Home Networking company For the first time in its history, Facebook is in decline. Has the tech giant started to crumble? | John Naughton

For the first time in its history, Facebook is in decline. Has the tech giant started to crumble? | John Naughton

0

Facebook made headlines last week, although you might not realize it because it was renamed Meta in hopes that the bad vibes associated with its maiden name would gradually fade from the public memory. (Google tried the same stunt with Alphabet and that didn’t work either.)

For a change, however, Facebook’s last moment atop the news agenda had nothing to do with scandals and everything to do with its financial results, which were so startlingly bad that shares fell 25% to at one point, taking $240bn (£177bn) off its market value, sending the Nasdaq index down 2%.

Since Facebook was until now a license to print money, so much so that at some point (in 2019) when it was fined $5 billion by the Federal Trade Commission, his actions actually went at the top as Wall Street recorded the ostensibly massive fine was actually the equivalent of a chip on an elephant.

But this time it was different. Why? Three factors stood out from reports from Mark Zuckerberg’s conference call with stock analysts: the impact of TikTok; Apple’s decision to require iPhone users to consent to being tracked by advertisers; and the revelation that Facebook’s previously unstoppable user growth has stalled.

Zuckerberg’s new obsession with TikTok must have intrigued many observers. After all, TikTok is not a social network. It is a service that hosts short form user videos of genres such as pranks, stunts, tricks, jokes, dance and entertainment. It is owned by Chinese company ByteDance, not understood by anyone over 40, and has taken the world by storm. As a form of Chinese cultural imperialism, this makes Xi Jinping’s Belt and Road Initiative look amateurish.

So why does he keep Zuckerberg up at night? The answer is that TikTok brilliantly caters to a demographic – so-called young adults – that Facebook, with its aging demographics (parents and grandparents), no longer seems to serve well. This explains its zeal to reinvigorate Reels (its ridiculous attempt to emulate the short-video genre) and reprioritize young adults in its other offerings. But the real problem for Facebook is that TikTok monopolizes the account of its users Warningwhere the money for surveillance capitalism comes from.

As Ben Thompson, the veteran technology analyst, explains: “The problem for Meta is that its business is not based on streaming content from your friends; it’s engagement-based and ad-serving, which means any service that takes up your time and attention — and TikTok takes up a lot of it — is a fundamental threat.

The second source of misfortune for Facebook is the impact of Apple’s “Application Tracking Transparency” (ATT) feature, introduced last year with version 14.5 of its iOS mobile operating system. This required iPhone users to provide explicit consent for user-level, device ID-based surveillance by apps. Unsurprisingly, users declined en masse. And the impact for Facebook has now become clear – in the form of $10 billion in lost ad revenue. That’s 8.5% of the company’s revenue in 2021 but, more importantly, a quarter of its overall profit for the year.

It’s easy to see why such results might cause investors to reconsider their stock portfolios. But Facebook has already had swings and recovered. As a company, it has vast resources of money and talent. In time, he might be able to find a way to steer young adults away from TikTok and navigate around Apple’s ATT. But for anyone considering these longer-term struggles, the big story is that the company’s user base may have stopped growing. Figures released last week show that the number of daily active users fell by 500,000 and the number of monthly active users appears to have stabilized at 2.91 billion. If it’s the start of a trend, it’s really significant.

Why? Basically, it’s all about network effects. In 1990, Bob Metcalfe, the co-inventor of Ethernet, formulated a “law” that the value of a communications network is proportional to the square of the number of connected users of the system. This law has guided every networking system on the planet, and exploiting it has always been the goal of company founders.

The trick was to attract users quickly (by not charging for services) and get to the point where the number of users is large enough that it is very difficult to break into the market. Facebook reached this point a long time ago and if you want a measure of its power right now, try to figure out what the square of 2.91 billion is.

If the network effect is so powerful, it is because as long as the number of users increases, the company is in a virtuous circle. The more users there are, the more incentive new users have to sign up. Driving user growth has been Zuckerberg’s overriding obsession from the start. This is why he always listened carefully to the voices of caution when the company was the victim of scandals and accusations of causing damage to society.

But network effects work both ways. If the number of users starts to decrease, the virtuous circle suddenly becomes vicious, resulting in a downward spiral. This may be what TikTok is already doing on Facebook’s Instagram, for example. Zuckerberg is smart enough to know that his position as ruler of the current universe may be transitory. Sic transit gloria and all that. Which may explain why he plans to be the master of the upcoming Metaverse.

John Naughton chairs the advisory board of the Minderoo Center for Technology and Democracy at the University of Cambridge