Facebook's Second Pitch

👋 Hello from the home office.

Today’s newsletter:

Bitcoin and The Technology Adoption Life Cycle.

Facebook’s crypto project.

Later this week: My experiment with Beyond Meat (BYND). The meat, but not real meat company making veggie burgers and sausages.

I’m not a bull or bear on Bitcoin or blockchain technology. I think it’s interesting and something we need to pay attention to for two reasons.

Smart, talented people are leaving high-paying jobs at companies like Google and Facebook to work on blockchain projects. Good products and services usually follow talented people.

I came across this quote from Pomp that made me go🤔

If Bitcoin reached $100+ billion market cap with horrible user experiences, just imagine what happens when it is as easy to use as US dollars?

And he’s right, the user experience is confusing. Below is a typically Bitcoin transaction.

Investors, myself included, tend to project what a technology will be like in the future based on what it looks like today.

Remember the first version of the iPhone? It wasn’t great. Many journalist and tech analyst crushed it. They said it was slow, clunky, and crashed to often. It wasn’t obvious at the time it would be better or more useful than the Blackberry.

Crossing the chasm

A helpful framework to gauge the total addressable market (TAM) or potential of a new product or technology is Geoffrey Moore’s “The Technology Adoption Life Cycle” framework (see below).

iRobot makes the number one selling robot vacuum in the U.S., the Roomba. This chart was from their 2018 investor presentation. They believe the penetration rate for robot vacuums is around 10% for U.S. households. And that their product is still in the early adopter segment.

Whether they can cross the chasm and penetrate the mainstream market is anyone’s guess, but the point of this exercise is to estimate a product’s potential.

In my view, Bitcoin falls into the early market section. Companies like Robinhood, Square (SQ), and E-trade have made buying and selling Bitcoin as easy as trading stocks.

But the greater opportunity for Bitcoin and other blockchain companies is to build products that are useful for the masses (mainstream).

Which takes us to Facebook…

Facebook (FB)

Last week I was thinking what Apple, Google, and Amazon’s second pitch (i.e. next product innovation) was going to be , because all of their core products are well ingrained in our society.

I left out Facebook because their second pitch has the potential to be a doozy; in a good way I hope:)

Facebook is recruiting dozens of financial firms and online merchants to help launch a cryptocurrency-based payments system on the back of its gigantic social network, per The Wall Street Journal

Initially, they are trying enable two things:

Maintain a digital coin (stablecoin) that users could send to each other and use to make purchases both on Facebook, Instagram, and across the internet.

Reward users for taking a specific action on Facebook’s platform. Like earning money for watching an ad.

It seems like Facebook is building a payments system that would encroach on one of the most profitable businesses in the world in which two companies have a duopoly (almost).

I wrote about them last week: Visa and Mastercard.

How Visa and Mastecard make money

Visa and Mastercard are payment networks that process transactions between banks and merchants. They don’t assume credit risk.

They make money through licensing deals and interchange fees. Fee arrangements and splits can vary based type of account, type of card, type of merchant, fees are generally $0.29 plus 1.5%-3.5% per swipe.

This is a very profitable position to be in. Building a network is hard, and once the ball got rolling for Visa and Mastercard, network effects took over.

Merchants want to make buying their products as easy as possible. If most people have Visa or Mastercard, it’s logical for merchants to accommodate those customers by being on the Visa and Mastercard network.

That in turn attracts customers…

Today, customers want a near frictionless shopping experience.

Have you ever been to a store that won’t accept your Amex or Discover card, or only takes cash? It’s an inconvenience . It wastes our time. And we don’t like that😡

So we default to merchants that make our lives easier. And most accept Visa and Mastercard.

More customers, attracts more merchants, and so on and so forth.

Facebook’s network

Facebook has already done the hard part. Building the network!

More than 2 billion people and ~80 million SMBs (small & medium businesses) are on their platform. And they are rolling out ways to make it easier for you to buy products directly in the app.

It’s not a big jump to see how a payments network would make this even simpler.

A big problem merchants have in accepting bitcoin as a payment method, is the risk that a wild swing in Bitcoin’s price will yield them less dollars than other forms of payment, like credit cards or cash.

Merchants have bills to pay, and the majority of their vendors don’t accept payment in Bitcion. So any price swing in Bitcoin can adversely affect their ability to pay bills.

Which is why many believe Facebook’s coin will be a stablecoin (pegged to the dollar).

A coin where one Facebook coin would equal one dollar or something equivalent (fixed), to give merchants peace of mind that when they convert their Facebook coin to dollars, they don’t have to worry about price swings.

The bottom line

As we discussed yesterday, not having visibility into the future is an opportunity. If we knew how and what this product will look like, and the effect it would have on Facebook’s business, it would already be reflected in the price. One way or the other.

Facebook is already a $500 billion dollar company. Will advertising, though still growing fast, lead their leg up to $1 trillion and beyond? Maybe. But something like this has the chance to be transformational, or a complete bust.

And if it’s a bust, that’s ok. Remember, it’s not how many wins or losses we have as investors. It’s how much we make on our winners vs. how much we lose on our losers.

Companies that have extreme network effects are rare; but super valuable. Finding and investing in them is a worthwhile pursuit.

Have a blessed day,

-Caleb

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