Facebook Inc Is Just Like Your Cable Company

By Markets Fool.com


Source: Facebook

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No industry has a worse rap with customers than the cable industry. Comcast and Time Warner Cable consistently rank at the bottom of the barrel for customer satisfaction.

Despite that being the case, most American households continue to subscribe to their services. The practical monopoly of the cable companies dictates that you'll either subscribe to their services, or you won't be able to watch the programming you love. And while over-the-top services like Netflixare starting to have an impact on pay-TV's customer base, most households can't part with their cable habit despite the terrible way cable companies treat their customers.

Similarly, Facebook treats its users only slightly better than cable companies. Updates to its privacy policy and News Feed algorithm serve to promote its own business despite its claim of providing a better user experience. Every update to Facebook's terms of use come with griping from users, but very few actually take action because, just like with the cable companies, there's no other option.

Users are a resource
Facebook's users are its biggest resource. Not only does its huge audience of 1.44 billion active users present an enticing value for advertisers, it presents a value for potential users to join the network. Likewise, it's what keeps users from leaving the network, because Facebook has become the easiest way to connect with friends, family, acquaintances, businesses, and anyone or anything that exists.

Facebook has grown into a standard Internet utility similar to email or Google search, but with a bigger moat. In emerging markets, new Internet users don't sign up for email, but they sign up for Facebook using their phone numbers. It's the standard authentication tool (to log into other websites) for many, which makes ditching Facebook almost impossible.

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As a result, Facebook is able to treat its users as a resource from which it can extract value. And it's done a very good job doing just that. The data it gathers on its users for ad targeting is rivaled by few.

Rearranging what items get shared first in a user's News Feed has enabled it to charge more for advertisements and increase video views. This is all because Facebook doesn't have to worry about users completely abandoning the service, just like cable companies (up until very recently) haven't worried about customers cutting the cord.

How to avoid cord cutting
Facebook hasn't been without its criticisms, and upstart companies have tried to capitalize on those criticisms in the past. Remember Ello, the social network that vowed to never treat the user as the product? It's since evaporated into the Internet ether. Still, Facebook faces strong competition from companies now calling themselves the anti-Facebook, just as cable companies face strong competition from over-the-top streaming services.

Companies like Snapchat and Pinterest are doing very well to attract an audience, taking time away from their Facebook habits. Likewise, Netflix is consistently cutting into the time users spend watching regular broadcast television, and has even convinced many to ditch cable altogether. The equivalent of cord cutters is what Facebook must work to avoid, and it's done an excellent job so far.

If over-the-top services like Netflix and HBO Now represent an unbundling of the cable package, Facebook's growing constellation of apps represents its own unbundling. Basically, Facebook is preventing companies from copying its best features as stand-alone services by doing it itself.

That's a strategy cable companies simply can't take due to their reliance on content producers and the contracts they have. As we saw when Verizon started offering its own pick and play offering, unbundling the cable package often violates existing contracts between pay-TV providers and content makers.

Providing stand-alone apps can often cut off the legs of competition; but when it doesn't, Facebook attempts to buy them out. It bought Instagram in 2012 as it started to challenge Facebook's photo sharing. It tried to buy Snapchat in 2013 as it gained popularity as a photo and messaging app.

It bought WhatsApp in 2014 as its network started to take off and challenge Messenger. It even tried to acquire Twitter way back in 2008. All of this keeps users from completely cutting ties with Facebook.

Great for investors
Facebook's users are what provides value for investors. A cautious investor would want to see Facebook do everything it can to hold onto those users; but the value of those users can only be extracted by a company willing to let them go. The cable companies understand that concept just the same, and they've successfully increased their revenue through rate increases despite losing customers in recent years primarily because they're willing to lose some customers.

Facebook is now in a position to continue growing revenue at a breakneck pace by doing whatever it needs to in order to increase ad prices on its platform. Meanwhile continuing to provide new stand-alone services and iterate on top of existing ones will provide new platforms it can monetize well down the road, if and when it sees engagement on its flagship platform plateau.

The article Facebook Inc Is Just Like Your Cable Company originally appeared on Fool.com.

Adam Levy owns shares of Apple. The Motley Fool recommends Apple, Facebook, and Netflix. The Motley Fool owns shares of Apple, Facebook, and Netflix. 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.