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Instant Analysis: India Bans Facebook's Free Basics Service

By Jamal Carnette, CFA - Feb 8, 2016 at 5:22PM

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What should Facebook investors make of Facebook's free, limited Internet initiative being booted from the country.

Facebook's (META 3.70%) free, but limited, Internet initiative, Free Basics, was dealt a blow by India's telecom regulator in a recent ruling. The service had become a lightning rod in the country with Facebook and allies arguing the initiative offered citizens without the ability to afford Internet access a slimmed-down offering of websites.

Critics countered Free Basics violated the broad tenets of net neutrality by allowing Facebook and partners to choose which sites it allowed users to access. After a spirited debate, India banned zero-rating, or the ability to allow access to certain sites for free, dealing Facebook and its allies a defeat.

No good deed goes unpunished
Facebook CEO MarkZuckerberg is no stranger to criticism when it comes to his philanthropic efforts. Between his announcement to give his Facebook stock to charity -- which was ridiculed for being structured as an LLC, not a charitable trust -- and India's rejection of Free Basics, it's safe to say Zuckerberg's efforts to give away his fortune, and Internet access, haven't t been as easily successful as he would have liked.

Fortunately for Facebook's investors, this isn't a huge issue. Writing in The Times of India in late December, Zuckerberg disavows any corporate interest by stating "there aren't even any ads in the version of Facebook in Free Basics." In doing so, Zuckerberg implies his company has no direct financial interest in Free Basics, but that's not necessarily true, either.

Does it matter?
The simple fact that Facebook doesn't have ads in its Free Basics service doesn't mean that Facebook is a disinterested party. Advertisers pay Facebook and investors give Facebook favorable valuations on account of its massive reach. As opposed to its smaller counterpart Twitter (TWTR 3.41%) and its monthly active user (MAU) base of 320 million, Facebook's scale is massive with 1.6 billion MAUs. Even better, the company is growing that figure by recently posting 14% year-over-year MAU growth while Twitter's last reported results only provided 11% MAU growth. As a result of its scale and MAU growth, Facebook's stock has rallied while Twitter's stock has flagged.

While Facebook may not receive any revenue from its Free Basics initiative, the company is able to count those users in its user base to support its high valuations and keep its growth story intact. India's large population without Internet would have been a natural fit for Facebook's MAU growth, but probably not absolutely necessary as the company has been able to grow MAUs in their absence. As such, investors should file this news between (mostly) market noise and unclear due to possible slowing MAU growth rates. 

Jamal Carnette has no position in any stocks mentioned. The Motley Fool owns shares of and recommends Facebook and Twitter. 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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