Facebook and the Cloud Bust

NEW YORK (TheStreet) -- Having covered technology since 1982, I have learned that it's a gold rush. It's subject to booms and busts. The survivors are those who understand, during the boom, the long game of getting through the bust.

Facebook (FB) CEO Mark Zuckerberg is playing that long game. He believes the key to surviving the next bust is having enough traffic to fill his company's clouds, while having enough cloud capacity to compete with other expected survivors such as Google (GOOG) and Amazon  (AMZN).

Seen through that prism, Facebook's acquisition of WhatsApp, a mobile-messaging provider, was less a stroke of brilliance than a savvy survival tactic.

The deal, for $19 billion in stock and cash, puts Facebook in the global messaging business and can drive new cloud investment.

That investment is definitely coming. During 2013, Facebook had capital expenditures of $1.36 billion, according to CSI Markets. Sounds big, but it's less than what Google spent in either of the last two quarters, and less than half of what Amazon spent over the year. 

Facebook is making up the difference through its Open Compute Project, an effort to get major hardware players on board with a single, compatible cloud structure, the same structure it's using in its own operations. When the cloud boom busts, Facebook hopes it can rent capacity its rivals have to shutter.

The other side of this strategy involves filling clouds with profitable business. Google does that through search and other services related to search. Amazon does it through commerce and through capacity rentals.

Facebook has decided to compete on the revenue side by building a collection of big communications services. WhatsApp will be run independently of the main company, just as Instagram is run, driving its own business model rather than having Facebook's ad-based model bolted on to it.

WhatsApp charges second-year users 99 cents per year for its service. (It's free the first year.) Bullish analysts think the price can be raised, bringing in an extra $1 billion per year or more for each dollar increase. Instagram, like Facebook, runs on an ad-based business model, and integrating its ads with Facebook's ad system scales it. The system can also, in time, be applied to WhatsApp.

Mark Zuckerberg turns 30 in May, and so the Internet commerce history I lived through as an adult in the 1990s, he lived through during his high school years. He was in middle school when the boom started, 16 when the bust began and graduating high school amid the wreckage.

What we saw was that companies that survived the crash, such as Amazon and Priceline (PCLN), had scalable ways of continuing to extract cash from users -- goods and travel -- as well as the cost flexibility to stay in the game through the early 2000s.

That's the game Zuckerberg is playing now. I believe he has his eyes firmly on the next Internet bust.

The game is not about how much money Mark Zuckerberg's worth today, any more than it was about how much Bill Gates was worth in 1989 or Steve Jobs was worth in 2007. It's about how viable Zuckerberg can make Facebook on both the cost side and the revenue side, and how big the company is after the cloud boom turns to bust. You don't count your money until the dealing is done.

When you're 30, facing rivals who are roughly 40 (Google's Larry Page) and 50 (Amazon's Jeff Bezos) you are playing a long game, but also a small game. This game is about having a viable cloud business model after the current construction boom exceeds what customers can use.

When that happens, will Facebook be able to generate sufficient cash flow and have a flexible enough cost structure to remain viable and get new assets cheaply, as Google did with its dark fiber in the early 2000s? WhatsApp is about creating that cash flow, the Open Compute Project about creating that flexibility.

Investors putting money into Facebook today are putting their money on the jockey, Zuckerberg, and his vision of the cloud bust.

At the time of publication, the author owned shares of Google.

This article represents the opinion of a contributor and not necessarily that of TheStreet or its editorial staff.

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