It is important to remember that although Facebook has managed to lift the amount it makes through advertising by double digit percentages when user growth and engagement is starting to drop-off, the two are interlinked. Engagement drives advertising and if this is to worsen going forward then investors will be concerned that lower usage will eventually drip-down to its core advertising revenue further down the line. With investors preparing for tighter margins and lower profits, a decline in revenue may prove too much for some to cope with. Facebook is expecting revenue growth in the second half of 2018 to “decline by high single digit percentages”, suggesting growth will go from over 42% in the most recent quarter to somewhere closer to over 20% to 25%.
But the trend of rising profit will come to an end over the next couple of years as Facebook expects margins to tighten from 44% in the second quarter to somewhere in the mid-30’s over the next two or so years.
Facebook yet to see full effect of GDPR on European operations
‘GDPR was an important moment for our industry. We did see a decline in monthly actives in Europe - down by about one million people as a result,’– Facebook
The introduction of GDPR is proving to be a test for businesses both big and small. Facebook refused to provide an outlook for Europe for the rest of the year, considering that GDPR hadn’t even been fully rolled-out in Q2 and still had a notable effect, replying ‘we're not providing any guidance on MAU and DAU in Europe on this call’ when asked for some estimates by analysts following the results.
The company has tried to place a positive spin on the matter, claiming that it will help to make adverts more relevant and therefore better for both advertisers and users. Facebook said the ‘vast majority of users had chosen to opt in to data collection, including allowing Facebook to track other websites they visited’ after it had revisited its privacy and data policies following the data leak, implying the effect on Facebook’s reputation has not been as damaged by the scandal as first expected. This is a huge win for the company as its success is based on accessing data.
Still, while GDPR ‘has not had a significant revenue impact’ as of yet it still represents a risk that Facebook will watch closely, with clients still figuring out how to respond and what the real implications are. Looking forward, GDPR is expected to have a modest impact on revenue growth, and apart from having to overcome that hurdle, the company is otherwise ‘feeling good about Europe.’
Facebook pressures margins to invest in longer-term growth
The other prong pressuring margins is Facebook’s higher levels of spending. Expenses this year will be 50% to 60% higher than 2017, with costs to officially start rising at a faster pace than revenue in 2019.
Facebook has had little option to up its spending in order to clean-up the mess of the data scandal. Hiring new moderators and other staff helped push its total full-time employee headcount to over 30,000 by the end of June – nearly 50% more than a year ago.
Its efforts to bring more automation to help speed up its efforts also means it needs more computing capacity, requiring investment in new datacentres and infrastructure. Facebook has to start effectively automating its business if it is to have a chance of getting a grip on the billions of bits of information that flood onto the platform every day, in addition to handling the hyper-growth being seen in its messaging services. A company like Facebook having to rely so heavily on human monitoring is absurd.
Speculation began to emerge that Facebook was considering making a move into the cloud-computing space, currently dominated by companies like Amazon, Microsoft and Alphabet’s Google, because the size of the investment seems huge. Facebook started to build its own data centres in 2011 and has only opened six since, but it now has another six in construction and is working on a further eight.
Zuckerberg himself confirmed the company has no plans to enter cloud-computing. Facebook says it needs vastly more capacity as it continues to invest in the likes of artificial intelligence (AI), virtual reality (VR) and augmented reality (AR). Facebook plans to start looking beyond apps during the next decade, starting with AI and followed by VR (remembering it bought Oculus for $2 billion in 2014). Returns from heavily investing in these areas will be a long time coming, but Facebook says investments in the likes of AR and VR are ‘really about building the next generation of computing and that's got a longer-term return window’.
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The investment in data centres, infrastructure and office facilities for its significantly larger employee base will see Facebook spend a total of $15 billion in capital expenditure this year, with the intention of raising the budget beyond 2018.
Facebook shares suffer biggest one-day fall in US corporate history
Facebook’s valuation had steadily grown to sit at about $535 billion before reports concerning Cambridge Analytica started to emerge. The fallout resulted in 17% being knocked off its value to $444 billion by late March, its lowest level in nine months, before gaining momentum to reach an all-time high valuing Facebook at $628 billion.
But the wane in optimism behind Facebook’s guidance erased most of its recent gains. The results knocked $119 billion off Facebook’s value on July 26 alone, to $509 billion – the biggest fall in a single day by any company in US corporate history, overtaking the previous title holder Intel, which lost nearly $91 billion on 22 September 2000. Facebook shares have since fallen below the $500 billion threshold.
