Facebook Inc (NASDAQ:FB) opened for trade Feb. 1 at an all-time high — a market cap of $365 billion — on the strength of its dominance in mobile apps. But the big news is that Facebook is about to challenge the video league leaders with a mobile app for existing streaming boxes like the Apple Inc. (NASDAQ:AAPL) TV. The question is, what will this do for FB stock?
Moving into TV through an app rather than a device makes sense, given the failure of the original Facebook phone and its overwhelming success with apps for others’ phones.
FB is already bankrolling the creation of videos for the video tab of its mobile app.
So where does Facebook fit its service into the evolving market, and what does its presence as a broadcaster mean to its claims not to be a media company?
FB Stock: TV vs. Phone
The company is already a presence in video thanks to Facebook Live, which allows live streaming of video on the service and it has a Presidential endorsement.
FB has prepared to offer longer videos by introducing “mid-roll” ads — ads that play in the middle of a video — to its line-up, making the service more TV-like.
Over time, this might allow Facebook to compete directly with Amazon.com, Inc. (NASDAQ:AMZN), Netflix, Inc. (NASDAQ:
NFLX) and Alphabet Inc’s (NASDAQ:GOOG, NASDAQ:GOOGL) YouTube in the growing market for streaming services.
The problem is that there is a big difference between the experience you get on a mobile phone and what you want on a TV screen. A phone is active, a TV is passive. A phone may support videos of a few minutes, while people will watch TV for hours-and-hours.
There is an assumption in the breathless reporting of Facebook’s latest move that TV is easy; that it’s just something you throw money at. Given the success of Netflix in generating subscribers and Emmys, and Amazon in generating Prime members and Oscar buzz, that is an easy mistake to make.
Worth the Candle?
For Facebook stock, this may not be as huge a deal as analysts think.
Netflix revenue is only a fraction of FB stock’s. Analysts expect Facebook to deliver over $27 billion in 2016 revenue when it reports after the market closes Feb. 1. This is against roughly $9 billion for Netflix. NFLX also brings just 3% of that revenue to the bottom line, while FB stock brings nearly one-third of revenue to its net income line.
Entering the world of creating television poses another risk. CEO Mark Zuckerberg has repeatedly said he doesn’t run a media company, that his is just a communications service. Media companies have responsibilities to truth and accuracy that, say, phone companies don’t have — responsibilities that can limit profitability.
If Facebook is going to license content from media suppliers, whether live or scripted, it becomes a media company, subject to political and public scrutiny for its programming choices, on a global basis. This is a dance FB stock shareholders should fear, because it costs money to play, and carries risk.
But Facebook may now have no choice in the matter. The big screen is the last frontier for internet services, it’s where everyone is heading. FB stock does not want to be left behind.
The Bottom Line on Facebook Stock
While most analysts are jumping for joy over the Facebook TV app news, I am a lot more cautious. This move has enormous implications for the entire company, for how it’s perceived and (more important) what it costs to run.
FB, like Alphabet, prefers to manage itself through algorithms. Algorithms scale in ways people do not. Facebook is starting to bow to pressure on the media front, hiring Campbell Brown to coordinate media alliances. Now it’s about to become a TV network, or at least a streaming service.
What will that mean to its profitability and growth? I think they both slow, because people aren’t algorithms and talent has temper that code does not have. Politics can kill the media star.
Dana Blankenhorn is a financial and technology journalist. He is the author of the sci-fi novella Into the Cloud, available at the Amazon Kindle store. Write him at danablankenhorn@gmail.com or follow him on Twitter at @danablankenhorn. As of this writing he owned shares in AMZN, GOOGL AAPL, and FB.
