👍Facebook's 3 woes and why only 1 of them is existential

#127 | The Meta Drop!

Aditi Chaturvedi

Feb 06, 2022

Hello Folks 👋,

Welcome to Wisdom Letter #127.

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The topic is Meta’s stock crash earlier this week.

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“The biggest risk is not taking any risk...
..In a world that’s changing really quickly, the only strategy that is guaranteed to fail is not taking risks.”
-Mark Zuckerberg

🤔 What

Meta, Facebook’s parent company, saw a massive drop of $200Bn in market capitalization after it shared its quarterly results this Wednesday (2nd February 2022).

It was the worst drop ever in the history of US stock markets.

The company’s own outlook for the future is gloomier than what analysts had expected.

3 factors impact Meta’s negative outlook:

The metaverse project reported losses worth $10Bn in 2021. These losses will grow as the company doubles down on this project. It could take as long as a decade to see any returns from this.
Inability to show personalized ads on Apple devices because of Apple’s new privacy policy.
The number of users dropped for the first time in the history of the company. It is facing stiff competition from TikTok.

💡Why it matters

The Meta “family of apps” (Facebook, Instagram, Whatsapp, and Messenger) is the biggest influencer in the world.

They impact how we spend our time, attention, and money online.

Hence, they also impact where other businesses spend their advertising dollars.

Change in the company’s direction can shape how and where the tech industry moves from here.

And in the longer term, where society moves from here.

💎 What you need to know

#1 This has happened before

This is not the first time that Facebook has seen this massive erosion of market cap. It happened in 2018 after the Cambridge Analytica debacle.

But the company recovered from it within months and has posted solid QoQ earnings every since.

This time 3 big problems are hitting Meta all at once.

Also, each of these will take a long time for the company to deal with - time that Wall Street is uncomfortable in giving.

#2 A bet on the Metaverse

The metaverse is a space that Facebook is most bullish on. Its rebranding exercise is an exhibit of its vision for years to come.

Other players (Amazon, Microsoft, Disney) have similar bets in the virtual reality space, but it’s not core to their business.

For Meta, this bet is now directly linked to its existence.

#3 Feud with Apple

With Apple’s new privacy policy, users can now choose if they want to be tracked across apps or not.

In absence of cross-app tracking, delivering personalized ads become difficult.

Users may still see the ad and make the purchase under the influence of the ad, but the advertiser wouldn’t know if the ad led to the purchase.

This affects Facebook’s bottom line.

Facebook will have to invest time and resources in developing machine learning models to solve this attribution problem.

Another problem with no short-term solution.

#4 Declining Users

For the first time in the history of Facebook, its users are declining.

With already 2.9 Billion Monthly Active Users, saturation was imminent. But users going to competitors is a bigger problem.

Especially like TikTok which is fundamentally a different product and a different business model.

So this problem is more dangerous than the other two.

Getting back a churned user is more difficult than getting new users.

Because of TikTok, Facebook has been forced to focus on getting young adults into its family of Apps. Rather than focus on a broader target market - “everybody in the world”!

This would mean significant changes in Facebook’s core products like the News Feed, which has been the primary source of revenue so far.

The newer modes of engagement like reels and stories are yet to mature for optimum monetization.

Urgent product level changes will be required to solve this one.

🔮 Predictions

#1 Community-led interactions are the dark horse in the social network battles.

Users who move away from Facebook to Tiktok, have an unmet need for social interaction. This gap is now filled by players like Discord and Telegram. We will see their dominance increase with time.

That’s another serious challenge to Meta, but it’s being overlooked in the current discourse.

#2 Facebook will have an edge in a cookieless world

With Apple taking a strict stance on privacy, there's pressure on Google to follow suit. It plans to phase out its current cookie technology that it uses to show targeted ads.

In a cookieless world, companies like Facebook and Google will have an edge over everyone else because of all the data they have already collected.

The fact that Facebook is being forced to initiate machine learning research to display targeted ads will turn into an advantage for the company in the long term.

Advertisers will return to Facebook because of its technology moat.