For years, Silicon Valley giants have increasingly used advertising revenue to scale their data-harvesting businesses, with Facebook Inc. (FB) and Alphabet Inc. (GOOGL) raking in over 500% and roughly 100% for their shareholders respectively over the most recent five years. In the recent period, however, the tides seem to be changing as Facebook and Google face heightened scrutiny on their use of consumer data, with many turning their back on the media giants in favor of FAANG peers Apple Inc. (AAPL), Netflix Inc. (NFLX) and Amazon.com Inc. (AMZN), who employ old fashioned direct-to-consumer business models, as outlined by Barron's.
Investors Overlook Fundamental Difference in FAANG Business Models
"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," wrote Barron's reporters Alex Eule and John Swartz in a story published April 21.
In the recent weeks, the fundamental difference between America's largest tech behemoths has manifested in a one-on-one battle between the Chief Executive Officers (CEO) of Apple and Facebook. In the weeks following Facebook's most recent headline data scandal involving political data analysis firm Cambridge Analytica, founder and CEO Mark Zuckerberg saw $100 billion shaved off of his 14-year-old company's market capitalization on news of the data breach that led him to testify in front of U.S. law makers for the first time ever. (For more, see also: Zuckerberg, Cook Continue to Insult Each Other.)
In a recent interview with MSNBC, the iPhone maker's leader Tim Cook spoke lowly of the social media platform and its founder, indicating that Apple "could make a ton of money if we monetized our customer—if our customer was our product." Zuckerberg has continued to defend Facebook's free platform as a service that services not only "rich people," calling Cook's criticism "extremely glib and not at all aligned with the truth."
Apart from the CEOs' personal feud, recent events shed light on the growing importance and contrast between direct-to-consumer revenue models and ad-driven data models, as noted by Barron's.
While Silicon Valley has long "brushed under the rug the fact that Madison Avenue is the center of its commercial activity," according to Brian Wieser of Pivotal Research Group, the current environment has brought the reality to light and has put ad-reliant business at high risk of regulation and consumer backlash. (For more, see also: YouTube Ads Funded Extremist Content: CNN Report.)
In 2017, FB generated 98% of its revenue from advertising, while photo and video sharing app Snap Inc. (SNAP) attributed 97% to ads, and Twitter Inc. (TWTR) and Google-parent Alphabet tied in third at 86%. On the other hand, Apple, Netflix and Amazon, the latter which has recently ramped up its ad business, do not mention ad revenue in their risk section, according to Barron's.
Facebook, down over 5% in 2018, has secured a 16.3% return in one year, while rival SNAP is up 6% YTD, recovering from last year's plummet which dragged shares down 26% over 12 months. Jack Dorsey's Twitter has also made a comeback this year, up 31% YTD and 115% over the year. Shares of search giant Alphabet have also outperformed the broader market, up 3% YTD and 26% over 12 months.
Wall Street darling Netflix, which again soared on its most recent earnings beat earlier this month, bringing its year-to-date (YTD) and 12-month gains to 67% and 124%, respectively, has touted its subscription-based revenue 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,” said CEO Reed Hastings during Netflix's quarterly conference call.
Apple generates 60% of its sales from the iPhone, which had an average selling price of $796 last year.
While Facebook has long touted its accessibility to all people around the world, some have weighed the possibility of a paid version of the platform. A recent survey by research firm Ponemon Institute found that just 27% of consumers trust Facebook's ability to protect privacy and safeguard data, compared to 79% in 2017, indicating that Facebook's model could be outdated. Facebook, with 2.13 billion monthly active users, makes about $26 per year per user, and expects to generate $55 billion in ad revenues this year. It's important to note, however, that digital advertising, despite its woes, remains a cash cow business, with analysts estimates for FB's revenue actually picking up since the start of 2018.
The shift has changed business in tech's largest U.S. hub, according to Prashant Fonseka, a principal at Silicon Valley-based venture capital find CrunchFund.
“From 2013 to 2016, the tech community assumed consumers didn’t care about privacy anymore,” Fonseka told Barron's. “We thought all data would eventually be in the public sphere.” Now, he suggests that privacy questions are some of the first and most important raised by potential investors in tech startups. (For more, see also: Tech Still Reigns Over the Market: Credit Suisse.)