The FTC settlement and antitrust probe hide important Facebook achievement
Facebook’s FTC settlement and antitrust probe have overshadowed a great achievement by the company in the last quarter. The achievement offers an important peek into where Facebook might be in the coming years. Facebook’s non-advertising revenue rose 36% year-over-year to $262 million in the second quarter. While that may not seem like much considering Facebook generated $16.9 billion in total revenue, it shows encouraging progress in Facebook’s business diversification efforts. And for Facebook investors, that is an achievement worth celebrating.
Facebook currently relies on advertising for almost all of its revenue. But the advertising marketplace is getting more challenging, raising the need for Facebook to find alternative revenue sources outside advertising.
In the FTC settlement, for instance, Facebook will have to comply with certain data usage restrictions. In light of the data usage restrictions, Facebook executives anticipate a blow to the company’s core advertising business. Facebook is particularly worried that the data usage restrictions under the FTC settlement could hurt its ad targeting ability. Targeting ads to audiences results in better outcomes for marketers, and for providers like Facebook, it is a lucrative business. Therefore, headwinds to ad targeting would hit an important part of Facebook’s advertising business, potentially leading to revenue loss. Then, there is also growing competition for digital advertising dollars, particularly from e-commerce companies like Amazon and Alibaba.
Facebook’s Oculus Quest device selling like hotcakes
Facebook wants to ensure it can keep creating value for shareholders regardless of what is happening in the advertising marketplace. Therefore, the company has sought to diversify into new businesses outside advertising.
New products sales supported the 36% increase in the non-advertising revenue Facebook recorded in the second quarter. Facebook said its new virtual reality device, Oculus Quest, is contributing strongly to the non-advertising revenue growth.
Oculus Quest is an all-in VR device. That is to say that Quest doesn’t require pairing with an expensive PC to work. The Quest went on sale in May this year at a starting price of $200. Facebook’s original Oculus device cost $600 and required pairing with a high-end PC costing $1,000 in order to work. Consequently, the original Oculus device became too expensive for the everyday consumer to afford and limited its sale.
Facebook revealed at its second-quarter earnings conference that there is strong demand for the Oculus Quest device. The company said that it is selling the devices as fast as it can make them. Moreover, Facebook revealed that Quest users are purchasing more and more content. With Oculus devices, Facebook is not only selling hardware, but content also. Facebook sold $5.0 million worth of Quest content in the first two weeks of the device going on sale.
The global market for virtual reality systems, including hardware, software, and content sale, was worth $7.9 billion in 2018. The market is on track to surpass $44.7 billion by 2024, data from Research&Markets shows.
Facebook is about to unleash a new Portal device
In addition to virtual reality, Facebook is also into the smart speaker business. The company sells a smart speaker device called Portal. The original Portal, which is available in two versions, went on sale in the fall of 2018. Facebook plans to launch a new generation of the Portal device later this year. The Portal is available at different price points starting at $200. Facebook markets Portal as a video-calling device. It partnered with Spotify and Pandora to provide music entertainment for Portal users.
The global smart speaker market was worth $4.4 billion in 2017. The market is on track to top $23.3 billion by 2015, Allied Market Research estimates show.
Facebook raising Workplace prices for first time
Facebook’s other non-advertising business involves providing businesses with staff chat and collaboration service on a subscription basis. The company provides business chat and collaboration service under the Workplace brand.
Facebook recently announced new prices of its Workplace service plans. Presently, Workplace prices start at $3 per user per month. But Facebook also offers a free version of the app, except that the free option has limitations. A new Workplace price of $4 per month will take effect in September. Facebook launched Workplace in 2016 and hasn’t hiked its price since.
Besides the price hike, Facebook also has introduced a new paid option for the Workplace app. The new option is Workplace Enterprise and will offer more features and cost $8 per user per month. Facebook has designed the Enterprise option to suit the needs of large, complex organizations.
Facebook’s Workplace has more than 2.0 million paying users. Notable Workplace clients include retailer Walmart, which has over 1.5 million employees in the United States alone. The other one is Vodafone, one of the world’s leading telecom companies. The market for workplace chat and collaboration software was worth $8.2 billion in 2017 and is on track to grow to $16.6 billion by 2025, according to Grand View Research estimates.
FTC settlement and the antitrust probe shouldn’t distract investors too much
Facebook’s main competitors in workplace chat and collaboration software market include Slack Technologies (WORK), which went public this past April. Slack finished the first quarter with $295 million in cash, up from $104 million a year earlier. Thus, Facebook’s FTC settlement and ongoing antitrust probe should not distract you from the company’s business diversification progress.