3x founder, 1 exit. I write a bunch about Security Tokens, venture capital & Startup community
26 Jul 2018 was a very memorable day for Mark Zuckerberg for two reasons.
Reason 1 was well known. His personal fortune dipped a ‘little’. As personal fortunes of the majority of today’s richest billionaires go, it was a paper loss.
A ‘little’ for Zuckerberg is relatively speaking as compared to his overall remaining wealth. For the rest of us mortals, it is no small dip.
In real terms, it is more than the entire market capital value of some venerable institutions like Macy’s!
It was also the biggest stock market 1-day drop in Market Capitalization in history. Facebook lost US$ 124 billion dollars or 20% of its earlier value. The loss was larger than Intel’s loss of US$ 91 Billion at the turn of the millenium in September 2000.
20% loss is not insignificant & any company other than Facebook would have gone through much more serious questioning about their stability.
But Facebook is a consumer internet company, used by billions of people everyday. The proof of its health was on everyone’s smartphone. So, the stock stabilised & life carried on.
However, it was a jarring lesson for Zuckerberg. It unsettled him deeply & by the end of the day, he made a very important call to two of his senior executives. The call itself was very brief. Some say it lasted a minute at the most.
Zuckerberg decided that, if having an ubiquitous centralised social media platform couldn’t prevent his company from being dumped by stock holders, he would have no choice but to double down on one particular measure that can cause revolutionary growth.
Zuckerberg had no doubt that there was one particular unifying tech that could deliver many years of extraordinary growth that his stock holders crave.
The stock market crash had raised serious questions about Facebook’s ability to continue multiplying revenue at the rate they had in the past.
Much as we like to think that Facebook is global, it is primarily a western business. Much of its revenue is derived from the west. Aproximately 30 percent of its users and 73 percent of its revenue is from North America and Europe. The monthly average revenue per user for Western users is $3.33 versus 53 cents for the rest of the world. And it was seeing a slowing down in revenue growth. And it was almost reaching limits of market penetration. In North America, Facebook’s monthly active users (MAU) represent 80 percent of the population above the age of 14. There aren’t much options there.
Facebook tried to buy & bully snapchat but that didn’t work out as planned. Instagram was one remaining possibility to develop immediately & bring in revenue by agressively copying Snapchat. WhatsApp is an undefined ecosystem in Facebook’s vision, especially post Cambridge Analytica privacy quagmire.
Cambridge Analytica scandal had caused a dip in share price in March 2018. So Zuckerberg was treading softly on WhatsApp.
Facebook had publicly acknowledged that it was almost reaching saturating point with respect to how many more advertisements it can show without adversely affecting user retention. It had already tried to implement auto-play sound on videos just after Google & Apple said they were banning that format on their platforms as unacceptable user experience (UX).
Facebook, just as every other tech company worth its salt, had a large research & development team that worked on many ideas. Talent is added everyday. New ideas are investigated. Their labs have some of the world’s best engineers and visionaries working 24 x 7.
The R&D division is headed by their CTO & sub divided as follows:
AR/VR: Creating the future of personal & shared reality
Computational Photography & Intelligent cameras: Mobile visual processing to understand, augment & enhance sharing & connections. (or in other words stuff that can look at a particular photo & understand that you look more attractive to your connections than in other photos)
Computer vision: Understanding the visual world around us
Connectivity: Connecting the unconnected
Data science: Gaining insights to deliver meaningul social interactions
Economics & Computation: Exploring the intersection of economics & computation
Facebook AI research: advancing the field of machine intelligence
Human Computer interaction & UX: Understanding & improving social experiences
Machine Learning: Applying Machine learning science to Facebook Products
Natural language processing & speech: Breaking down language barriers
Security & Privacy : Keeping the Facebook community safe & secure
Systems & Networking: Building the systems to bring the world closer together
There are many bright spots in these divisions but beyond Instagram & Messenger, there wasn’t much hope in revenue terms in the next 4–6 public reporting cycles. So, Zuckerberg looked further afield. Blockchain! That had to be it!
The call that Zuckerberg made was to his CTO Mike Schroepfer & VP David Marcus. And in essence, Zuckerberg told both his executives that they had authority to do ‘what it takes’ to make Facebook, the bank of the world, by using blockchain.
