Facebook is a powerful advertising platform


You can see from the charts above (originally on Techrunch) that Facebook is getting stronger and stronger as an advertising platform. So long as advertisers are spending rationally, which is a good first order assumption, then if ARPUs are rising then ads are becoming more effective.

Perhaps unsurprisingly, none of this is happening by accident. Facebook has been improving ad measurement, improving app speed, and pushing video to increase time-on-site. And that’s just what I read about today.

We see this amongst our partner companies too, many of which are now finding Facebook a much better platform than Google. That’s particularly true for those selling a novel product or service – people don’t know they want it so they aren’t searching for it, but well targeted ads Facebook can excite demand.

Social network usage is starting to drop

2014 has been a great year for social media marketing. A number of our companies have enjoyed great success advertising on Facebook and they’re not alone. Facebook is forecasting Q4 revenues of $3.6-3.8bn, up 40-47% on the year ago quarter. Yet, paradoxically in some markets social network usage is starting to drop:

weekly social network access

As you can see from this chart it is in the US, China, and particularly the UK that consumers are turning away from social networks, and it’s a fair bet that the trend in these countries will be seen more widely next year.

The best guess is that users are shunning Facebook et al for messaging apps, which goes a long way to explaining Facebook’s $19 billion purchase of WhatsApp earlier this year.

This means that we can expect Facebook advertising to become more competitive next year. Buoyed by the success stories from 2014 bigger brands and bigger budgets will come to the platform whilst inventory remains the same or declines, at least in the UK or US. That means higher prices. We’ve seen the same trend play out on Google over the last few years where paid search in many categories is now too expensive for startups.

As this plays out entrepreneurs will be forced to look at newer platforms and one of the interesting things will be whether messaging apps emerge as an interesting advertising category.

A big industry is born and peaks within 13 years

It’s been widely reported this morning that music downloads are now in decline. If you take the launch of the first iPod as the date when music downloads started to become a meaningful market then the time from inception to decline is a meagre 13 years.

As an indicator of the significance of the download market, remember that it was the iPod that saved Apple after Jobs returned to the company – according to Wikipedia iPod revenues peaked at $4bn in Q4 2007 and were 42% of Apple’s sales in that period (I imagine that there was an Xmas boost and that iPod sales were a lower percentage over the whole year, but I don’t have the data).

Apple, of course, came up with the iPhone and has prospered in spite of the declining significance of music downloads, but this story shows how quickly new markets spin up and down these days and how fleet of foot companies have to be to survive and prosper. This is why Google is launching driverless cars and Facebook is bought Occulus Rift – the pressure to come up with significant new innovations gets greater and greater as the pace of change increases.

Yesterday I noted that the desktop advertising has also peaked. There’s a similar story there. If you take the 1995 Netscape IPO as the start of the internet advertising market then that industry went from inception to decline in 19 years.

New markets spinning up creates opportunities for startups and when they spin down it’s because a new industry is spinning up, with more opportunity for startups. The faster this happens the better it is for those of us in the startup world.


Facebook now a mature and stable partner

Yesterday Facebook showed what a mature and stable partner they have become. At F8, their annual developers conference, they made the following announcements which make me comfortable that entrepreneurs building businesses on top of Facebook face relatively little platform risk. Here’s the list of announcements, taken from a GigaOM post:

  • Facebook’s “stable platform” guarantees: Developers will have a 2-year Core API stability guarantee, and the company promises to remedy platform bugs within 48 hours.
  • Facebook’s platform will now support app versions, allowing developers to push different builds over time.
  • Changes to Facebook Log In give users line-by-line control over the information shared within apps, including apps downloaded by friends of friends.
  • Anonymous Log In: Users will now be able to log in anonymously to apps and “test drive” services before turning over information to an app.
  • Facebook’s Parse has now lowered pricing, offering developers more free options to build their apps.
  • Parse Local Data Store will allow developers to create offline experiences for mobile apps.
  • Parse announced AppLinks, a live, open-source SDK that provides seamless browsing to URLs from within apps.
  • Facebook’s Send to Mobile offers users the option to send app links to a mobile phone from the desktop.
  • The Mobile Like button gives users the ability to “Like” things on mobile, even without Facebook log-in enabled.
  • Message Referrals, which works within Messenger, provides rich links to be shared within the app.
  • FB Start: Facebook’s newest developer program offers up to $30,000 in tools for startups looking to grow their apps on Facebook.
  • Facebook Advertising Network: The final announcement at F8, Facebook’s Advertising Network allows developers to serve mobile ads and interstitials backed by Facebook’s targeting data.

