What’s Facebook’s problem?

For years, Facebook has been the darling of the tech and media worlds. Is the inevitable conclusion of its latest quarterly report that its star is fading?

The unstoppable rise of Facebook – until now

For many years, Facebook seemed unstoppable, unbeatable. Since its beginnings in Mark Zuckerberg’s dorm room in Harvard University, it has grown into a technology behemoth with 1.47 billion daily active users and 2.23 billion monthly active users. Facebook has very efficiently monetised these users’ data, with advertisers flocking to Facebook and contributing to a company value of over $500 billion, and to Zuckerberg’s personal fortune of around $70 billion. But it is Facebook’s handling of its users’ data that seems to be at the root of its recent reversal in fortune.

What went wrong?

Facebook’s sheen started dimming two years ago, when it was first implicated in fake news and political meddling. This didn’t seem to have any impact financially until its second quarter 2018 report last week, which made for painful reading for its investors. The report disclosed that the number of users in Europe dropped by 3 million, ending its nine-year streak of quarter-on-quarter growth in numbers of European users (note that this was for Facebook only, and not its other owned properties such as Instagram, WhatsApp and Oculus), and user growth in North America flattened. It gained just 22 million users worldwide in quarter 2 (largely in Asia), less than half of the quarter 1 figure. Worse, in the eyes of investors, was that it missed revenue forecasts for the quarter, bringing in $13.2 billion versus the $13.4 billion that analysts had projected. All this led to $120 billion being drained from Facebook’s value and a 20% decrease in stock price in after-hours trading on Wall Street, as investors were spooked further by Facebook’s predictions that its revenue growth would continue to decelerate.

Scandals, data, addiction and saturation

With the problems that have beset Facebook over the last few years, it was perhaps inevitable that this point would come. The first and perhaps most serious headaches for its leadership have been the twin issues of political interference – notably in the US presidential election and the UK’s Brexit referendum – and fake news. This culminated in the Cambridge Analytica scandal of earlier this year. Facebook was fined $656,000 – the maximum possible – for breaching UK data protection act, but has had to spend much more to offset the negative press. It exacerbated Facebook’s increasingly toxic reputation as a company that interferes in and affects society and politics, and it is likely that many users deleted their accounts in disgust, particularly in the UK where Cambridge Analytica was based.

Another challenge for Facebook this year has been the implementation of GDPR in the EU, which set guidelines for the collection and processing of the personal information of individuals within the European Union. It is believed that GDPR was directly responsible for the loss of 1 million of Facebook’s monthly active users in the EU, with many possibly choosing to opt out instead of confirming assent to Facebook’s new data collection practices.

Facebook, as with all media largely consumed via mobile phones, has of course been affected by the growing concern among consumers of the effect that spending a lot of time on smartphones and social media is having on their mental health and concentration. Across the world people are choosing to cut down on the amount of time they spend on their phones.

Scandals, data protection and switching off aside, it may be that saturation is Facebook’s most serious long-term issue. Of the 3.5 billion internet users globally, 2.5 billion use at least on Facebook app, which means that user growth in many places, especially in mature markets, has naturally stagnated – there simply aren’t many people who don’t use Facebook, at least occasionally. This means that the business model must focus on increasing revenue per user, which Facebook has struggled with – newer initiatives such as Stories (Facebook’s answer to Snapchat) have proven difficult to monetise compared to the Newsfeed. And compared to Google’s parent company Alphabet, Facebook appears to be over-reliant on ad revenue: $13 billion – over 98% of its overall second quarter revenue of $13.2 billion – was from advertising, compared to 86% of Alphabet’s. This is thanks to Alphabet’s more diversified product offering, which includes hardware, the Google Play Store and Cloud services that are non-ad revenue. This discrepancy could be part of the reason that Google appears more resilient than Facebook, despite the fact that its record isn’t squeaky clean either.

All is not as gloomy as it seems

Despite the recent doom and gloom around Facebook’s latest financial reporting, the future isn’t too bleak for the social network. While the financial and user growth figures didn’t meet investors’ expectations, they’re still extremely healthy, particularly considering the storms that it has had to weather. The furore around its Q2 report is rooted in the fact that its growth has slowed, rather than in any actual crisis. Facebook has announced that it is investing billions into safety and security initiatives; these will future-proof the company but do eat into profit margins in the shorter term. Perhaps Facebook’s real problem is that it has been the subject of – and purveyor of – too much optimism and exuberance in recent years: it’s now time for it to settle down and accept its responsibilities as one of the world’s major technology companies.

Thumbnail image: Wachiwit/Shutterstock.com 

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