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Zuckerberg Plays the Amazon Game

Katie Benner is a Bloomberg View columnist who writes about technology, innovation, and the cult and culture of Silicon Valley. She lives in San Francisco.
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Facebook's fourth quarter earnings handily beat Wall Street expectations today, but the social media behemoth still managed to freak out investors.

Yes, the company's all-important advertising metrics show that things are going pretty well at One Hacker Way. Mobile ad sales almost doubled compared to the same quarter last year and now account account for 69 percent of total ad revenue.

But Facebook also plans to spend 55 percent to 70 percent more on research and development this year than it did in 2014. Overall expenses last quarter had already risen by 87 percent to $2.7 billion. Some investors, nervous about how much Mark Zuckerberg can channel Amazon's Jeff Bezos when it comes to managing Wall Street expectations, fled the stock, causing Facebook shares to dip almost 2 percent in after-hours trading.

Zuckerberg -- Facebook's founder, chief executive, and mega-shareholder -- runs the company as he sees fit. He seems unencumbered by the angst that surrounds other executives when they talk about the unwelcome, quarter-to-quarter financial scrutiny that comes with running a public company. He just goes ahead and piles more money into R&D.

Investors, of course, generally hate it when a company gears up to do something new or spends piles of money pursuing intangible goals. Remember when Netflix said it would focus on streaming videos over its network instead of shipping physical DVDs? The sturm and drang reached such a fever pitch that people were calling for Reed Hasting's head...until he was vindicated just a few quarters later.

Investors usually don’t have much faith that management can implement grand new strategies, so when they hear about expenses increasing by billions of dollars they have nightmare visions of executives flushing money down the toilet.

"Facebook, we must penalize you," the market said. "You make so much money on mobile advertising. Just do that! We love that! Never change!"

The market isn't entirely nuts. Madison Avenue is paying companies like Facebook to find ways to deliver web-based video at scale so they can tack ads to the clips. Facebook has a huge user base, but it can still grow. And video on Facebook is exploding. Clips shared on the site grew by 70 percent globally and 94 percent in the U.S. in 2014 -- and Facebook users now watch three billion videos a day, up from one billion last September.

Facebook can grab a lot of low-hanging ad revenue. It doesn’t yet need to pay for premium content or share revenue with content creators, because Facebook users are happy to do the creating and curating themselves for free.

Why would Facebook want to do anything but serve videos of people being arrested and panda bears all day long? You can almost hear the ka-ching above the roar of the Rolfe the Dog covering Biz Markie's "Just a Friend."

Zuckerberg made it pretty clear on the analyst call today that he has ambitions beyond being YouTube/Google lite. As I wrote a few weeks ago, Google has yet to find meaningful revenue sources beyond the indisputably lucrative role it plays as the most pivotal purveyor of cheap, online ads. Now Wall Street is looking for something new from Google.

Zuckerberg told Wall Streeters that if Facebook was only focused on making money, he would just increase the number of ads that people in U.S. see and leave it at that. But he said that's not all he cares about.

Zuckerberg strongly hinted that his company is working to make messaging -- including Facebook messenger and its WhatsApp messaging service -- a vital piece of its strategy. He certainly cares about making money, noting on the call that messaging services are at about the same place that Facebook itself was in 2006 and 2007 in terms of revenue prospects. He said that monetizing WhatsApp is an "intellectual challenge" that he's looking forward to this year.

Zuckerberg also cares about building a premier Internet and mobile company. I suspect that his forays into China haven't just been overtures designed to lift the country's Facebook ban. He's too smart not to notice that one of China's biggest Internet businesses -- Tencent and its messaging app WeChat -- integrates everything from payments to games to cab-hailing apps. All of those services are built on top of a messaging and payments platform that generates revenue and keeps users locked into a convenient technology ecosystem that serves them lots of useful tools.

Whether or not Zuckerberg can engineer a structural shift akin to but more complex than Netflix's DVD-to-streaming pivot is still unclear. But Facebook should at least try to explore new businesses, possibly diversify its revenue stream and come up with ways to monetize WhatsApp (for which Zuckerberg forked over $22 billion -- an I-don't-care-what-Wall-Street-thinks-of-me move of the highest and potentially craziest order).

If seismic change at Facebook requires billions of dollars in R&D spending and lots and lots of new hires, then I hope that some of the stuff Zuckerberg tries succeeds. After all, if the alternative is simply riding the video-ad wave (which, to be sure, Facebook can ride for a while), Wall Street will be a whole lot unhappier a few years down the road.

This column does not necessarily reflect the opinion of Bloomberg View's editorial board or Bloomberg LP, its owners and investors.

To contact the editor on this story:
Timothy L. O'Brien at tobrien46@bloomberg.net