Morningstar - Fall 2019 - 19

Mastercard MA, Visa V, Uber UBER, Lyft LYFT,
and Spotify SPOT.
While the costs of Libra's development and its
blockchain are probably minimal for Facebook, we
don't think Libra will lead to a significant
improvement in the company's user monetization
during the next few years.
First, we do not expect that the revenue generated
directly from the currency or Calibra will be
material, because we think the nonfee services,
such as peer-to-peer payments, are likely to
attract users to the currency and the wallet. The
Libra Association and Facebook are initially
targeting consumers without bank accounts,
which the association's white paper says is about
1.7 billion adults worldwide.
Second, according to Facebook, data related to
transactions using Libra will not be used
to attract more targeted advertising dollars to the
company's Facebook or Instagram platforms.
Again, Libra will be monitored by the association.
While Facebook has not explicitly said this,
we think it may be able to use transaction data
from its digital wallet, Calibra. However,
it may face significant regulatory restrictions.
Third, Libra is an open-source platform, which
means other apps that compete with Calibra
are likely to be developed. Plus, the currency can
be used to make purchases or transfer
funds by Facebook users as well as non-Facebook
users. Even if Libra is adopted widely, it
is not likely to bring everyone onto Facebook's
platform or digital wallet.
In the long run, however, we think Facebook's
network effect may benefit from the possible
extensive adoption of Libra. In our view,
with its 2.4 billion users, Facebook can attract
many merchants or retailers to Calibra and,
therefore, accept payments with Libra. Because
a wider range of products and services
may become available on Facebook's Marketplace,
which already attracts nearly 1 billion users
a month, it may attract even more users.
The same can apply to Instagram and its Checkout
feature. In addition, the ease of use that
Calibra may offer could help WhatsApp and

Messenger users embrace e-commerce and
possibly even other tasks and services,
similar to what Tencent TCEHY accomplished
with WeChat.

...or Will Libra Disrupt
Financial Services?

On the advertising side, while user growth will
continue to decelerate, we think the time spent on
Facebook may increase as more transactions
may be conducted on the company's platforms.
In our view, this alone could attract more
advertising dollars.

The Libra announcement makes Facebook FB the
first major company to attempt to bring
cryptocurrency into the retail mainstream. Overall,
we are not yet worried about a negative
impact on economic moats in financial services.

In addition, if Libra is widely adopted, Facebook
(along with other association members) will
receive interest on the Libra Reserve. According to
the white paper, after using some of the interest
on those bank deposits and short-term government
securities to cover Libra Association costs,
the remaining interest will be paid to members.
While potential long-term benefits from the launch
of Libra and Calibra may be attractive, the
regulatory risks that Facebook is confronting could
prevent the company from fully realizing
the benefits. In the United States, we think news
of the Federal Trade Commission possibly
investigating Facebook over alleged antitrust
issues may affect the commission's decision about
the data privacy settlement, which according
to Facebook may require a payment of $3 billion
to $5 billion by the company. While possibly
unintentional, the FTC's move on alleged antitrust
issues, combined with the Libra news, may
reduce any influence that Facebook might have
had regarding a finalized data privacy settlement
amount. We could also see further negative
reaction from Europe. Last, while users continue
to access Facebook, Instagram, WhatsApp,
and Messenger, they may not have enough trust
in those platforms to immediately embrace
Libra and Calibra.
Ali Mogharabi is a senior equity analyst for Morningstar.

Libra will be run by a consortium, with Facebook
as the lead until the end of 2019, at which point
all members will have equal power. It will
start out as a "permissioned blockchain" with the
ambition to move toward "permissionless" over
time. Libra will be backed by a reserve, in
contrast to a cryptocurrency like Bitcoin, where
there is no fiat currency backing, which leads
to wild price swings. Facebook believes this
will keep Libra relatively stable in value, although
not 100% stable. The initial goal is to target
the unbanked market. The project is also focused
on cross-border payments, an area that has
historically been more difficult to handle from
a processing standpoint.
Any prognostications concerning Libra are
speculative at this point. It is hard to tell exactly
how this will evolve over the next five to 10
years; a lot will depend on how popular it becomes,
what the initial uptake is, and if it can reach
a critical mass of users and transactions. The initial
stages of trying to develop a network effect
are inherently uncertain, although Facebook's
existing network effect in its social media platform
may help.
In trying to disrupt the financial-services industry,
Libra will face a number of hurdles. Facebook's
initial strategy is to go after users without
a bank account or access to the existing banking
system, so this is not a direct attack on financial
services at this point. However, once the
platform gets a critical mass of users and volume,
it is not hard to imagine that it will begin to
affect users with bank accounts.
The first hurdle we see is that governments will
probably not want large amounts of transactions
going through unregulated, unmonitored,

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