Why Facebook is going to be the P&G of social media

…and the opportunity that presents for Yahoo

Facebook is just at the beginning of a strategy that I’m thinking of as:

“Be the P&G of social media”

I remember being astounded back in 2006 when Zuckerberg turned down $1b from Yahoo. It’s hard, looking back, to recall exactly how crazy that sounded at the time. But it wasn’t the last time I was astonished by his bold moves. Buying Instagram (only 13 people at the time) for $1 billion. Buying WhatsApp for $19 billion. Each of these made me reconsider what Facebook is and what they’re trying to do. Let’s go back to the first of these purchases to understand the moves they’re making:

The Instagram purchase started me thinking

The Instagram purchase is fascinating because it wasn’t bought to integrate it into the core platform, nor was it the pure defensive play many assumed.

Instead, Instagram has been kept separate in branding, in user experience, in the app stores, and in the minds of the public. I originally assumed this would be a temporary play to ride its adoption curve before bundling it back in. I now believe that it’s going to stay separate and form a central pillar of a diversified strategy.

Where does P&G come into all of this?

As the owner of 23 billion-dollar brands, with a total of $83 billion in sales, P&G controls somewhere in the region of $5 billion of marketing spend.

Why does P&G own so many brands?

I think there are two interesting sides to this question:

1. Why not bundle them up into fewer brands?
2. If they are going to exist, why are they better owned by P&G than being independent?

Let’s look at each in turn, and compare them to Facebook’s emerging strategy as a conglomerate of social media brands.

1. Why not consolidate the brands?

As I understand it, this is mainly a segmentation play — consumers typically don’t know (or care) that different brands are owned by the same parent company, but separation of branding allows segmented targeting:

1. Pricing: Different brands can compete at different price points. This allows P&G to capture more of the consumer surplus for themselves by allowing people to spend “as much as they want” on a specific consumer product
2. Positioning: In a similar way, brands can be positioned differently to increase the total target market. See, for example, Head and Shoulders vs. Sassoon

In addition, not only does the diversification reduce risk and lower the impact of adverse market effects, but it also allows the parent company to experiment effectively without worrying too much about damaging their existing performance in a given market.

Facebook is keeping Instagram and WhatsApp independent for similar reasons

There are clear analogues to Facebook in both of these lines of thinking.

Facebook experiments with “pricing” through not only the direct price to the consumer, but also through the kinds of advertising a platform offers:

• “regular” digital adverts (in the sidebar)
• in-stream “native” adverts
• paid-amplification of organic posts
• currently, no advertising at all (in the case of WhatsApp)

I recently read a great breakdown of Facebook’s strategy on Stratechery [sidenote: there’s a paywall here, but it’s totally worth it — start out by following Ben Thompson to get a flavour]. According to Thompson, Zuckerberg talked on the recent earnings call about their approach of developing each of their platforms through a very deliberate growth sequence whereby each product:

• Acquires users
• Increases engagement
• Increases user value
• Only then monetizes

As a result of this, they will always have “brands” with different amounts of advertising to help capture spend yet allow consumers to avoid an overload beyond their preferences.

In a similar way, it’s clear that the “positioning” of Instagram and WhatsApp are both different from the positioning of the core brand. This brings additional power to the conglomerate because Facebook’s Atlas product, which allows advertisers to benefit from their audience being “always logged in” benefits greatly from depth of penetration, and ensuring that someone is logged in on every device they use.

2. What’s the benefit to the brands of being part of a group?

Aside from the benefit of a strong balance sheet and central management that any parent company would offer, P&G offers their brands a couple of particularly compelling benefits:

1. Resources: Access to unsurpassed logistics and supply-chain capabilities and resources
2. Relationships: Relationships with buyers and the key influencers throughout their channels to market — and particularly the ability to wield negotiating power on a par with the incredible power wielded by the multiples

Instagram and WhatsApp benefit from Facebook ownership in analogous ways

Again, each of these advantages have equivalents in the world of social media:

1. Engineering capabilities, server farms, and peering deals are the logistics and supply-chain of the digital world
2. Rather than buyers, we should think about CMOs and Marketing Directors of major brands. Facebook not only provides the relationships, but can go a step further and offer unified buying and management interfaces for marketing teams to advertise across the entire Facebook stable. Think: the ability to buy Instagram ads through the same interface as regular Facebook ads.

What does this say about what Facebook will do next?

Well, firstly, we should acknowledge that it is likely that we will see a proliferation of social networks rising to rapid prominence in the coming years. This is in part because they can all tap into the shared network of contacts and the unified notifications centre on both Android and iOS.

If I’m right about the “P&G” strategy, we’ll see Facebook continue to snap up anything that gains traction, while continuing to run them as their own apps. They’ll focus particularly on:

• Things that access different users or complementary use-cases (e.g. snapchat) — the equivalent of expanding into new markets
• Things that differ in some part of the user experience (e.g. images vs. text) — the equivalent of market segmentation by preference
• Things that could offer different kinds of ad products — the equivalent of “price” segmentation (watch out for ever more forms of native advertising)

We will also, crucially, see them offer an integrated way to buy ads across their whole platform, and use the market power this gives them to force buyers from even the largest spenders to go through their programmatic platform.

There are some things to learn from Google’s purchase of YouTube

Google’s 2006 acquisition of YouTube (for $1.65 billion) was arguably a similar play — particularly in that it involved Google learning how to make money from a new form of media. In particular, there are parallels between the forms of in-stream advertising that seems made for Instagram and the new ad formats invented by YouTube.

In particular, it seems likely that:

• Developing in these ways requires the development of new forms of advertising
• Each new platform will bring its own struggles as it seeks to make money — I’ve always felt that there must be some confusion at the top of YouTube about why they aren’t sitting on tens of billions of dollars of revenue yet

It seems to me, though, that Google kept YouTube separate for different reasons

Google doesn’t want to be a conglomerate. Almost everything else Google has bought has ended up merged into the core brand. YouTube is the bet on a slightly different future — a hedge against the threats to the business model of search (from the app economy, from lower CPCs on mobile, etc.). YouTube should win as TV money flows to digital.

What about Yahoo?

Perhaps weirdly, I feel that, of all the players in the digital space today, this theory makes the most difference to Yahoo. In short:

I wonder if Yahoo has an opportunity to be Unilever to Facebook’s P&G.

Unilever is smaller than P&G and often discounted as weaker, but it is growing faster by dominating emerging markets. Can Yahoo out-accelerate Facebook from here by riding the new waves of social apps that are going to continue to appear? I think that would be my play if I were in Mayer’s shoes.

The basic strategy then, for Yahoo, would be to acquire emerging networks before Facebook gets there, and then integrate them into a common ad buying platform.

To continue this analogy, what are the “emerging markets” of digital? There are the regular emerging markets, of course, but they are hard places in which to make money and the same players often do well there anyway.

I suspect that the “emerging markets” are not geographic, but rather psychographic / demographic. Most of the adoption of new social media apps has happened first for either tech early-adopters or for teens / young people. Yahoo’s core audience was always older, more rural, less tech-savvy. Which new social apps are going to take off among that audience? Those are the ones that Mayer has to go and find.

In summary

Image credit: zoharma / Flickr

I love the diagrams that visualise these corporate connections, and if I’m right, we’ll see a whole bunch of new social media companies with links to Facebook on this kind of diagram, and if I’m even more right, we’ll see just as many with links to Yahoo.