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How Facebook Dug Its Wide Moat

Facebook has a wide economic moat based on its 'social graph,' communications layer, and competitively advantaged platform for brands, application developers, and advertisers.

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We look at three considerations for Facebook's moat: 1) Facebook as an identity, 2) Facebook as a platform, and 3) Facebook as a destination site. Largely, Facebook's ownership and control of its user data affords it substantial competitive advantages. Within Facebook, the company continues to build a rich database of friends, actions, demographics, and applications, but it only shares the data with business partners. Third parties cannot track information that happens on the Facebook platform.

Facebook as an identity: We believe identity is the most important component of a social network (and a reason why Google+ might still create value for  Google (GOOG)). Facebook partners can easily use the company's login credentials through Facebook Connect instead of requiring users to separately register a new ID and password. This functionality is good for both Facebook and the partner, as data can be more easily shared between the companies allowing for better personalization, ad targeting, and social functionality, such as sharing. Furthermore, we have seen data suggesting that websites convert casual users into registered users twice as often after deploying Facebook Connect login functionality. This rich data set is extremely difficult to replicate. Although all partners might not benefit, we believe Facebook has an early and sustainable advantage here.

Rick Summer does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.