When Mark Zuckerberg built "The Facebook" (NASDAQ: FB ) back in 2004, his goal was to "create a richer, faster way for people share information about what was going on around them." Now, with over a billion people sharing their information freely, Zuck has a few new goals, which he revealed in the company's most recent conference call: "connect everyone, understand the world, and help build the knowledge economy."
These are long-term goals, as Zuckerberg put it; these are the changes he wants to make in the world over the next 5 to12 years. This long-term outlook, which Zuckerberg and Facebook have seemingly always held, is what makes Facebook the kind of company worth a Foolish investment.
There are currently only about 2.7 billion people with Internet access around the world. Even in the U.S., only about 80% of the population has access to the Internet. That leaves a huge 4 billion person market for a company like Facebook to monetize.
In the last two years Facebook has made it easier and less expensive to access its service, particularly in developing countries. It launched its "Facebook for every phone," which recently reported its 100 millionth user and contributed to significant earnings growth in Asia and the rest of the developing world. Additionally, Facebook is making deals with carriers to allow subscribers to use Facebook's app and website without paying for data.
Internet growth is decelerating, and companies like Facebook and Google (NASDAQ: GOOGL ) are working to ramp up the growth again. Google, for its part, is full of interesting experiments to help increase access to the Internet and its services. For example, a network of blimps or balloons carrying wireless signals across Sub-Saharan Africa and Southeast Asia could connect approximately 1 billion people.
It's no doubt that both Facebook and Google have a lot to gain from increased connectivity. The two advertising giants rely on scale to grow ad revenue. And while the next 5 billion Internet users will mostly come from the developing world, where ad rates are lower for both companies, it's reasonable to expect rates to climb as those economies grow. In the meantime, scale will have to make up for lower rates. So, both in the near-term and long-term, there's lots of growth left for these Internet advertisers in connecting the rest of the world.
Understand the world
With its 1 billion-plus active users, Facebook is gathering new information every second that can help it build up long-term knowledge about the world: people's interests, favorite restaurants, good hotels. Unlike networks like Yelp (NYSE: YELP ) , which specifically ask for user generated reviews, Facebook is gathering this information organically.
As this knowledge base grows, Facebook will become a bigger threat to networks like Yelp and TripAdvisor as it develops new services that help users find the information they want. Graph Search was the first of such services, but is really only a starting point for Facebook. Zuckerberg believes his company "should be able to build intelligent services ... that could answer lots of questions for you that no other service can."
Last year, Yelp generated $138 million off of its 86 million unique visitors (twelve month average)That number is expected to grow with the website's audience, but the company's margins will continue to feel pressure as new competition from both Facebook and Google encroach on its local business review market. As Yelp is just an advertising business, attracting a large audience is key. Both Facebook and Google have significantly larger audiences and the capabilities to make competitive products. I expect Facebook to move swiftly into this area, which should attract more advertisers and ad views.
When Zuckerberg speaks to a knowledge economy he's referring to helping companies grow through Facebook's advertising platform. Facebook's platform, perhaps more so than any other, allows businesses to connect with potential customers. It helps developers create apps, nearly 18 million local businesses find customers, and big brands to tell their story.
Going forward, Facebook ought to continue the excellent advertising growth it saw in the second quarter. It plans to add special video advertisements that could generate upwards of $1 billion in added revenue for the company next year. Additionally, it should see continued acceleration in its app install advertisements. Moreover, the visual nature of its yet-to-be-monetized Instagram service lends itself well to excellent advertising opportunities.
On the back end, Facebook's acquisition of Atlas from Microsoft earlier this year will allow it to provide analytics and important insights for both advertisers and Facebook itself, thus increasing ad value and prices. Eventually, Facebook could build an ad network to place its ads on websites outside of Facebook. Using its knowledge from its vast user base, an external ad network could increase revenue 200%.
For investors concerned that Facebook could compromise its user experience through advertising, fear not. Facebook is likely even more concerned. That's why Zuckerberg iterated on the conference call, "Our top priority is to expand the number of marketers and overall demand in our system. ... We believe that this will help us ... by creating a more competitive auction." Investors should see increases in cost-per-click, and more clicks will come from an expanded user base, not more advertisement, thus preserving the user experience.
Facebook has come a long way from its dorm-room beginnings. Originally designed as a place for people share information with their friends, the site has become a depository for the goings-on of 1 billion lives. Going forward, the company has plenty of opportunity to 1) bring its service to two-thirds of the world's population, 2) use the information users share to create new products, and 3) help businesses (and its own revenue) grow using its advertising platform. All three of these factors make Facebook a great long-term investment.
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