Over the years, Facebook’s distribution platform became huge. It was an advertisement delivery platform. But it depended on being an intermediary. Advertisers served ads that Facebook didn’t own & customers watched them when interspersed with content of interest generated / shared by other users. It had built a distribution network to the limits to serve third party advertisements. There wasn’t a unifying identity of ‘Facebook-ness’ in advertising even though it was the platform owner. In the aftermath of the fake news scandal, it was a disconnect that had no easy fix & more importantly the model was starting to show a slowdown in revenue.
Blockchain on the other hand, is promising. Facebook could put every user on the blockchain & give them an identity. They already do by offering users to login to 3rd party websites with their Facebook ID.
But that is just a small use case of Facebook’s gigantic reach. Facebook’s goal is to offer a Global Passport. A Global Unique Identity, on the blockchain, that could be used to interact with any partner or third party costumers & derive more value than the Facebook tracking Pixel ever managed to. Couple that with an internal payment token, the idea seems very powerful indeed.
To a Facebook user, it could provide a seamless solution of Identity, Security & Payment being handled within the Facebook ecosystem & never leave it for One Time Passwords, Signing into user IDs of Facebook partners/merchants etc.
To Facebook, it means user engagement, user loyalty & long term highway to being the World Bank of 2025 & beyond.
The tools & the infrastructure that are needed to achieve Zuckerberg’s vision for Crypto within Facebook are not yet scalable. But if Facebook does not start building out today, Zuckerberg thinks that either Google or Amazon may get there first. In this game of scale, being first matters. Especially when there are equally capable competitors rumoured to be already working on Blockchain projects.
To make it work at the outset, Facebook could most likely issue a payment token to drive adoption. For fun sake, let us call this FaceCoin!
This could be used within the Facebook Messenger or with Facebook Business Merchants. It is easy to start getting people to use it. Many Blockchain ICO’s already use this technique to drive mass adoption : Airdrops!
Phase 1 could be a surprise rollout of Wallet-in-Messenger with US$10 worth of FaceCoin free to send or tip any other friend or person on Facebook. Want a cool Emoji pack? Sure! It’s just US$ 0.99 but you can only pay with FaceCoin!
For phase 2, Facebook will have to tie up with merchants to enable their Merchant Wallets too! But, convincing Merchant base might be easier if the Phase 1 shows adoption at scale.
Of course, there are more difficult challenges than what we read here. KYC/AML compliance, APIs are just some of the many.
Why go such lengths for just a crypto coin? Facebook wants your identity to drive its growth. Identity wars are about to come to Silicon Valley. Online Privacy concerns that we have soon thus far in 2018 are just the tip of the iceberg that slowly drifting in our direction. GDPR was implemented in May 2018. There will be more activism in the realm of privacy than we have seen until now. More data breach scandals & more demands from users to take back control of their online identity. Facebook looks towards Blockchain to get around these thorny issues.
Blockchain will provide users more control of their own identity. Users will have a vote on who to share their Facebook ID with. In the short term, it may appear that Facebook is relinquishing control to the user. It is indeed handing over the power to the user but in return users will adopt Facebook ID platform for the sheer network effects it has. The network effects are gained by air-dropping FaceCoin to Facebook users.
After the flippening of roles, Facebook appears to be more of a Universal Crypto Wallet with baked in KYC & ID management features
Facebook will probably sell this to the public as equal parts hype & logic. Since online privacy is such a touchy topic, it is easy to appear as if throwing in the towel & handing Identity ownership to the user but on Facebooks blockchain solution.
The same data privacy knife that hurts Facebook also applies to all businesses online. GDPR rollouts have been haphazard, confusing & irregular. Businesses had to spend precious work hours & money on consultants to understand the implications of GDPR and roll out compliant privacy policies on their websites. Not to mention the proof of continued compliance rests with the business forever. All this costs precious money & takes focus of executives away from their core business.
With the Facebook ID solution, some of those challenged may be outsourced to Facebook! This frees up precious time for a business to focus on ramping up core business value for clients. This could result in a multiplication of revenue while identity is safely handled by users & Facebook!
A win-win for all ? Probably!!