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How Facebook Is Stacking the Deck Against the Competition

By Leo Sun – Jun 17, 2017 at 3:33PM

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The world’s biggest social network is making it tough for any competitor to gain ground.

Back in 2011, Steve Jobs told his biographer, Walter Isaacson: "We talk about social networks in the plural, but I don't see anybody other than Facebook (META -3.08%) out there. Just Facebook, they are dominating this."

At the end of 2011, Facebook had 845 million monthly active users (MAUs). Today, Facebook has1.94 billion MAUs -- making it the biggest social network in the world by a wide margin. Jobs was certainly right about Facebook "dominating" the market.

Facebook CEO Mark Zuckerberg.

Facebook CEO Mark Zuckerberg. Image source: Facebook.

Unfortunately for Facebook's rivals, that dominance will likely continue for a very long time. Let's discuss the four key ways Facebook is stacking the deck against its competition.

1. Double-digit MAU growth

At nearly two billion MAUs, you'd think that Facebook would run out of room to grow. Yet the company is still posting double-digit annual growth in MAUs every quarter. Its MAUs rose 17% annually last quarter, and its daily active users (DAUs) rose 18% to 1.28 billion. Its total advertising revenue also rose 51%.

To put that into perspective, Twitter's (TWTR) MAUs rose just 6% annually to 328 million last quarter, but its advertising revenue fell 11% due to lower ad prices -- indicating that Twitter has neither the mainstream appeal nor pricing power of Facebook.

2. Providing free internet

Since Facebook is widely used in developed countries, the company is focusing on developing and emerging ones which still have low internet penetration rates. India, for example, only has a 35% internet penetration rate, compared to an 89% rate for the U.S.

Facebook wants to offer free internet in many of these countries via subsidized plans like Free Basics, which works with local carriers to provide free "basic" services (like Facebook) to all mobile device users, and solar-powered drones that "beam" internet connections to remote areas. These services require high initial investments, but Facebook likely hopes to recoup those costs if those new internet users sign up for its social network.

This plan sounds clever, but it raised red flags among net neutrality advocates, who claim that Facebook exerts unfair control over free internet platforms like Free Basics. Those concerns led to Free Basics being rejected in India last year, but Facebook still plans to launch the service in other markets across Asia, Africa, and the Middle East. This strategy could make it tough for any rival social networks to gain ground.

3. Alternative apps

Over the past few years, Facebook expanded its ecosystem with the purchases of Instagram and WhatsApp, as well as the launch of its stand-alone Messenger app. WhatsApp now has 1.2 billion MAUs, Instagram has 700 million MAUs, and Messenger has 1.2 billion MAUs.

Facebook's Messenger app.

Facebook's Messenger app. Image source: Google Play.

Each of these apps serves a different purpose. WhatsApp counters simpler chat apps, Instagram offers a streamlined platform for sharing filtered photos and videos, and Messenger is becoming a monolithic platform for various services -- including mobile payments, mini-apps, games, bots, ride-hailing services, and other services.

They also address different markets. WhatsApp is immensely popular in overseas markets like Brazil, Instagram counters Snap's Snapchat with similar ephemeral and story-based features for younger users, and Messenger rides the coattails of similar "platform" chat apps like Tencent's WeChat.

4. Investments in next-gen technologies

Facebook is also investing heavily in next-gen technologies like virtual reality and artificial intelligence. It sparked a land grab in the VR market with its $2 billion purchase of Oculus VR in 2014, and launched the commercial version of the headset last year. It also launched Oculus Home, a VR launcher and marketplace for its Rift headsets and Samsung's (NASDAQOTH: SSNLF) Gear VR headsets, to lay the groundwork for a VR-based app ecosystem.

The Oculus Rift.

The Oculus Rift. Image source: Oculus VR.

In the AI market, Facebook's FAIR (Facebook AI Research) unit is constantly developing new tools for image recognition, algorithms for crafting targeted ads, and chatbots. Facebook added some of these chatbots for Messenger last year, and several companies jumped on board with their own "virtual concierges" for e-commerce and customer support tasks.

These next-gen technologies aren't meaningful pillars of growth yet, and they've run into problems before. Oculus Rift sales came in well below expectations last year, and Facebook sent some of its chatbots back to the drawing board earlier this year due to technical issues. But as they improve, they could help Facebook stay ahead of big tech rivals like Alphabet in the ongoing tech arms race.

The key takeaways

Facebook is a powerhouse because it capitalized on its growth in social networks and evolved its news feed into a full-fledged platform -- a feat which last-gen rivals like Myspace and current-gen rivals like Twitter failed to accomplish. If it continues to widen its moat with smart investments in developing countries, alternative apps, and next-gen technologies, it could become even tougher for its competitors to keep up.

Suzanne Frey, an executive at Alphabet, is a member of The Motley Fool's board of directors. Leo Sun has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Alphabet (A shares), Alphabet (C shares), Facebook, and Twitter. The Motley Fool has a disclosure policy.

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