The two faces of Facebook
Facebook has always had two faces. One is the sad smiley face of a company that many people, especially politicians, profess to hate.
President Joe Biden recently accused the social media giant of "killing people" by spreading misinformation about covid-19 vaccines. (The president later backtracked a bit after Facebook said it had done a lot to stop the spread of such content and to promote helpful vaccine advice.)
The other is the happy face of a company that users, advertisers and investors cannot do without. The smiley is even more smiling since last July 28, when Facebook presented its second quarter results.
Revenue jumped 56% over the year to $29 billion – despite Apple updating the iPhone operating system in April to allow users to deny tracking to apps like Facebook.
Over a trillion
The second-quarter result puts it on track to surpass $100 billion in sales in 2021. Quarterly net income reached $10,4 billion, double the year before.
Despite a stock float following close of trading after announcements of slowing sales growth in coming quarters, Facebook appears to have become a permanent member in the exclusive club of companies with a market capitalization of more than a trillion dollars.
How can a company with such a reputation be so successful? The answer to this question also has two sides. With 2,9 billion daily users, Facebook's main propositions – the flagship social network (known internally as Blue), photo sharing on Instagram and messaging on WhatsApp and Messenger – are a sort of digital magnifying glass of the human nature.
This lens magnifies the good (for example, helping neighbors in the midst of the pandemic) as well as the bad (conspiracy theories or charlatan "cures"). It also serves as an important filter for advertisers to focus on the preferences of consumers around the world.
And bifrontality will likely become more marked if Facebook succeeds in its greatest project: to create a "metaverse" that combines a digital 3D world with the physical one that is already 3D.
A giant advertising machine
Essentially Facebook is a giant advertising machine. Advertisements generate 98% of revenue. Blue is the dominant international advertising platform, raking in $2020 billion in 55, according to estimates by KeyBanc Capital Markets, an investment firm (Facebook doesn't break down results by service).
Instagram, which Facebook bought in 2012 for $1 billion, now totals another $20 billion or more. Its share of overall advertising revenue has risen to nearly 30%, from just over 10% in 2017.
According to Debra Aho Williamson of eMarketer, a data provider, Facebook's ability to target ads is "incredibly accurate." Advertisers really appreciate this precision: Facebook earns $8 a quarter for each of its users, almost double that of Twitter.
Even the Chinese buy advertising from Blue
The company tracks users not only of its services, but also of almost all online activity. This allows you to determine which products to offer to a particular user, identify others with similar interests and verify whether or not the ad generates a purchase.
Even before the pandemic, this was something impossible to replicate for small businesses – who make up the majority of Facebook's 10 million advertisers – with limited resources to execute sophisticated marketing operations, but also for large global brands.
Chinese businesses are also spending billions of dollars on Facebook, says Brian Wieser of GroupM, which places advertising on behalf of big brands.
Facebook applications are banned in China, but Chinese merchants can advertise their wares to Western consumers thanks to companies like Wish, a US online marketplace that helps manage ads, payments and shipping.
The turbo of Covid
Covid-19 has put the turbo into the Facebook machine. Quarantined American adults spent an average of nearly 35 minutes a day on Blue in 2020, according to eMarketer, two minutes more than the year before.
This equals more than 10.000 years of collective attention. While some companies went bankrupt or slashed advertising spending during last year's recession, others have sprung up: 6,6 million in America alone since the start of the pandemic.
Many aim to get more attention. Running an online consumer business without targeted ads is unthinkable today, just as it once would have been impossible to run a business without a publicly visible storefront, says Mark Shmulik of Bernstein, a broker.
The largest chunk of these companies' advertising budgets will be spent on Facebook and the other ad-tech giant, Google, he says. The people in the ads call it "the new rental."
Facebook has added more than 2 million "renters" in the last 15 months. It will add more as economies reopen and digital advertising, which now makes up 60 percent of America's total ad spending, continues to take resources away from older media.
iPhone user opt-out
In the current quarter; Facebook has reported that it has observed a "significant impact" of Apple users' opt-out on tracking.
Flurry, a data company, estimates that four out of five iPhone users have opted out of tracking. While this makes Facebook's targeting a little less effective, it will still be a penalty that will hit competitors as well, predicts Mark Mahaney of Evercore ISI, an investment bank.
And even though the US antitrust agency was given three more weeks on July 23 to resubmit its antitrust lawsuit against Facebook, which it dismissed last month due to lack of evidence, it won't be easy to prove that Facebook is a social-networking monopolist under current competition law.
With all the anti-tech trumpeting in Washington, the law is unlikely to change as long as Congress remains so polarized.