Google is the only other internet company with a similarly mature platform. Twitter and others aspire to join them but aren’t there yet, and working with emergent platforms carries the risk that the platform won’t thrive, and/or the platform company will choose to bolster profits by eating it’s own ecosystem (remember Twitter doing that to all the Twitter client companies?). The irony for entrepreneurs, of course, is that all the hot companies on new platforms dive in early and expose themselves to the platform risks just mentioned. Evaluating the platform risk for these sorts of companies should be a key part of due diligence for investors.

As a side note, the anonymous log in announcement might just turn out to be very significant. If Facebook implement it in the right way, and with total integrity, then they are in a good position to become the universal login service for huge parts of the internet.

The key to Whatsapp’s success? Focus on product



When I talk about our approach to investing I often say that the next generation of successful companies will be most notable for their amazing products. That contrasts with previous eras where great sales and marketing capabilities and great engineering were often more important than product (think about the great enterprise software success stories of the 1990s…).

Whatsapp, which following last week’s $16bn acquisition by Facebook is now the largest startup M&A deal in history, makes a good case study. This is from a post about the company and exit from their investor Sequoia:

From the moment they opened the doors of WhatsApp, Jan and Brian wanted a different kind of company. While others sought attention, Jan and Brian shunned the spotlight, refusing even to hang a sign outside the WhatsApp offices in Mountain View. As competitors promoted games and rushed to build platforms, Jan and Brian remained devoted to a clean, lightning fast communications service that works flawlessly.

The note pictured above is apparently taped to one of the founder’s desks and it sums up what they Whatsapp is about: great user experience. They process 50bn messages per day with 99.9% uptime and a service so good that 72% of active users come back daily.

And they do that with 32 people. Amazing.

Finally a note on Whatsapp’s valuation – the $16bn price tag ($19bn including employee retention bonuses) is best understood in the context of Facebook’s valuation ($180bn as I write this). If Whatsapp as an independent company, or more likely in the hands of Google, could have become a powerful competitor that took 10% of Facebook’s business then this is money well spent.

Mobile now accounts for 53% of Facebook’s ad revenues

Screen Shot 2014-01-30 at 11.52.24

Two years ago Facebook had $0 from mobile and everyone was wondering if they would survive the transition away from the desktop. As you can see from the chart above 53% of their ad revenues now come from mobile. That’s an amazing story of business transformation, and their share price is now around the $60 mark valuing the company at c$150bn, up from $104bn at IPO in May 2012.

Zuck and co still have their challenges, of course, with new social platforms springing up all the time and teenagers spending less time on Facebook.com, but that doesn’t detract from the impressiveness of these results. It does mean that they will have to put in a similarly impressive performance to keep moving forward, but that’s how things are with the rapid pace of change in the world these days.

It will be interesting to see how they get on. In the earnings call yesterday they outlined a multi-property strategy which answers many of the biggest questions around Facebook.com. Whether they can execute well on that strategy remains to be seen, but from where I’m sitting their track record so far is very strong.


Facebook remains the dominant social network

screen-shot-2013-12-30-at-15-54-02It may be that teenagers are deserting Facebook and that their future prospects aren’t as rosy as they were maybe a year ago, but the chart above makes it clear that Facebook is in a much stronger competitor than any of it’s competitors. LinkedIn, Pinterest, Twitter and Instagram are all great businesses that either have their use as marketing channels or soon will do, but Facebook remains the grand-daddy of them all. With the exception of LinkedIn these are all advertising based businesses so think of it this way – if you are targeting all US online adults you will find 70% of your target market on Facebook, and only around 20% on each of the other sites.

