They say that the internet is the great leveler. The World Wide Web evens up the playing field, as the world is just a click away from your digital door. Thankfully for investors things don’t always play out that way. There are plenty of dot-com centric speedsters that have major advantages over the competition.
Netflix (NASDAQ:NFLX), Twilio (NYSE:TWLO), and Facebook (NASDAQ:FB) dominate the fields of premium video streaming, in-app communications solutions, and social networking, respectively. They have rewarded investors over the years, eating up the naysayers that have underestimated the size of their moats. Let’s go over the killer advantages that Netflix, Twilio, and Facebook are exploiting with great success.
It seems as if every single internet, telco, and media giant has its sights set on streaming video content, but no one dominates the premium market the way that Netflix does. Netflix added 5.1 million net additions during the second quarter, and while that news disappointed investors as it fell short of Netflix’s earlier guidance, you aren’t going to find another company adding 5.1 million paying customers to its stand-alone premium service this year. Netflix is coming off of back-to-back quarters of better than 40% growth as it grows its subscriber base and milks more revenue out of the average member.
The advantage here is that Netflix can spread its content costs across more paid users than anyone else. Netflix had 130.1 million total subscribers by the end of June, and more importantly 124.4 million of them are paying members. Rivals with millions or even tens of millions of paying users can’t afford the roughly $8 billion that Netflix will invest in new programming this year. Content matters, and as Netflix widens the subscriber gap the content catalog will follow.
Twilio isn’t a household name like Netflix, but that doesn’t make it any less of a beast in the narrower niche that it dominates. Twilio is the leading provider of in-app communication solutions. The next time you need to reset your Netflix password or have your Uber or Lyft driver call you to let you know that you’re not waiting at the right corner you can thank Twilio for enhancing your experience without having to leave a developer’s app. Twilio’s rocking, and not just because its stock price has more than doubled this year. Revenue soared 48% in its first quarter, and it should come through with another strong report when it announces its second-quarter financials next week.
The major advantage here is that Twilio is a niche pioneer and darling in an industry where the switching costs are high. Most of the leading developers use Twilio. There may be cheaper solutions out there, but hot apps aren’t likely to risk any fall-off by going with less proven players to shave expenses. Twilio isn’t immune. It took a hit last year as Uber and Lyft began outsourcing some in-app features to Twilio rivals. However, with Twilio’s active customer count growing nicely — up 33% in the first quarter — and revenue per user moving higher, it’s proof that you can find sustainable moats even in cutthroat business services.
It may seem like lousy timing to sing Facebook’s praises. The stock got rocked last week after posting disappointing financial results. Investors are freaking out that European active users are declining. Flat daily active users closer to home also didn’t help. Lost in the tumble is that revenue still grew at an impressive 42% clip in the period.
Facebook’s secret weapon is scale and information. Don’t underestimate a platform that attracts 2.23 billion monthly active users and 1.47 billion daily active users. Folks go to Facebook because it’s where the family, friends, and co-workers are. This is the networking effect at its extreme setting. Some may argue that younger users are flocking to Instagram as their visual-centric social platform of choice or leaning on WhatsApp for bare-bones communications, but Facebook owns those sites, too.
Additionally, Facebook has years of data, a selling point that also applies to Netflix. No one knows usage trends better than Netflix when it comes to video and Facebook when we’re talking about nearly everything else. Having this kind of information can backfire, as it did last year when Facebook got caught in the cookie jar. However, information is gold that can be monetized — and these companies are doing exactly that. The internet is the great leveler, but sometimes it’s the advantaged leaders that are playing on a different level.