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Facebook's Proposed Phantom Revenue Stream

Question: How will the company monetize encrypted communications? Answer: Nobody, especially Facebook, knows

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John Kinsellagh
Mar 15, 2019
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Perhaps it was mere coincidence that two senior Facebook Inc. (

FB, Financial) executives resigned in the wake of CEO Mark Zuckerberg’s announcement the company would be placing its future bets on private, encrypted, ephemeral communications. Do the departing executives know something we don’t?

By seeking to establish a private messaging and payment services platform, Facebook clearly wants to emulate the success and popularity of China’s WeChat messaging service. The difficulties the company would face in implementing such a private communication platform are pronounced and may prove to be insuperable.

First, even if the company is successful in diversifying or expanding its platform to partner with financial services firms for a payment system through the Facebook private messaging platform, the revenue generated from this new business operation is going to be a pittance compared to the Niagara Falls-type of cash flow it generates from selling users' private data to advertisers. Nothing Facebook pulls out of its hat is going to surpass or equal this money-making Leviathan. Ever.

Second, Tencent’s (

HKSE:00700, Financial) WeChat app was developed and flourished in an environment where it was sheltered by the Chinese government from any potential competition. WeChat also doesn’t provide the level of privacy many Facebook users would demand from a private messaging service. Additionally, given the social media giant’s continuing practices of abusing personal private data, few exiting users are going to rely on the promise their encrypted communications will remain private.

Third, another American company has already been dabbling in payment services. Has Facebook ever heard of Apple (

AAPL, Financial) Pay?

Facebook will encounter other challenges in its bid to diversify. Any new platform geared to expanding the Facebook messaging concept to payment services would have to be home-grown. Regulators are finally waking up to the fact that, for years, while they fiddled, the competitive tech marketplace burned. Facebook and Alphabet's (

GOOG, Financial) Google gained prominence by buying out competitors.

According to The Wall Street Journal, in the last decade, the five largest tech companies have made more than 400 global acquisitions, and none have been blocked in any jurisdiction. This isn’t laissez-faire, it's madness.

Although it may be too late to reverse the damage from the perspective of ensuring a more competitive business environment, some governments are rolling out new ideas to tame the tech companies hereto before untrammeled power.

As Greg Ip of The Wall Street Journal noted, in the U.K., the government recently released a proposal intended to circumscribe tech giants' threats to competition, while managing such a provision with a very light hand. The economic proposal does not address privacy issues in any way, but rather is an attempt to acknowledge digital markets do have characteristics that tend towards monopolization. A designated regulator would work with companies to voluntarily develop a code of conduct that would bar them from using their dominant market power over other players to stifle competition.

Clearly, the proposed provisions would no longer countenance Facebook’s business ethos of aggressive acquisition of actual and potential rivals so as to consolidate its power.

Under the proposed provisions, Facebook and other companies would have to adopt open standards on user profiles, so the user could easily switch platforms; the private data would inure to the user and not the company. In short, users would exercise control and custody of their private data. This concept is anathema to Facebook’s lucrative business model.

Some analysts continue to grossly understate the regulatory risks the company faces. Currently, there has been serious discussion among academics, lawyers as well as antitrust regulators that establishes a novel legal concept related to social media companies and private personal data. These proposed ideas seek to address the seemingly intractable problems with competition, ensuring a beneficial user experience and the weakness of traditional antitrust remedies for the anti-competitive problems posed by 21st century tech giants.

Under the proposed novel theories, users, not Facebook, would own and control their private data. As Raghuram Rajan noted in Barron’s, under such an arrangement, any data collected on a customer could be maintained in standardized but decentralized fashion. If users owned their private data and could store it in a designate escrow utility, then social media companies could still retrieve the data, but would not own it.

The user would be able to sell their own private data to social media companies who want to use it, or to third-party app developers. These revolutionary legal and regulatory ideas are gaining steam and should any take hold and come to fruition, it would drive a stake through the heart of the existing business models of the tech companies.

In short, none of these proposed anticompetitive provisions bode well for Facebook. In addition, the company cannot evade their impact on its bottom line by promising shareholders any lost revenue will be recovered in its encrypted private messaging service. Such an assertion is fanciful.

Zuckerberg sees the writing on the wall. Over time, regulatory oversight is going to circumscribe and eventually kill Facebook's business model in its present form. Zuckerberg’s announcement on private messaging was simply a way to stay ahead of the curve. Far too many analysts and shareholders remain complacent in the face of dangers lurking on the horizon.

Zuckerberg is trying to placate regulators and privacy advocates, while at the same time reassuring stockholders. In the end, this ruse will be shown to have been a fool’s errand.

Facebook has had a combative relationship with regulators over the past 12 months. Zuckerberg’s appearance before European regulators in 2018 was haughty; his disclosures incomplete and, in some cases, deceitful. All of the company’s demonstrable bad faith exhibited toward U.S. and European regulators alike is now coming back to haunt it.

Disclosure: I have no positions in any of the securities referenced in this article.

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