growth but until that time, the short-term issues are likely to weigh on share price performance.
  • Hence, I suspect that now is a good time to take some money off the table, for a little while at least.