Facebook is winning the identity war

Screen Shot 2013-08-23 at 13.17.57

I know a lot of people won’t be happy to hear this, but new data out from Facebook suggest they are becoming the dominant provider of online identity. The numbers are a little hard to interpret but my read is that 850m first time registrations to services are made using Facebook Connect each month, and 81 of the top 100 iOS apps and 62 of the top Android apps offer Facebook login. That’s an awful lot of activity. I imagine the next most used identity service is Twitter and from my own experience I would expect that their service sees an order of magnitude less usage.

What we are seeing here is users choosing Facebook Connect for its speed and convenience despite concerns about privacy and app companies cluttering their feed with spammy posts. This is a movie we’ve seen before, and we’ll see it again.

Facebook knows this too and is working on both sides of the equation to make Connect even more attractive. It is getting faster (31% faster on mobile, 16% faster on web) and they are making it more difficult for apps to get permission to post on behalf of their users.

The takeaway is that if you are a consumer facing company you really should be offering Facebook sign up and login.

LinkedIn and Facebook – two very different approaches to going public

I just read How LinkedIn became a Wall Street juggernaut on Techcrunch. The article lists four things, three of which relate to being a great company (multiple growth vectors, a product that gets better as it gets bigger, deep competitive advantage). The fourth describes how their approach to the market, which was to under promise and over deliver. As you can see from the chart below the latest projections for 2013 revenues are 2x what they promised in their 2011 IPO, and EBITDA is forecast at over 2x.

Screen Shot 2013-08-19 at 13.32.32On the back of outstripping expectations LinkedIn has had an easy ride from Wall Street and the media and the share price has risen from $93 at the IPO to $227 today.

Facebook took a very different approach. Rather than focusing on success post IPO they decided to maximise the share price on IPO. That meant ramping promises to the maximum credible level and thereby increasing the chances of disappointment and missing forecasts afterwards. This is, of course, exactly what happened, and after some truly exceptional results over the last six months the share price is only now getting back to the $38 they went out at in May 2012. In the meantime the company has been the subject of intense scrutiny and criticism.

So which is the better approach?

From a purely objective standpoint they are both valid strategies. The Facebook strategy is riskier and requires a thick skin, but if you have confidence in your business then pushing the share price as high as possible to maximise the value of existing shareholders’ stakes can be the right answer, particularly if you are able to limit people’s ability to take action against you by retaining control of the company via the share voting structure. My preference, though, is for the LinkedIn approach, largely because it is more honest.


Facebook turns in a great set of results

Facebook reported strong Q2 results yesterday, bucking the trend in what has generally been a disappointing earnings season for large companies. For many people, Facebook is the company they love to hate, I suspect because of privacy concerns. That dislike often manifests itself in criticism of the company’s business model and long term prospects. Whilst the company is still falling short of the heights it set for itself in last year’s IPO these results show that the business is in rude health.

Screen Shot 2013-07-25 at 10.12.51This slide from their investor presentation is perhaps the most telling. DAUs continue to grow fast. Note also the table at the bottom which shows that DAUs are growing faster than MAUs, telling us that engagement is increasing (see Nir Eyal’s post for more on why this metric is important).

Other highlights are:

  • Mobile revenues are now growing very fast  (up 75% from last quarter, incredible at this scale) and are projected to overtake desktop revenues this year
  • News feed ads are working well on desktop and mobile leading to increased ARPU – now $1.60 on average, $4.37 in the US and $1.87 in Europe
  • Engagement is increasing with younger cohorts as well as on average
  • At 31% GAAP operating margins are remain strong (GAAP margins are after share based compensation)

The only big weaknesss I see is the need to open their platform on mobile.