miércoles, 9 de mayo de 2018

miércoles, mayo 09, 2018

Barron's Cover

Facebook and Apple Embody New Tech Divide

By Alex Eule and Jon Swartz
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    Photo: Christina Chung


Apple became the largest public company in the world the old-fashioned way: charging lots of consumers lots of money. So it’s not surprising that its CEO, Tim Cook, would chafe as Facebook grew to challenge Apple’s supremacy without charging its users a dime.

In recent weeks, that tension has grown, as Cook and Apple (ticker: AAPL) sought to distance themselves from Facebook (FB) and the uproar over user data. In a television interview, Cook, hardly a rabble-rouser, accused Facebook of building a business based on an “invasion of privacy.”

“The truth is, we could make a ton of money if we monetized our customer—if our customer was our product,” Cook told MSNBC. “We’ve elected not to do that.”

Added Cook: “We’ve never believed that these detailed profiles of people, that have incredibly deep personal information that is patched together from several sources, should exist.”

Facebook CEO Mark Zuckerberg, who proved his composure during two days of congressional grilling, was less patient when it came to Cook’s criticism. We’re “not just serving rich people…you need to have something that people can afford,” Zuckerberg said about Apple. He called Cook’s comments “extremely glib and not at all aligned with the truth.”

Welcome to tech’s great divide. For several years now, investors have talked about FANG—Facebook, Amazon.com (AMZN), Netflix (NFLX), and Google-parent Alphabet (GOOGL)—or FAANG (adding Apple) as a unified trade, a way to play the latest tech trends.

The companies are all similar in that they use technology in disruptive ways, but investors have generally overlooked substantial differences in their business models. As changes loom, ignoring those differences is a risky bet. 
It’s not just personal sniping between rival CEOs. There are real differences between direct-to-consumer revenue models and ad-driven data models. Or, in a nutshell: Apple versus Facebook.




The divide has been amplified by the Facebook controversy, but the fault lines have been widening for years, as tech firms turned to advertising revenue to scale their businesses. Silicon Valley never got fully comfortable with that deal.


“The odd thing to me—as someone who has worked on Madison Avenue—is that most of Silicon Valley has always brushed under the rug the fact that Madison Avenue is the center of its commercial activity,” says Brian Wieser, an analyst with Pivotal Research Group, who spent eight years forecasting the global advertising economy at Magna Global, and currently has one of the few Facebook Sell ratings on Wall Street.

But after the outcry over Cambridge Analytica’s harvesting of personal data, the reality can no longer be ignored. Facebook and Google are advertising companies that don’t sell to consumers, while Apple, Amazon, and Netflix have spent years building direct connections to customers. The free frontier of Silicon Valley is now vulnerable to regulation, while the subscription model may be more stable and attractive.

To highlight the divide, we looked at how much revenue Big Tech players receive from advertising. Earlier this month, Zuckerberg repeatedly reminded his congressional questioners that Facebook doesn’t sell data to advertisers. The well-honed response is technically accurate, but Facebook is set to sell over $50 billion in ads this year, specifically because of its user data.

The same applies to Google. Data—and the ability to target viewers—is the main ingredient separating Big Tech from the traditional publishing and media companies.

As the risk of regulation mounts, advertising exposure should be a good proxy for which companies are most vulnerable among big tech. At the top of the list is Facebook. Last year, 98% of its revenue came from advertising. Snap (SNAP) came in at 97%, with Google-parent Alphabet and Twitter (TWTR), both at 86%.

We pulled the data with the help of Sentieo, a financial data platform. Not all tech firms break out their ad revenue as a separate segment, but the companies routinely disclose their ad dependence in the risk-factor section of annual reports. Those risk factors, while often full of worst-case scenarios, hold valuable data for investors.

Apple, Netflix, and Dropbox (DBX) have minimal, if any, ad exposure, and they don’t mention ad revenue in their risk section. Amazon is one to watch, given its growing ad business. So far, the company doesn’t address the ad risk, either.



Ad-free Netflix is the best performing stock in the Standard & Poor’s 500 index this year. After a banner earnings report last week, Netflix shares are up 71% in 2018. Strong subscriptions are the cause, but it doesn’t hurt that Netflix has skated worry-free as Facebook got dragged through the mud. Facebook shares are down 5.8% on the year.

Last week, during Netflix’s quarterly conference call, CEO Reed Hastings took a victory lap for the company’s ad-free model: “I’m very glad that we built this business to not be advertising supported, but to be subscription. We’re very different from an ad-supported business….So I think we’re substantially inoculated from the other issues that are happening in the industry, and that’s great.”

That line is unlikely to go over well at Facebook headquarters in Menlo Park, Calif. Hastings sits on Facebook’s board of directors; the great tech divide may soon play out live in Facebook’s boardroom.

Even oft-troubled Uber has found the moral high ground in Facebook’s struggles.

Uber CEO Dara Khosrowshahi told the Today show, “The fact is, human beings are sometimes good and sometimes not. I think Silicon Valley is understanding that with building these platforms comes the responsibility to make sure that those platforms are being used for good.” But “we don’t try to monetize it,” he added.

We contacted the companies cited in this article. Some declined to comment, while others didn’t want to speak on the record.

It makes no sense that Apple and Facebook would emerge as the primary adversaries in the privacy debate.

