Facebook was prominently featured in the news last week, though you may not have noticed because the company has changed its name to Meta in the expectation that the negative connotations linked with its original moniker will eventually disappear from public consciousness. In a similar vein, Google attempted the same ruse with Alphabet, which failed miserably.
The company’s most recent appearance at the top of the news agenda, however, had nothing to do with scandals and everything to do with its financial results, which were so unexpectedly bad that the stock dropped by 25 percent at one point, wiping $240 billion (£177 billion) off its market value and causing the Nasdaq index to fall by 2 percent.
In light of the fact that Facebook has historically been treated as if it were a licence to print money, so much so that when it was fined $5 billion by the Federal Trade Commission in 2019, its stock actually rose as Wall Street realised that the ostensibly massive fine was actually the equivalent of a fleabite on an elephant.
This time, though, was different. Why? Several factors were highlighted in reports of Mark Zuckerberg’s conference call with financial analysts: the impact of the video-sharing app TikTok; Apple’s decision to require iPhone users to consent to being tracked by advertisers; and the revelation that the previously unstoppable growth in the number of Facebook users has come to a grinding halt.
Many onlookers were perplexed by Zuckerberg’s newfound fascination with the TikTok video-sharing app. Despite what some may believe, TikTok is not a social networking site. Basically, it’s a video hosting service that stores short-form user movies from many categories such as pranks and stunts as well as tricks, jokes, dancing and entertainment. Despite the fact that it is owned by the Chinese corporation ByteDance and understood by no one over the age of 40, it has taken the world by storm. As a manifestation of Chinese cultural imperialism, it casts a negative light on President Xi Jinping’s Belt and Road Initiative.
As a result, what is it that keeps Zuckerberg awake at night? To put it simply, Facebook, with its ageing demographics (parents and grandparents), does not appear to be serving this demographic well any longer. TikTok, on the other hand, caters wonderfully to this demographic group (so-called young adults). The company’s desire to re-energize Reels (a ludicrous attempt to imitate the short-video genre) and to re-prioritise young people in its other offers can be explained by the fact that the company is targeting young adults. Although TikTok has gained widespread popularity, the company’s actual problem is that it is monopolising its users’ attention, which is where the money for surveillance capitalism comes from.
The veteran tech analyst Ben Thompson describes the situation as follows: “The problem for Meta is that its business isn’t based on surfacing content from your friends; it’s based on engagement and serving ads, which means that any service that takes up your time and attention – and TikTok takes up a lot of your time and attention – is a fundamental threat.” Facebook’s financial results were disappointing for a corporation that has been accustomed to providing extraordinary growth to investors over the past few years.
Facebook suffered a $230 billion loss in the largest one-day stock market decline in US history.
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Second, the impact of Apple’s “app-tracking transparency” (ATT) feature, which was introduced with version 14.5 of its iOS mobile operating system last year, has been a cause of concern for Facebook. As a result, iPhone users were obliged to provide explicit approval for apps to monitor them on a user and device ID basis. It should come as no surprise that users declined in droves. Additionally, the financial impact on Facebook has finally been revealed – in the shape of a $10 billion loss in advertising revenue. This represents 8.5 percent of the company’s 2021 revenues, but more importantly, it represents a quarter of the company’s overall profit for the year.
It’s understandable why investors might be prompted to reassess their stock portfolios in the wake of such results. Facebook, on the other hand, has experienced hiccups in the past and recovered. As a corporation, it possesses enormous financial and human capital resources. In the right amount of time, it may be able to discover a way to divert young folks away from TikTok while still navigating around Apple’s ATT. However, for those who take a longer-term perspective on these challenges, the most significant development is that the company’s user base appears to have plateaued. According to the results released last week, the number of daily active users has decreased by 500,000, while the number of monthly active users appears to have reached a plateau at 2.91 billion. In the event that this represents the start of a trend, it is quite significant.
Why? Essentially, it all comes down to network effects. Bob Metcalfe, the co-inventor of Ethernet, devised a “law” in 1990 that states that the value of a communications network is proportionate to the square of the number of users who are connected to the system. Because of this law, every networking system on the earth has been driven by it, and mastering it has always been the dream of company founders.
The goal was to attract customers rapidly (by not charging for services) and to build up a large enough user base that it would be extremely difficult to break into the market once it was established. Facebook achieved that point a long time ago, and if you want to get a sense of the company’s current dominance, try figuring out what the square of 2.91 billion is.
The reason why the network effect is so powerful is because as long as the number of users continues to grow, the company is riding a virtuous cycle of growth and development. The bigger the number of users it has, the greater the incentive for new customers to sign up for the service. Zuckerberg has been obsessed with increasing the number of people who use Facebook since the beginning of the company. It is for this reason that he has always turned a deaf ear to the voices of caution when the corporation has been involved in controversies or been accused of causing societal harm.
However, network effects have both positive and negative impacts. If the number of users begins to fall, the virtuous loop becomes vicious, resulting in a downward spiral that is impossible to reverse. Perhaps this is what TikTok, for example, is already doing to Facebook’s Instagram, as one example. Zuckerberg is astute enough to see that his position as master of the current universe may be a temporary one. All that stuff about “sic transit gloria” and such. This may explain why he aspires to be the ruler of the upcoming metaverse, as well.
