Once upon a time, the fundamental philosophy of the social media universe was to share everything with everyone. No more -- people have come to realize just how much they want their privacy. But that, of course, conflicts with the way leading platform Facebook (NASDAQ:FB) is built, and it's still a pretty tough habit to break. So we muddle along, getting angry when our data is spread willy-nilly, but we don't usually quit. Now it seems that Facebook CEO Mark Zuckerberg has been listening, and he intends to change the core model of Facebook to a private encrypted service where people can feel confident about data security, and also know that their messages and content won't last forever (and perhaps come back to haunt them). Interesting idea -- but can Facebook really pivot from a "massive public square" to a patchwork of tiny, overlapping private gardens?
In this segment from MarketFoolery, host Mac Greer and senior analysts Ron Gross and Jason Moser weigh in on how this might work, whether the business model can function if the company sacrifices its ability to mine users' data, and more.
A full transcript follows the video.
Check out the latest earnings call transcript for Facebook.
This video was recorded on March 7, 2019.
Mac Greer: In a blog post on Wednesday, Facebook founder and CEO Mark Zuckerberg said he wanted Facebook to become a "privacy-focused communications platform." Hmm...
Ron Gross: [laughs] Curiouser and curiouser!
Greer: Curiouser and curiouser. Here's the money quote from his blog post. "I believe the future of communication will increasingly shift to private encrypted services where people can be confident what they say to each other stays secure and their messages and content won't stick around forever."
Jason, we do not have a lot in the way of specifics, but this sounds like this could have huge implications for the business.
Jason Moser: Yeah, I think you're right. If, in fact, he does end up pursuing this type of strategy, it would have material impacts on the business. Now, because of that, I don't think he will ultimately end up pursuing this strategy. But I do appreciate what he's saying. I appreciate that he's getting out there and talking about privacy because obviously, Facebook has a lot of issues in regard to privacy recently.
The problem I have is...I don't mean to sound so skeptical, but when you think about what Facebook is, when you think about what Facebook has become today, privacy basically runs counter to the company's DNA completely.
Greer: Why is that?
Moser: Because Facebook was built on you putting all of those pictures out there for everyone to see. [laughs] They mentioned it more than a couple of times in that blog post. It's been that public square where you just put that stuff out there for the world to see. And I agree, I think that as we're seeing the evolution of social media, we're seeing people starting to prioritize privacy over living their life for everyone to see. There's more of a premium on me being able to communicate with someone or a small group of people intimately as opposed to having to yell it out there and tell everyone what I just had for breakfast. And that's fine, but remember, if you go to that private side, and you're talking about encrypting data to where Facebook can't even see it, well, that business model has been built solely on advertising to this point. If you don't have that data, then you're not lobbing up relevant ads, which completely throws their business model into total, total chaos.
Gross: Obviously, they've been under a lot of stress here over the last couple of years with respect to privacy. This may be an overcorrection on Zuckerberg's part. I don't doubt that they will move toward some of this. But they've got $22 billion of net income to protect. If they move too quickly and that starts to plummet, obviously the stock will get crushed, a lot of implications would reverberate down the road from moving too quickly. Whatever happens will be slow because they're going to protect that cash flow.
A lot of thoughts out there about how they could potentially monetize this new privacy world that Zuckerberg has in mind. Ads will always be a big part of that. A lot of talk about how the Stories platform, kind of like the Snapchat platform, would be a good place where ads could still be delivered up. Conversations about a cryptocurrency to allow people to transfer money from one person to another, perhaps through the WhatsApp feature, but it could be in a number of different places.
A third way Facebook could make money is focus on private messaging and shopping. He's been talking more about shopping lately than I've seen him do in the past. Again, if you're going to move to this, you have to figure out how to make some money here. It's a multibillion-dollar company that you need to protect.
Greer: Along those lines, it's worth reminding everyone that when we're talking Facebook, we're not just talking about Facebook, the core platform. We're talking Instagram and WhatsApp. Jason, we were talking before the show, WhatsApp, people love the service. There's only one problem, right?
Moser: Yeah. The word you heard Ron mentioned multiple times there was "could," as in maybe. I would encourage anyone who's interested in this, please go actually read the blog post that Zuckerberg wrote. Don't read the articles talking about it, read the actual post. I think you'll see what I saw, which was essentially a very long-winded look at privacy.
Greer: So you like the post?
