Things Will Get Worse for Facebook Before They Get Better. A Second Act Is Required.
Our thesis is simple. User growth has slowed and in the recent June quarter declined. We expect this trend to continue in the near-term as the following factors negatively impact Facebook’s business.
Declines in User Trust and Engagement: The Cambridge Analytica fiasco coupled with the recent September data breach impairs user “trust” and almost certainly will negatively impact user engagement and net user growth. This trust factor is far more important to the company’s fundamentals than any short-term impact to FB’s user numbers caused by the company’s purge of bogus accounts and accounts owned by political actors.
Ad Fraud: speaking from experience Facebook’s ad effort is hardly a can’t miss experience. “Interested Users” aren’t always who they self-report to be and this genie is now out of the bottle. Small business owners have been “in the know” for some time and as a result put little faith in the integrity of Facebook’s ad platform. Fortune 500 companies are now privy to the issue. This translates to Facebook having less leverage when negotiating ad rates with enterprise buyers.
Instagram Founders Out: The founders of Facebook’s crown jewel Instagram left the company. I’m not privy to how much of this may have been earnout-related, but reports suggest that Systrom and Krieger’s leaving Facebook was more about Zuckerberg becoming increasingly hands-on at Instagram. The risk here is that Instagram’s success may cause its downfall. We’ve seen this movie before where a product line or service does well only to capture the c-suite’s attention to where the CEO invariably meddles and impairs the value prop. I can envision a scenario where Zuckerberg overloads Instagram with intrusive ads thereby negatively affecting the user experience and causing user engagement to drop, user growth to slow and/or go negative, ultimately reinforcing ad buyers’ leverage over the company. Our recent CEORater podcast on the subject: Ep. 213: Instagram’s Founders Are Out and It’s A Big Deal
Regulation: Increased regulation will likely come to pass as Facebook, Google and others struggle to secure PII data. Amazon has yet to suffer a large-scale data breach but has its own issues with bogus product reviews.
Decreased Negotiating Leverage: These various elements in the aggregate are a significant negative to Facebook when sitting at the negotiating table with ad buyers. Couple this with the fact that Amazon is establishing itself as a clear number three in the online ad world behind Facebook and Google.
Time for Phase II
Our Conclusion: Facebook will be required to give users a new reason to engage. Phase I of the social media phenomenon – the connectivity phase – has largely run its course. We’re now in Phase II – the content phase – where the large technology platform companies will have to provide unique content to retain and attract new users. Netflix expects to invest approximately $8 billion during 2018 in original content. Apple (A $billion loss leader), Amazon, YouTube (YouTube has acquiesced) and Facebook each expect to invest approximately $1 billion over the same period. By this measure Facebook is not the aggressor. One should question whether Facebook can become an original content leader (including AR and VR content). Second, if so, can Facebook do so quickly enough to offset deterioration in its business associated with Phase I? Our educated guess is things will get worse for Facebook before they get better.
Our recent CEORater podcast: Ep. 217: Facebook Needs to Do More to Engage Users. Original Content May Be the Answer.