Facebook (META -11.11%) expanded into Match Group's (MTCH) backyard last year with Facebook Dating, a new tab that lets users maintain separate dating profiles. That seemed like dire news for Match, which currently dominates the online dating market with apps like Tinder, OKCupid, and Hinge.
Yet investors shouldn't assume that Facebook can beat Match at its own game. Instead, they should realize that Match consistently does five things better than Facebook -- and those tailwinds could widen its moat against the tech giant.
Image source: Getty Images.
1. A first mover's advantage
Match enjoys a first mover's advantage in the online dating market because it consistently acquires the most promising platforms and apps. Its top app, Tinder, is practically synonymous with online dating.
Facebook is the world's most well-known social network. But in recent years, it's become increasingly associated with data breaches, questionable privacy practices, and an aging user base. Those three factors could quickly kill off Facebook's dating ambitions.
2. Fewer privacy concerns
Over the past three years, Facebook's data breaches led to congressional hearings and regulatory probes. Match didn't suffer any major data breaches, although security experts highlighted some vulnerabilities in Tinder in early 2018.
Later that year, Match updated its security practices and ensured users that all their interactions were properly encrypted. That quick reaction, along with Match's clean track record, prevented it from being thrust into the public spotlight like Facebook -- which is still struggling to regain user trust.
Last December, a HuffPost/YouGov social media survey found that two-thirds of U.S. adults still didn't trust Facebook with their personal data -- which indicates that people likely trust Match's apps more than Facebook.
3. It doesn't depend on targeted ads
Facebook's privacy problems are rooted in its constant need for personal data for its targeted ads, which generated 98% of its revenue last quarter.
Match generated 98% of its top line from "direct revenue" -- which come from paid subscriptions and a la carte services -- last quarter. The remaining sliver came from "indirect revenue", which mainly come from digital ads.
Match's business model is arguably more stable than Facebook's, for three reasons: It locks in users, it's better insulated from macro headwinds, and it doesn't need to constantly mine its users' personal data for ads.
Image source: Getty Images.
4. Smarter acquisitions
Match acquired six companies over the past decade, and all of them expanded its horizontal reach across the online dating and social networking markets. These platforms were easily monetized and integrated into its broader ecosystem.
Facebook acquired dozens of companies during the same period. Some of them strengthened its social network, but many of its biggest acquisitions -- including Oculus VR and WhatsApp -- have barely been monetized. Other acquisitions, like its recent takeover of brain-to-computer interface developer CTRL-labs, seem rooted in sci-fi instead of reality.
I'm not faulting Facebook for its scattershot strategy, since it has plenty of cash to toss at speculative bets, but Match's growth strategy is clearer and easier to understand.
5. Less regulatory heat
Over the past year, Facebook faced a $5 billion FTC fine over privacy violations, potential fines in the EU over other privacy violations, and additional fines from other regulators, organizations, and countries. Those headwinds aren't dampening Facebook's growth yet, but Match faces less regulatory heat.
The only regulatory issue for Match is an ongoing FTC lawsuit regarding misleading ads. But as I explained in a previous article, the potential damage should be limited to just $60 million -- or 2% of its estimated revenue next year.
The bottom line
Facebook and Match are still both solid long-term investments. However, investors shouldn't assume that Facebook can challenge Match in the online dating market, and they should realize that Match actually does quite a few things better than Facebook.
