Is Facebook Connect Mark Zuckerberg’s Ace in the Hole?

With a network of nearly 1 billion strong, Facebook (NASDAQ: FB) is one of the world’s largest social media sites, having reached such bulk by providing users with an all-encompassing bevy of features.  From Facebook Chat to Facebook Credits, surfers are able to fine-tune their profiles to fit the exact online experience they desire.  The most valuable part of Facebook’s platform, however, may be a service that the company is currently giving to third party websites free of charge.

Flying relatively under-the-radar in the media, Facebook Connect lets users sign into third party websites with their pre-existing profile information, abling them to avoid the hassle of creating separate screen names on each site they visit.  Released in 2008, Connect is the offspring of Facebook API (2006) and Facebook Platform (2007), earlier iterations of the service.  On the social network’s official blog, it states that Connect was made to give “users the ability to take their identity and friends with them around the Web, while being able to trust that their information is always up to date and always protected by their privacy settings.”  Considering the average America visits nearly 100 domain names per month, it is understandably convenient; the service also allows third parties to develop apps that serve as a form of free Facebook-style marketing.

While Zuckerberg and Co. do not consistently release official statistics on Connect activity, it is estimated that the average FB user has anywhere from 5 to 15 connections on his or her profile, ranging from websites like ESPN to Mashable.  In fact, some organizations have even gone as far as mandating that their users connect through the social media giant, such as the Swiss-based digital music service Spotify.  Altogether, over half of Facebook’s total populace is considered to be actively using Connect at least once a month, as the remainder of users seem to display a ‘click it and forget it’ mentality.  From Facebook’s perspective, Connect helps it to craft a more accurate examination of its user base, though third party companies may actually benefit the most.

In its first twelve months of service, FB reported that around 80,000 sites were connected; by the end of 2010 this number grew to 2 million.  In the past year and a half, execs have stated that on average, a whopping 10,000 sites per day are integrating with Facebook Connect.  Thus, the current total is somewhere in the 7 to 8 million range, and growing.  Compared to the premium service of LinkedIn (NYSE: LNKD) – the closest parallel – Facebook Connect’s growth has been more impressive.

Just to note, this graph shows growth in terms of years after inception. LinkedIn began its premium pricing in 2003; years 5, 6, and 7 correspond to 2008, 2009, and 2010 respectively.  In Facebook Connect’s case, these three final data points are projections, based on current growth rates.  Unfortunately, this is not a perfect comparison, though it does demonstrate how Facebook would be at an advantage over its ‘professional’ competitor if it decided to monetize its Connect service.  Now, techies may also point to the Google (NASDAQ: GOOG) umbrella that allows users to stay logged into Gmail when on other sites like YouTube and Google +, though this connectivity exists predominantly in-house.  Microsoft (NASDAQ: MSFT) also has its new ‘social search’ platform So.cl (read more here), though the network is still in its infancy, and does not have any plans to develop a Connect-like service for the time being.

Aside from the sheer numbers, the general consensus among third party sites is that Facebook Connect helps traffic, though estimates vary wildly.  Some also state that the real winners are existing users, who are now able to share their actions on newly connected sites with their Facebook friends.  The one conclusion that can be agreed upon is that site developers must build their platforms with the service in mind, so the design is fluid, clean, and easy-to-use.  Simply slapping a ‘connect with Facebook’ button will most likely yield little to no benefit.   Thus, the social media giant has a great deal of leverage if it decides to start charging for Connect because: (1) third party developers have optimized their sites to be integrated with the service, and (2) users are already comfortable with the connectivity it provides.

If the Zuck does decide to transform Connect into a premium service, he might do well by emulating LinkedIn, which charges paying subscribers $24.99 a month.  Though this amount seems menial, it would have a definite effect on the company’s bottom line, which can be seen in the graph below, based on estimates through 2015.

 

Aside from having higher earnings, a move toward a pay-to-play connectivity service would do wonders for Facebook’s one trick pony of a business model, which currently relies on advertising to generate over 85 percent of its revenue.  Taking future earnings estimates into account, shares of FB are currently trading at a Forward Price-to-Earnings ratio of 55.6X, which is more than double the industry average and competitors like GOOG (12.0X) and MSFT (10.0X), but way below LNKD (99.8X).  If the company is able to monetize Facebook Connect within the next year, this valuation slips down to 42.9X – still expensive but closer to a level where bulls can feel a bit more comfortable buying in.  Going forward, ardent investors would be wise to monitor how this situation shakes out on WealthLift INSIDER.

Disclosure: The author has no holdings in the stocks mentioned in this article and has no plans to initiate any positions within the next 72 hours.  He does, however, have the intention of rating these stocks on WealthLift.com, a social media website where investment ideas are shared openly and free.

Jake Mann is a Finance Editor at WealthLift.com, having recently graduated Illinois Wesleyan University with a double major in Economics and Business Administration. In his spare time, Jake enjoys playing guitar, partaking in good ‘ole fantasy baseball, and being an alumni of Tau Kappa Epsilon.

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