Facebook's Newest Acquisition Helps Long Term

Facebook (NASDAQ: FB  ) took another step to connect everyone to the Internet earlier this week with the purchase of Onavo. The Israeli-based start-up focuses on data compression and mobile analytics -- two things that will prove very valuable to Facebook as it expands its reach in developing economies. The market sold off Facebook on the news of the purchase, but it makes long-term sense for the company.

Thinking long-term
Facebook has practically saturated the market in the U.S. and Canada. It's nearing saturation in Europe as well. But what Facebook is working on now, is expanding its market.

There are nearly 5 billion people in the world that do not have access to the Internet. In August, Facebook and several other technology companies, including Qualcomm (NASDAQ: QCOM  ) , launched Internet.org with the goal of connecting everyone to the web. Onavo's data compression technology will be a tremendous asset toward achieving that goal.

One of Onavo's applications is used by mobile phone users to compress unencrypted data on the fly. An app like Facebook could use 80% less bandwidth by utilizing this technology. Reducing the amount of bandwidth necessary for users to enjoy the Internet will make expanding the networks in developing countries much easier.

Connecting everyone
Facebook isn't the only company with a stake in connecting more people to the Internet. Google (NASDAQ: GOOGL  ) wants more people using the Internet to search for information.

The company has taken several initiatives to expand Internet access all over the world. For example, Google launched "Project Loon" this summer, a network of blimps and balloons carrying Internet signals. At maturity, the project could connect over 1 billion people in Sub-Saharan African and Southeast Asia.

Google, Facebook, and Qualcomm are portraying their efforts to connect everyone as a humanitarian effort, that Internet access is much like a human right. Of course, all these companies stand to gain financially from broader Internet use. Google and Facebook own the three most visited websites in the world. (YouTube is third.) Increasing page views is their business and increasing eyes should be lucrative. 

Qualcomm's interest in connecting everyone is just as self-interested. Most people, in developing economies, will be connecting to the Internet with their mobile phones. Qualcomm chipsets power the majority of 3G and 4G devices. If more consumers have access to the Internet, there will be higher demand for devices capable of utilizing Internet access.

Growing revenue
Both companies rely on scale to increase ad revenue. Google has had trouble growing its ad rates recently, and in the last two quarters, the company saw its average ad price decline. Cost per thousand clicks or CPM was down 6% year over year in the second quarter, and 4% in the first. The second quarter average ad price also declined sequentially.

Meanwhile, Facebook appears to be growing its ad rates, as advertising revenue growth outpaces the growth in page views. Facebook's ad rates are still below Google's, however, and Google's recent struggles indicate there is an upper limit on ad prices.

The fact that Facebook is working hard to expand its addressable market before it reaches that limit will make it easier for the company to continue growing revenue at a rapid pace.

Improving conversion
One way for the company to continue increasing ad rates is to help companies improve their ad conversion. This is particularly a problem on mobile, as its a relatively new medium for advertisers. Onavo can help in that regard with its Insights product.

Onavo Insights provides brands with advertising data points from thousands of mobile applications. This data can be used to help find best practices for mobile advertising, which can be copied and used to improve conversions. Facebook could offer this as a free service to its advertisers to incentivize them to choose Facebook as an alternative to Google, and to help it increase its ad prices in the long run.

A good buy
While the market might not agree, Onavo looks like a good purchase for Facebook. I believe the company will see significant synergies from the acquisition in the long-term. Onavo's data compression technology will make it easier to expand Internet access despite bandwidth limitations. Additionally, Facebook can use its Insights products to help improve its mobile product. The market's short-term outlook might have caused it to miss the point of Facebook's buy.

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