Thursday, 31 May 2012

A night at the Opera won't do Zuck any good

As Facebook's shares continue to decline (they closed at $28 on Wednesday) rumours have begun to circulate about a takeover bid for browser software maker Opera. This, like Instagram, would be a puzzling move.

I definitely think that getting into mobile in a serious way is the only way for Facebook to generate the returns that investors hope it will. But Facebook's biggest issue is its lack of a compelling business model.

The same could be said of Opera, which, despite expanding market share in both desktop and mobile browsing, is hardly a cash generating machine. Despite a nearly $900Mn market cap, in a good year, its EBITDA from nearly 200mn users probably won't cross $20mn. Annual per-user revenue was about $0.6 in 2011, tiny even when compared to Facebook's $4.7 per user per year.

There's also the difficult issue of cannibalisation. 60mn Opera users are PC based and about 200mn use its Opera Mini mobile browser. I'm not sure that the former would become more valuable if sold together with the browser content.

I suspect the latter are almost entirely feature phone users and therefore represent a useful add on to Facebook in emerging markets.

But what happens when those users convert to smarter devices? Well, Symbian has traditionally licenced Opera as the browser on its devices and Nokia have ambitious plans in $40 smartphones for emerging markets. Even so, white label only makes up about 20% of Opera Mini's installed base. The rest should be considered at risk if the prices of Chinese branded Android devices continue to fall and their market share continues to increase. I'd expect Chrome to dominate on those devices. This is why Opera's market share has shrunk markedly over the last 2 years.
What Opera would bring is engineering expertise and relationships with operators and device manufacturers beyond what Facebook has today. But it isn't a credible operating system choice and it doesn't offer Facebook the ability to do what Apple can do and use a great core product to generate huge returns across an ecosystem of devices.

A lot has been made about Opera's ability to use HTML5 and CSS3 technologies to vertically integrate Facebook's offer across multiple platforms via web apps. I don't see how that's possible without an operating system. Opera is never going to be the default for the mass market operating systems - Apple, Google and Microsoft will see to that. Very few users know that Opera is a better browser than what's pre-loaded and infront of them on the home screen.

So my opinion remains that if Zuck wants to play in mobile, he needs to play in operating systems and hardware. And that means RIM or HTC. Best get them while the share price is still in double figures, Mark.

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