Mark Zuckerberg, the Warren Buffett of technology?

By Felix Salmon
March 26, 2014

What does Mark Zuckerberg think he’s doing, spending $2 billion on Oculus? You could take him at his word — that he sees virtual reality as “a new communication platform” where “truly present” people “can share unbounded spaces and experiences”. Basically, virtual is the new mobile, and Zuckerberg wants to get in on the game early.

But note what Zuckerberg doesn’t say, as much as what he does. There’s no mention of “social”, no mention even of “Facebook”. Zuckerberg is one of the greatest product managers in history, but his legendary focus is nowhere to be seen here: it’s all big, vague, hand-waving futurism. And note too one of the quieter members of Zuckerberg’s board of directors: Donald Graham, the CEO of what used to be called the Washington Post Company, and old friend of Warren Buffett.

Buffett, of course, is the classic conglomerator: he’ll buy any business, so long as it’s good. Graham is similar: he inherited a grand media property, and added on all manner of unrelated businesses. Eventually he sold the Washington Post to Jeff Bezos, for $250 million — and is still the CEO of a company, Graham Holdings, which is worth more than $5 billion.

Is it too early to declare that Zuckerberg has ambitions to become the Warren Buffett of technology? Look at his big purchases — Instagram, WhatsApp, Oculus. None of them are likely to be integrated into the core Facebook product any time soon; none of them really make it better in any visible way. I’m sure he promised something similar to Snapchat, too.

Zuckerberg knows how short-lived products can be, on the internet: he knows that if he wants to build a company which will last decades, it’s going to have to outlast Facebook as we currently conceive it. The trick is to use Facebook’s current awesome profitability and size to acquire a portfolio of companies; as one becomes passé, the next will take over. Probably none of them will ever be as big and dominant as Facebook is today, but that’s OK: together, they can be huge.

Zuckerberg is also striking while the iron is hot. Have you noticed how your Facebook news feed is filling up with a lot of ads these days? Zuckerberg is, finally, monetizing, and he’s doing it at scale: Facebook’s net income grew from $64 million in the fourth quarter of 2012 to $523 million in the fourth quarter of 2013. At the same time, his stock — which he is aggressively using to make acquisitions — is trading at a p/e of 100. If you’re going shopping with billions of dollars in earnings multiplied by a hundred, you can buy just about anything you like.

Eventually, inevitably, Facebook (the product) will lose its current dominance. But by that point, Facebook (the company) will have so many fingers in so many pies that it might not matter. Zuckerberg, here, is hedging. Oculus might be valuable to Facebook if the social network grows. But it will be even more valuable to Facebook if the network shrinks. Zuckerberg has seen the astonishing speed with which products come and go online; he knows that his flagship won’t last forever. So he’s decided to build himself a flotilla.

23 comments

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“Zuckerberg is one of the greatest product managers in history”

What is that nonsense based on? He had a good idea, and ran with it, but beyond the original site, he hasn’t done much.

As for the comparison with Buffet, BH companies all generate revenues, not to mention profits. These companies that Facebook is buying are mostly experiments. Nothing wrong with that, but they are very expensive experiments, with each successive one outdoing the previous one in assumed risk. Oculus may be a leader in VR, but they have not spent a lot of money so far that can’t be easily matched by Apple or Google or Microsoft, and they are nowhere near a standard. It’s unlikely these companies will ever generate cumulative revenues that approach their acquisition, integration, and development costs, let alone profits that justify their costs.

Felix, you have to lay off the Zuckerberg is a genius kool-aid. Fingers in pies get messy, and a flotilla of rowboats provides no defense against obsolescence and irrelevance.

Posted by KenG_CA | Report as abusive

A big outlying question is what is the probability of successfully investing in other technologies? GM is a great example of a company that had huge cash flow and used that excess capital to invest in other businesses. The idea being that even if the main line business failed, GM would have all these profitable investments. Ultimately, poor management forced a liquidation of all the side bets in order to save the main business. McDonald’s is another example of a massively profitable company that expanded in areas tangential to their main line business (e.g. Redbox, Chipotle), but stock performance was superior when McDonald’s shed their sideline business and focused on their core. There is a managerial cost to not being focused, and that risk could very well materialize with Facebook.

A connected question is could Zuckerberg be overpaying for these investments. This is especially salient given your comparison of Zuckerberg to Buffet, whom always talks about buying business that have a large and increasing moat. Can that be said for the businesses Facebook is buying? How easy is it for another enterprise to usurp the value of the business Facebook is buying?

Posted by Tim_Walker | Report as abusive

Instagram was a defensive play — it was threatening to add to Twitter the one really useful feature Facebook has (sharing family photographs with friends). Whether it does anything useful beyond that is merely icing on the cake. WhatsApp has solid technology and a ridiculously big user base, much of it in the developing world, which naturally complements Facebook’s first world userbase. All they need to do is integrate Facebook messaging with WhatsApp and it’s a gigantic win.

Occulus makes no sense. It’s wasn’t worth $2B before Facebook bought it, and it’s worth less now. The only thing Occulus does which is novel is render distorted images in software and then reconstruct them optically in the HMD (which is brilliant). Everything else is, at best, merely incremental over existing technologies.

Posted by podperson | Report as abusive

Well said Ken G. So far M Zuckerberg mostly seems to have been in the right place at the right time.

“One for the greatest product managers in history?” That is crazy post hoc hagiography.

Posted by QCIC | Report as abusive

Zuckerberg better hope that the telepresence aspect of Oculus pays off, because this acquisition completely destroyed all of the built up goodwill and excitement that the founders built up with the gaming, tech and Kickstarter communities.

