In the 2010 movie The Social Network, there's a point where Mark Zuckerberg's co-founder Eduardo Saverin is trying to convince Mark Zuckerberg to start advertising and bringing in money for the fledgling Facebook (NASDAQ:FB) website. The idea incenses Zuckerberg, who thinks ads will ruin the experience.
Later in the movie, Sean Parker—founder of Napster—captures Zuckerberg's thinking when he says:
"The Facebook is cool; that's what it's got going for it. You don't want to ruin it with ads because ads aren't cool. It's like you're throwing the greatest party on campus, and someone's saying it's got to be over by 11."
The quote captures exactly why investors were so wary about Facebook ever succeeding, and exactly why the company has proven those naysayers wrong.
Zuckerberg's playing a different game, but all parties can win
One thing that Mark Zuckerberg has gone to great lengths to explain is the purpose of Facebook. It is not a business that connects people in order to make money. It is a company that makes money for the purpose of creating a more open and connected world.
At some point, supporting the infrastructure to maintain the platform for such an open and connected world requires lots of cash. It is then—and probably only then—that Zuckerberg is willing to use advertising to rake in the cash.
It just so happens that taking this approach is no only noble in a worldly manner, but ridiculously profitable. Just when Facebook has become integral in the lives of its billions of users, that's when the ads turn on.
And how well do those ads work at bringing in money for the company? Consider the mobile division, which only began offering ads in earnest by mid-2012.
Over the course of less than two years, it has been able to grow revenue at 32% per quarter (that's about 200% per year, for you math majors).
The next step in the growth cycle
Based on how Facebook's stock reacted following earnings, it's clear that many investors think the days of heady growth are ebbing. On some level, those folks are right—no company could continue such a torrid pace of growth indefinitely.
But as Zuckerberg made clear in the company's conference call, one of the key initiatives moving forward will be copying how the company approached monetization on the main Facebook platform, and applying it to its next generation of apps—namely, Messenger, Instagram, and WhatsApp.
As Zuckerberg explained: "We believe these apps have a lot of room to grow and will start to be important businesses in the future, but monetization isn't our near-term priority here."
For investors, what this really means is: "We've got some cool apps right now, and coolness is what's going for them. We're going to let that coolness run and when the time is right, turn on the monetization machine."
How popular are these apps? Consider the Instagram went from having 22 million monthly active users two years ago, to 200 million today. Or think about the fact that Zuckerberg himself said that he thinks WhatsApp could one day be as ubiquitous as Facebook's platform.
It's clear that advertising will be the monetization route of choice for Instagram, but Zuckerberg has made it clear he doesn't think that will work for Messenger or WhatsApp. While he has said that there are, "many clear ways that [Facebook] can monetize," these two, no specific details have been released.
As it stands, WhatsApp users pay a $1 yearly fee. That won't change anytime soon, as the company works on winning over customers. But in addition to the subscription model, Facebook could consider virtual gifts and freemium game platforms as other potential revenue streams.
While traders and short-term investors might roll their eyes at such an approach, us long-term Fools can smile at the market's reaction. We can also take solace in the fact that Zuckerberg is young, has a long-term vision for the company, and doesn't seem to be the least bit concerned about Wall Street's "now, now, now" mentality.
Brian Stoffel owns shares of Facebook. The Motley Fool recommends Facebook. The Motley Fool owns shares of Facebook. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.
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