“I’m not sure there’s a core business that works anymore at Facebook”
That is a quote from an analyst at investment bank Needham that covers the Facebook stock. And it’s a big call. Facebook, well now Meta, still operates some of the biggest online platforms in the world – Instagram alone is certainly a business to be admired. But the sentiment of the quote is shared amongst more and more of the investment community these days – can Meta figure it out?
The company’s problems are mounting. The ad business has been challenged by Apple’s iOS changes. Their users are being taken by TikTok. The metaverse bet has been criticised. Both sides of American politics think it should be broken up. (A side note: it is fascinating to see how differently Meta is discussed in political and financial circles – in the former it is an all-powerful monopolist, in the later it is a has-been with a failing business model. The truth, as with all things, is somewhere in the middle).
The fact of the matter is Meta is one of the most powerful businesses of our lifetime, with serious, existential threats at its door. The company has lost two-thirds of its share market value since September last year and is the 5th worst performing stock of the S&P 500 this year.
Social platforms like Facebook grow with network effects (the value of the network becomes more valuable to each existing user as each new user is added). But they can also fall into a death spiral as these network effects break down. As users leave the platform, users that stay on the platform have a worse experience (where did all my friends go?) and so then it makes it more likely that they will leave the platform as well.
And that is Facebook’s biggest challenge today. It is still an insanely profitable company – bringing in $6.7 billion in profit in the most recent quarter (that was down 36% from the same time last year, but still there aren’t many more profitable companies on earth). But those profits are needed to fund Zuckerberg’s long term dream of building the metaverse. To get there, his team need to right the ship and rebuild the network effects his social platforms have started to lose.
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