The biggest threat
The biggest threat to Facebook's prospects, the one that most worries Mark Zuckerberg, its co-founder and boss, is that the people of the network get tired of its applications and move elsewhere, dragging advertisers with them. In the last couple of years, a new generation of social media has emerged that poses this very threat.
While Facebook's share of US digital advertising has continued to grow, its share of global social media advertising has been declining since 2016.
The competitors are many and diversified: they range from specialized services such as Clubhouse and Discord, two audio-chat proposals, to Snapchat and TikTok, which aim more directly at Blue users and above all Instagram.
TikTok fans in America spend more than 21 hours a month on the video app, compared to less than 18 hours users spend on Blue, according to findings by App Annie, a market research firm.
In the past, Facebook could have bought smaller rivals, as it did with Instagram. With the antitrust supervising, it is instead heading towards big bets.
Bet #1: the creator economy
The first is on the "creator economy", where people make money with digital works. This is an extension of his advertising business, but it has lagged behind.
TikTok and YouTube, in particular, have been the best at attracting artists who keep users glued to their offerings. In April, Facebook said it was developing new audio features, including Clubhouse-like chat rooms where attendees can make suggestions to artists.
In June he launched French Newsletter, a newsletter hosting service similar to Substacks, which made this type of publication popular.
This month Zuckerberg promised creators a pool of cash on Blue and Instagram with $XNUMX billion in hand by the end of next year.
Bet #2: e-commerce
Facebook's second bet goes beyond advertising aimed at e-commerce. It aims at real e-commerce. FB already hosts 1,2 million online stores on Blue and Instagram.
This puts FB almost on the same level as Shopify, a fast-growing rival to Amazon, which has 1,7 million businesses.
A month ago, Facebook introduced a new way for clothing shoppers to virtually try on clothes.
It also intends to link the “Shops” offer with “Marketplace”, its existing peer-to-peer exchange service, and WhatsApp, which it wants to transform into a vehicle for chat-based “conversational commerce”, the latest novelty in online shopping. Later this year wants to phase in diem, its controversial cryptocurrency, which would strengthen its payments infrastructure.
Facebook has for now waived commissions on sales, but these could be worth a few billion dollars in sales as early as next year. In addition to bringing in non-ad revenue, an ecommerce business would also help the company with its tracking problem.
As shoppers spend more time and leave more data on an ecommerce platform, the inability to follow them elsewhere on the web becomes less important. Shmulik expects e-commerce to fragment into such gated marketplaces, each of which combines shopping and advertising, and is run by a tech giant.
The Biggest Bet: The Metaverse
However, Zuckerberg's biggest bet concerns the metaverse. When in 2014 he spent 2 billion dollars to buy Oculus, a maker of virtual reality (VR) equipment, many thought they were buying a toy.
But in recent years, Facebook has made other acquisitions in the field of providing VR services. Recently bought Big Box VR, which developed “Population: One”, a “shooter” game similar to “Fortnite”.
This gives Facebook control of a hardware VR and "augmented reality" (AR) platform, which hands users digital information by probing the real world through smart glasses and similar devices.
As with e-commerce, part of Facebook's rationale may be to reduce its dependence on the whims of hardware makers like Apple. The potential benefit is great.
Sales of Oculus headsets contributed about $1 billion to Facebook's revenue last year. If technology continues to improve, VR and AR are the obvious next phase of the gaming business, which has matured into an industry with a global revenue of $180 billion.
Metamorphosis
Zuckerberg's ambitions, however, do not stop there. Now there's the metaverse, which already has its own division within the company. For now, it's just a place to enjoy games or other immersive entertainment.
Zuckerberg, on the other hand, imagines it as a virtual space where people live and work, a dream that geeks have cultivated since 1992, when the term "metaverse" was coined by Neal Stephenson, a science fiction author.
In five years, Zuckerberg said, Facebook will no longer be primarily a social media company but a metaverse company.
This would make Facebook cool again. It would strengthen the initiatives of those concerned about the power of the company. If users start spending 35 hours a week immersed in the virtual world of the metaverse, rather than 35 minutes a day on Facebook, this could lead to really big regulation. For now, the metaverse is fueling what Zuckerberg fears most: competition.
Others are evaluating new technology, from video game companies like Roblox and Epic Games, to other tech giants. Apple is said to be designing its own AR glasses; Microsoft already sells AR glasses. If Facebook beats them in metaverse supremacy, it will have a lot to smile about. Otherwise, instead of cute smileys we will see angry faces.
From “The Economist”, July 31, 2021