Facebook is a social-media behemoth built on accumulating as many members as possible—and it has done a phenomenal job, with 2.13 billion monthly active users. It’s a scale play built on the lowest possible barriers to entry for its users. The trade-off is an ad-heavy business that generated $40.65 billion last year and a projected $55 billion this year. Altogether, Facebook generates just $26 per year per user.

Apple is on the opposite side of the spectrum. There are no specific user metrics for the company, but Barron’s recently estimated that the company has 900 million customers. Based on an estimated $262 billion in revenue this year, we get Apple per user revenue of $291, or roughly 11 times Facebook’s average.



More than 60% of Apple’s sales come from sales of the iPhone, which had an average selling price of $796 last year.

Perhaps partially to justify its high prices, Apple has made privacy a sales pitch for its products. In a letter to customers in 2014, Cook hailed the efficacy of creating a “great customer experience” but not at the “expense of privacy.”

And before his death, Apple CEO Steve Jobs directed his animus at Facebook and Google. “Privacy means people know what they’re signing up for, in plain English and repeatedly,” Jobs told tech journalists Walt Mossberg and Kara Swisher in 2010. “Ask them. Ask them every time. Make them tell you to stop asking them if they get tired of your asking them. Let them know precisely what you’re going to do with their data.”

Given lawmakers’ recent questions to Zuckerberg about Facebook’s complicated terms of service, Jobs—no surprise— sounded prescient.

Now, amid the Facebook controversy, Cook & Co. see an opportunity to gain leverage against a competitor, says Scott Brazina, chief marketing officer of Impact Radius, a digital marketing firm.

“Apple is in a uniquely powerful position to take the high road on this”—especially in the current news cycle, Brazina says. “Consumers are getting desensitized to hacks and breaches, yes, but the pendulum is swinging back to the Apple model. Security is job one.”

Zuckerberg and Facebook didn’t take us up on our request to discuss the topic, but Zuckerberg hasn’t hidden his disdain for Apple’s mission. “I think it’s important that we don’t all get Stockholm Syndrome and let the companies that work hard to charge you more convince you that they actually care more about you,” Zuckerberg said in his recent Cook response. “Because that sounds ridiculous to me.”

And in 2014, Zuckerberg told Time magazine, “A frustration I have is that a lot of people increasingly seem to equate an advertising business model with somehow being out of alignment with your customers. I think it’s the most ridiculous concept. What, you think because you’re paying Apple that you’re somehow in alignment with them? If you were in alignment with them, then they’d make their products a lot cheaper.”

Zuckerberg and Chief Operating Officer Sheryl Sandberg have both hinted at the possibility of a paid version of Facebook, potentially free of ads. On the surface, it wouldn’t cost consumers much. If Facebook makes $26 a year per user, that could theoretically be more than offset by a monthly payment of $3.

But that has not been the model for Zuckerberg, who has made worldwide access a company mission. And globally, plenty of people can’t afford $3 a month.

Early on, as Facebook became an ad behemoth, few blinked at privacy concerns.

“Facebook is locked into Web 2.0 (circa 2008), thinking that advertising is the only way,” says Joel Vincent, chief marketing officer at cloud start-up Zededa. “Their systems are locked and optimized for that business model.”



The problem is that the model now looks outdated: Consumer trust in Facebook’s ability to protect privacy and safeguard data has plunged from 79% in 2017 to a recent 27%, according to a survey of 3,000 people by the Ponemon Institute, a research firm.

When Zuckerberg was pressed by members of Congress this month on whether he would consider changing Facebook’s business model, he refused to answer the question.

“Congressman, this is a complex issue that I think deserves more than a one-word answer,” Zuckerberg said.

Apple, Netflix, and others are happy to talk up their ad-free business models now, but some of this has come about by accident. In 2010—the same year that Jobs praised privacy to Mossberg and Swisher—Apple began a mobile advertising network called iAd, touting $60 million in commitments from “leading global brands.” In the announcement, Jobs sounded almost envious of Facebook’s growing success: “iAds will reach millions of iPhone and iPod touch users—a highly desirable demographic for advertisers.”

Apple shut down the network in 2016. A company representative declined to discuss the reason.

It’s possible that Apple’s product culture got in the way. “They were trying to bend advertising to Apple’s will, and it didn’t work,” Pivotal’s Wieser says.

To be sure, digital advertising remains a powerful business, and few on Wall Street seem worried about Facebook’s prospects. In fact, analyst estimates for Facebook’s revenue have actually headed higher since the start of the year.

Ultimately, consumers will decide this debate. And there, too, Facebook’s problems might be exaggerated. The #deleteFacebook movement has faded on Twitter, and in terms of number of tweets, it never reached the peak of #deleteUber, despite Facebook’s far larger user base.

But the boardroom debates over Silicon Valley’s business models are just getting started. At the earliest stages, venture capitalists and entrepreneurs in the Valley are assessing the new climate.

“It is a question that every VC asks: What are you going to do about privacy?” says Prashant Fonseka, a principal at CrunchFund, a venture-capital firm in San Francisco.

“From 2013 to 2016, the tech community assumed consumers didn’t care about privacy anymore,” he says. “We thought all data would eventually be in the public sphere.”

That utopian notion has been undone by the Cambridge Analytica scandal. Now, tech companies are scrambling to adapt. Exuberant tech investors will have to adjust alongside them.

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