In brief
Facebook Dating challenges Match Group, but investors should not assume Facebook will win. The article argues Match is stronger in five areas: first-mover advantage, fewer privacy problems, no reliance on targeted advertising, smarter acquisitions, and less regulatory pressure.
Investors should not assume that Facebook can defeat Match Group on the online dating battlefield.
Facebook (NASDAQ:FB) launched Facebook Dating last year, formally entering the territory of Match Group (NASDAQ:MTCH) and throwing down a challenge. The feature is a new tab that lets users keep a separate dating profile. For Match, this is bad news, because the company dominates the online dating market with apps such as Tinder, OKCupid and Hinge.
However, investors should not conclude that Facebook can beat Match and that its plan will succeed. Instead, they should understand that Match has consistently outperformed Facebook in five areas. These advantages could widen its moat at any time and are enough to fend off an incursion by this tech giant.
1. First-mover advantage
Match has continually acquired the most promising platforms and apps and has already seized the initiative in the online dating market. Its flagship app, Tinder, has become synonymous with online dating.
Facebook is the best-known social network in the world. But in recent years it has been hit by repeated scandals involving data breaches, its privacy practices have come under heavy scrutiny, and its user base is aging. These three factors are enough to make Facebook's online dating ambitions run aground before long.
2. Fewer privacy problems
Over the past three years, Facebook's data breaches have led Congress to hold hearings and regulators to launch investigations. As for Tinder, although security experts pointed out certain vulnerabilities in Tinder in early 2018, Match has had no major data breach.
In the second half of last year, Match updated its security policies and properly encrypted all user communications to protect data. Match responded quickly to the risks, and with its clean record it has not become the center of a scandal and the target of public criticism as Facebook has. Facebook is still trying to rescue users' trust.
Last December, a HuffPost/YouGov social media survey found that two-thirds of American adults remain wary of Facebook and do not believe the company will properly protect their personal data. In other words, the public trusts Match's apps more than Facebook.
3. No reliance on targeted advertising
Facebook's business relies heavily on targeted advertising, which accounted for 98% of the company's revenue last quarter. It therefore needs to keep collecting users' personal data, which is what gives rise to privacy concerns.
Last quarter, 98% of Match's "direct revenue" came from paid subscriptions and à la carte premium services, with the rest coming from "indirect revenue," mainly from digital advertising.
Match's business model is arguably more resilient than Facebook's for three reasons: it locks in users, it is less affected by macroeconomic headwinds, and it does not need to keep collecting users' personal data for an advertising business.
4. Smarter acquisitions
Over the past 10 years, Match has acquired six companies, all of which extended its business into the online dating and social networking market. These platforms monetize very well and can be integrated into a larger ecosystem.
Over the same period, Facebook acquired dozens of companies. Some strengthened its social network, but many of its largest acquisitions, including Oculus VR and WhatsApp, have been almost entirely unable to generate revenue. Other acquisitions, such as the recent purchase of CTRL-labs, a developer of brain-to-computer interfaces, look more like science fiction than reality.
The author is not criticizing Facebook's diversification strategy, since the company holds huge amounts of cash and can certainly afford to speculate, but Match's growth strategy is much clearer and easy to understand at a glance.
5. Less regulatory pressure
Over the past year, Facebook was penalized with a fine of up to US$5 billion by the Federal Trade Commission (FTC) for violating privacy practices, and it may also face fines from the European Union over privacy issues, as well as penalties from other regulators, organizations and countries. These headwinds have not yet put pressure on Facebook's growth, but Match faces far less regulatory pressure.
The Federal Trade Commission is currently suing Match over misleading advertising, but this is the only area in which regulators are targeting Match. As the author explained in an earlier article, the potential fine is also limited to US$60 million, only 2% of next year's projected revenue.
Conclusion
Facebook and Match remain solid long-term investment choices. However, investors should not assume that Facebook can challenge Match's position in online dating. They should understand that Match is in fact stronger than Facebook in several respects.
Original article: http://bit.ly/2Gf7MBv