Moser: Generally speaking, no. I think brevity wins out. But to me, he continued to equivocate all the way through. He never really committed to anything. I think this was more of a PR move than anything else because once you get to the nuts and bolts of what this would mean for the business, it would have a material impact on the business model itself. It's not to say that you can't make money doing these things like commerce and payments or whatnot, but it's also not like this is the first time we've heard Facebook throw the idea out there that they'd like to be able to make money in commerce and payments. There's a reason why companies like PayPal and Square and Amazon and Wayfair are succeeding. They're e-commerce and payments businesses. Facebook is not.
When you talk about a company that has really flushed a lot of trust down the toilet here the past couple of years, I don't know why you would be able to get someone from one of those platforms that does something so well over to the Facebook universe. We've talked a lot about how messaging is an extremely difficult platform to monetize, whether it's Messenger or WhatsApp or direct messaging on Twitter or Instagram or whatever. Messaging inherently is difficult to monetize because it's so personal in nature. People don't want that invasion of privacy. That's why I ultimately don't think there's going to be much that comes of this. I think it was a great PR move. It makes him look a little bit better. It sounds like he cares. And I don't doubt that he does. But I don't think that they're going to fundamentally change much of what the business is all about.
Greer: I was a little hurt because you left me hanging on My WhatsApp comment. I said there was one problem with WhatsApp and I think you got there at the end. What's the one big problem with WhatsApp?
Moser: It's a messaging platform.
Greer: Right. And from a business standpoint?
Moser: It doesn't make any money.
Greer: Thank you!
Moser: Is that important?
Greer: You're killing me!
Moser: I guess I didn't lead with my strongest statement.
Greer: It's OK, we got there.
Moser: Your point is a very good one. WhatsApp just doesn't make any money. They paid $20 billion for that platform --
Gross: That's just details.
Moser: -- with the promise of, "Well, eventually we'll figure it out." And that's a lot of what this blog post is. "Well, eventually we'll figure it out." I'm one of those big grudging bulls on Facebook. I don't like being a bull on Facebook because I don't like Facebook. But I also can't deny the fact that when you have 2 billion people on the face of the planet using one or more of your services, it's very difficult not to make money. But, you want to know how you don't make money? You pivot and start trying to make money on messaging. That's where you don't make money, so that's why I don't think they ultimately will be able to follow through with this. It's just not the most lucrative market opportunity, and he has a business to run.
Greer: We'll call you cautiously pessimistic.
Gross: I actually do want to comment on the stock just for a second. Because it's a FAANG stock, and we think of it as one of these go-go stocks, which may or may not be cash flow positive or have operating profits, it gets thought of incorrectly. Facebook is a company that generates gobs of cash flow, $30 billion of cash flow. It's a stock that trades at 22 times earnings. Not expensive. Not a go-go stock. Not a stock that doesn't have profits. It's different. Again, I get back to what I said earlier. Because of that, they're going to protect those profits. They're not going to all of a sudden become an unprofitable company with ideas for their future, lofty goals, lofty growth goals. They're going to protect that valuable cash flow, move into this either very slowly or perhaps, in the end, not at all.
Greer: One more data point there, Ron. Queen Elizabeth just posted on Instagram for the first time on Thursday. How great is that?
Gross: Market top?
Greer: Yes. She posted a letter sent to her great-great-grandfather, Prince Albert, in 1843. Ron, I apologize because I always, always forget, so I apologize asking you this -- Queen Elizabeth, was she your year in high school? Or the year behind you?
Gross: You're older than me! How dare you!
Moser: Quick question for you, because you hit on something really important there. Facebook makes a ton of money. They do have to consider that when they look at strategies like this. All of that being considered, do you feel like the low-hanging fruit with Facebook has probably been picked at this point with investors? I mean, it's a big company. We're talking about close to a $500 billion market cap. Do you think the low-hanging fruit has been picked?
Gross: Yep. I do. It's not the go-go stock of old. I still think they'll continue to generate tons of cash going forward, but it's a different stock than it was five, six, seven years ago.
Moser: Yeah, we talked a lot on Motley Fool Money before about how a while back, we thought they had aspirations to get into the payments business. And that was probably a good strategy. I don't think they've shown that they're quite responsible enough to handle something like that. But, we figured that the easiest way for them to get access was to acquire either something like PayPal or something like Square. PayPal is probably too big now and wouldn't want to be a part of that family anyway. Square, I'm quite certain Jack Dorsey doesn't want to be a part of that family. And I don't think regulators would allow any of that to happen anyway. They're really stuck between a rock and a hard place.