The race to build the digital ecosystem, you can’t afford to fail

Written by on August 2, 2016 in Guest Blog with 0 Comments

Change direction.be differentFacebook and Twitter are going in opposite directions. Facebook and Twitter report very different results, highlighting the gulf between the haves and the have-nots in the digital ecosystem.

Facebook Q2 16A

Facebook reported very strong results as it continued to improve the degree to which it is able to monetise its users on mobile devices.

  • Q2 16A revenues / adj-EPS were $6.44bn / $0.97 well ahead of consensus at $6.01bn / $0.82.
  • Steady progress was made during Q2 16A with total MaUs reaching 1.71bn of which 1.57bn access Facebook via a mobile device.
  • Messenger and WhatsApp are now comfortably past 1bn MaUs, with Instagram passing 500m during Q2 16A.
  • Mobile now makes up 84% of total advertising revenues and user engagement with Facebook’s services continues to progress.
  • Facebook Live is also seeing traction and has been used several times to broadcast important current affairs.
  • This is very bad news for Twitter, which jumped onto the live video broadcast bandwagon first with Periscope, but is now at risk of becoming irrelevant.
  • The outlook for Facebook remains strong but I am increasingly concerned that expectations have more than caught up with the shares.
  • The fact that the shares rallied just 5% in after-hours trading is warning enough, but RFM’s monetisation model also indicates that growth may slow significantly in H2 2016E.
  • This is because Facebook still only occupies 35% of the Digital Life pie and without greater coverage, the monetisation opportunity is limited.
  • Facebook is working on this but I have long been of the opinion that its new strategies will not become revenue generating in time to meet consensus expectations.
  • Although I see Facebook as potentially becoming the biggest ecosystem of them all, I think that there will be a much better time to get involved in the stock.
  • I am holding off till then.

Twitter Q2 16A

  • Twitter reported another dismal set of results as it guided Q3 16E revenues well below expectations.
  • Q2 16A revenues / adj-EPS were $602m / $0.13 compared to expectations of $607m / $0.09 but guidance fell far short.
  • Q3 16E revenues are expected to be $590-$610m ($600m midpoint) way below consensus at $681m but broadly in line with RFM at $607m.
  • RFM’s estimate is based on its monetisation model for digital ecosystems which estimates revenues based on Digital Life coverage, MaUs and performance against the 7 Laws of Robotics.
  • Although users did expand to 313m during Q2 16A, Twitter’s fundamental problem remains the fact that it only covers 16% of the Digital Life pie explaining its lack of growth.
  • This is why its deal with the NFL is so important.
  • If Twitter can generate traction upon its platform from the 8 or so games it will be broadcasting in H2 2016, then it stands a chance to resist being swamped by Facebook Live Video.
  • Assuming this is successful and Twitter can build upon this foundation, then Twitter could have a media consumption offering which would increase its coverage to 26%.
  • This would then give it scope to entice users to spend more time on its platform and thereby start growing revenues once again.
  • However, this is very far from reality and I still have concerns that a part time CEO is exactly what Twitter does not need at the moment.
  • Hence, I can see Twitter becoming an acquisition target but with no growth now becoming the clear reality, interest is likely to start once the shares trade below $10.
  • I am still very cautious on Twitter.

This article was first published on RadioFreeMobile.

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About the Author

About the Author: Dr Richard Windsor is the founder of Radio Free Mobile which is an independent research provider. The research helps clients to understand and evaluate the players in the digital ecosystem and presents a unique perspective on how all the pieces fit together in an easy to read and digest way. The product is available on a subscription basis and counts members of the handset, telecom carrier, Internet, semiconductor and financial industries as its subscribers. RFM is the land of the one man band meaning that Dr. W. also makes the tea. .

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