Preacquisition, I thought it was literally impossible that Oculus could take such a disappointing turn. Even if they had released subpar hardware, at least it would have been a start to a promising future. But the invasiveness of Facebook? That’s about the only thing I can think of that could make me want no part in this technology at all. And obviously I’m not the only person/software developer that feels this way. Influential developers are dropping the project in droves already, most noticeably Notch of Minecraft fame.

Posted by spectre855 | Report as abusive

KenG put it well. Anybody with billions of dollars to toss around can “earn” hundreds of millions of dollars. “Invest” in your state lottery and your ultimate value will be around 50% of what you spend. An acquisition is only wise if the ROI is positive.

But Felix also makes a point. When a mature company is trading at a P/E of 100, then you can throw away half the cash and STILL end up adding value. The threat to Zuckerberg isn’t an overpriced acquisition. The threat to Zuckerberg is the realization that Facebook’s growth phase is over — and by speculating in futuristic hype, he can hope to confuse investors a while longer.

Posted by TFF17 | Report as abusive

The title of this article made me laugh. Warren Buffett is a national treasure. No one bats 1000 when it comes to investment stately..but no one has been right more often than Warren Buffett. Care to guess how much Facebook stock Warren owns……ZERO!

Posted by xyz2055 | Report as abusive

Buffett buys businesses that make a profit- they take in more than they pay out. Zuckerberg is simply insane with “power” to spend the shareholders money without any accountability. Today, FB jumped the shark. And by this afternoon their stock did a 9% nosedive from this morning.

Posted by rvm3 | Report as abusive

Felix,

US$2B for a company that makes one product; a set of goggles for kids to play computer games?

‘Virtual Reality’, indeed.

Posted by crocodilechuck | Report as abusive

Ha! Buffett is the exact opposite of him. It never ceases to amaze me how the media buys into their own hype. First it was… “FaceBook… The next Apple”. That was funny enough. But you’d think they’d learn by now. Even in a bull market, their stock went up, what…$20? If it wasn’t for that, they’d probably still be at opening price or lower. Yeah, what a financial genius. Now he buys some overpriced, hyped companies, and he’s a genius again. I guess because it takes so much talent to buy something, when you have billions?

Expecting him to have some sort of cohesive plan, is like expecting closure at the end of “Lost”.

Posted by dd606 | Report as abusive

Dry British irony, I presume. I hope.

Because if Felix Salmon has drunk the VR kook-aid, it’s time to short everything — house, food in my cupboard, the kids, everything.

Posted by zipflash | Report as abusive

AYFKM???

Someone should wash your mouth out with soap, then force you to memorize the definition of “value investing”.

Posted by Bubbles00 | Report as abusive

#1 KenG_CA nailed it.
#2 TFF is spot on as well…

#3 thought experiment here… If I’ve read the Facebook prospectus correctly Zuck can NEVER lose control so long as he doesn’t sell his supreme voting shares. If that is really true why wouldn’t he issue like 20 billion dollars worth of new facebook shares (which will never pay a dividend in his lifetime suckers) and buy some actual boring but profitable companies. Even if he bought 20 billion worth of a company with a 20P/E that would give facebook another billion a year to literally play with. The only smart thing AOL did after going public was to have the foresight to buy a big profitable business like Time Warner with their wildly overvalued stock. Facebook should do the same!

Posted by y2kurtus | Report as abusive

Warren Buffett has more or less the exact opposite philosophy. He invests in companies that he is most sure will have solid earnings 10,20,30 years from now. It is the certainty in the long term sustainability of a company that he values most in an investment. Zuckerberg seems to be speculating on many businesses with very little certainty as to which ones will pan out, which is more like gambling, than the true investing that Buffett does.

Posted by Dave99992 | Report as abusive

I did not appreciate the satire of this article at first.

Yes, Zuckerburg as a visionary is comical….

Thank you

Posted by everyone | Report as abusive

Nope, Warren never overpays, Zuck always overpays.

Posted by ajn | Report as abusive

I would wager that Warren Buffett would never pay a ridiculous premium on a company with little to no cash flow.

All Zuckerberg is doing is spending shareholder wealth and diluting their ownership.

Posted by dmat00 | Report as abusive

New anti-trust laws with teeth and a hefty wealth tax on individuals and corporations will put an end to these ridiculous “acquisitions”. We’re in an age of technology run amok. Robots to replace people? Not if we average people have any thing to say about it.

Posted by njglea | Report as abusive

Odd that a writer working at a major publication would not know his that from his which. Essential vs. non-essential clauses.

Zuckerberg knows how short-lived products can be, on the internet: he knows that if he wants to build a company which will last decades, it’s going to have to outlast Facebook as we currently conceive it.

company THAT will last decades

also, you really don’t know that Zuck is making these decisions because you present no sources. This entire article is a glossy reach made by a guy not really plugged into Facebook at all.

Posted by crawforddojo | Report as abusive

There are essentially no examples in tech industry of this as a successful process. There are lots of failed examples from MS, Dell, HP, etc., including Google who still has no other successful product line replacing or even likely to replace search. It has a bunch of failures and a lot of “product lines” Youtube, cloud, office, chrome, android, google play, etc. They all more or less serve search and advertising.

Apple and perhaps Samsung have made the changes but not by buying other companies, Apple with major disruptive innovation and Samsung fast follower or copier.

Posted by gprovida | Report as abusive

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Posted by footprints555 | Report as abusive

Just because Warren Buffet can pick stocks doesn’t mean he has a good judge of character! He’s with Obama. He has to be senile or just stupid to involved with Obama. Maybe he’s a communist too

Posted by dispiseobama | Report as abusive

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