FB Stock Gets a Lift from Video Expansion
Like a lot of companies in Silicon Valley, Facebook Inc (NASDAQ:FB) is throwing money at Hollywood development studios in order to create original content. These Facebook TV shows will be scripted and delivered in episodes, much like those on traditional TV.
This puts Facebook in direct competition for TV advertising dollars.
That is the whole game plan for Facebook. Get users, keep users engaged, sell them to advertisers. In order to keep Facebook stock growing, Facebook needs more advertisers to spend more money.
It isn’t like Netflix, Inc. (NASDAQ:NFLX), which operates on subscription revenues. The $9.99 fee per month is what made NFLX stock a phenomenon.
More than 97% of Facebook’s revenues come from advertising. When the company went public in 2012, here’s how it described its business:
“Our addressable market opportunity includes portions of many existing advertising markets, including the traditional offline branded advertising, online display advertising, online performance-based advertising, and mobile advertising markets.”
(Source: “Form S-1 Registration Statement,” United States Securities and Exchange Commission, February 1, 2012.)
In other words, you and I aren’t Facebook’s customers; we are its product.
So, for the sake of continued prosperity, Facebook needs to convince advertisers that it can deliver us on a silver platter. This means making content that we like, but also holding our attention long enough that advertisers can hammer home their messages.
Only one type of content lies at the nexus of these various threads: television.
Will Facebook Become the Next Netflix?
In a word, no.
With Netflix, you pay $10.00 per month for a sense of freedom. There are no advertisements, no obstacles; nothing to prevent you from watching what you want. Facebook is coming from a completely different angle.
Facebook is doing advertiser-sponsored television, which means it’s competing directly with traditional cable.
Facebook is willing to spend $3.0 million per episode for quality programming. This puts it on equal footing with established studios like CBS, but I suppose that shouldn’t be all that surprising. (Source: “Facebook Is Going Hollywood, Seeking Scripted TV Programming,” The Wall Street Journal, June 25, 2017.)
Facebook isn’t exactly strapped for cash. It has $32.31 billion in cash and cash equivalents, and that money needs a purpose. Otherwise it’s collecting dust. (Source: “Facebook Inc. Form 10-Q Filing,” United States Securities and Exchange Commission, May 4, 2017.)
So it makes perfect sense that Mark Zuckerberg is pushing video content in order to boost FB stock. Video is quickly becoming the primary use of smartphones (little TVs in everyone’s pocket) and advertisers are willing to pay more for the general brand awareness that comes from video ads.
That said, it is important to note that Facebook’s advertiser-centric model leads it down a very different road from the one that Netflix stock is travelling.
Netflix didn’t have to compete with traditional cable, because it wasn’t going after advertising dollars. Even though there was some friction over content rights, all-out war with TV companies was avoided because their revenues came from two separate streams.
In the words of CBS President Leslie Moonves, “We’re a big fan of Netflix. We don’t think they’re eating the world.” (Source: “CBS CEO Leslie Moonves on Netflix: “We Don’t Think They’re Eating the World“,” The Hollywood Reporter, September 20, 2017.)
I’m guessing he won’t be so affectionate to Facebook.
Facebook stock is an 800-pound gorilla that just sauntered over to CBS’s watering hole. It is going to drink from the same stream of advertiser revenues, which makes it a bigger threat than Netflix.
Put another way, if Netflix is a “frenemy” to traditional TV companies, Facebook is a plain old enemy. There will be no love lost there.
What TV Shows Should We Expect?
Facebook signed deals for 30-minute episodes, with ads. Although some of them are sitcoms, we should also expect short-form content from ATTN, Vox Media, and BuzzFeed.
Also, don’t expect Facebook to release the next Game of Thrones, because its target age group is between 13 and 34. Within that band, the core demographic is 17 to 30, so nudity, coarse language, and politics will be kept to a minimum.
Some reports say that Facebook will also dip into the reality-TV well, drawing from popular shows like The Bachelor and The Bachelorette. (What a depressing thought.)
In order to pacify its Hollywood rivals, Facebook plans on sharing viewership data. I understand that might not sound like much, but it’s the equivalent of offering them gold. Good data is what makes good programming (in the eyes of a studio, at least).
One could argue that Facebook is being generous by offering its tracking data, but I’m not buying it. Having watched Mark Zuckerberg steer this company through public waters during the last five years, I’ve come to respect him as a stone-cold killer (in the business sense, of course.)
His face may belong in a college frat house, but his mind is as sharp as Valyrian steel.
Conclusion: Facebook Stock Price Could Explode
Facebook is not going to obliterate Netflix stock. That said, you shouldn’t ignore this expansion of Facebook’s ambition. It matters a great deal, both to the Facebook stock price and to the overall TV landscape.
Not only is Facebook (implicitly) admitting that it is a media company, it is deploying a ton of capital. If this ends in disaster, it will be a huge stain on the legacy of Mark Zuckerberg.
But I don’t think it will end in disaster. I think Facebook is striking at an opportune moment, and Zuckerberg’s savviness raises the upside in FB stock significantly. We could see the share price accelerate to $300.00, $400.00, or even $500.00 faster than we ever imagined.