Facebook has huge clean up mission following Cambridge Analytica scandal
Facebook’s wider practices have been shoved into the spotlight since it became known that some third party app developers were using Facebook as a portal to harvest personal data on users, potentially letting our personal information be used for illegitimate gain and scratching at the surface of what is likely to be a substantial market that is both surviving and thriving by using our information.
Understandably, Facebook is under investigation across multiple jurisdictions following the leak, and embroiled in everything from the investigation into alleged interference by Russia in the US elections to the rise of fake news used during the UK’s Brexit referendum.
It has been understood from the beginning that Cambridge Analytica was only the start of what would be a long and likely drawn-out process to properly uncover the issues with how Facebook handles and shares the heaps of personal data it has on its billions of users around the world.
You would think that this points to a prolonged period of downside for Facebook as sentiment turns sour as each new leak or dodgy client is identified, but Zuckerberg and his team have the opportunity to do the complete opposite if they can deliver tangible progress that not only allay customer’s concerns about how their data is being handled but that of regulators, which will be poking Facebook for years to come.
And the company is starting to deliver that. It has suspended several data analytics firms this year as it investigates whether any have broken its data and privacy policies and whether there is any risk that companies have extracted consumer data to either store somewhere else or, worse, sold on to another party.
Facebook has opportunity to turn data scandal into opportunity
Facebook’s most recent update revealed it has closed 32 pages and accounts on Facebook and Instagram for being involved in ‘coordinated inauthentic behaviour’. The firm said that almost 300,000 people followed one of the accounts, which looked to encourage division by organising counter events with the aim of encouraging potentially violent protests and clashes. The group of pages and accounts paid $11,000 to run around 150 ads over a 15-month period.
Facebook has not yet found the culprits, but said they ‘went to much greater lengths to obscure their true identities than the Russian-based Internet Research Agency’, which it previously revealed had tried to create division among voters during the 2016 US presidential election.
Tackling the misuse of advertising by overseas businesses will not be easy, but it has introduced new measures such as a ‘new system to verify political advertisers’, and started to require any political adverts to clearly show what they are and who paid for them.
There is still a lot for the company and the rest of us to discover about the scale and implications of our data leaking out of Facebook, but it has started to make tangible progress with both customers (new privacy agreements and a big marketing effort to make sure everyone knows misusing data isn’t right) and regulators (by shutting them down before any considerable harm was done). In addition, any suggestions of election interference by Russia or any other country helps take the spotlight off Facebook and back onto the tumultuous political stage. It’s better for Facebook to address (or at least portray that it is) the matter and to be more transparent than go into hiding.
Governments worldwide investigate Facebook but concerns lie in US
Facebook is co-operating with multiple investigations in the UK and Europe but it has shown it is more concerned with matters in the US. It was not the first time calls were made for Facebook’s founder to be hauled in front of politicians, but while Zuckerberg made a landmark ten hour testimony to Congress, he has so far refused to do the same in Europe, sending senior representatives on his behalf. This is because Cambridge Analytica provided data-mining services to US President Donald Trump’s presidential campaign, embroiling Facebook in Robert Mueller’s investigation into Russian interference in the 2016 election. In addition, it has been proven time and time again that US regulators have a much bigger bite than their European counterparts, or at least a bigger appetite to use it. However, the EU’s record $5 billion fine against Google for breaking anti-trust laws with its Android operating system suggests otherwise.
Several US departments have been probing Facebook over the last couple of years. The Securities and Exchange Commission was the latest to open up an investigation to look at how the company disclosed information about the Cambridge Analytica scandal to the market, joining the Justice Department, Federal Trade Commission (FTC) and the Federal Bureau of Investigation.
The FTC’s investigation is of particular interest, looking into whether Facebook has broken the terms of a data protection agreement it signed with the regulator back in 2011, after it was revealed that Facebook had signed deals with several device makers that saw it share consumer data with partners. Reports suggest fines from the FTC alone could run into the billions, demonstrating the muscle that US authorities have.
While Facebook was sharing data with the likes of Apple, concerns have arose that it has also been sharing information with Chinese companies, including Huawei. Considering the current trade war between the US and China, centres of allegations that President Xi’s country has been stealing intellectual property from America’s leading tech firms, revelations that Facebook has openly shared information with Chinese tech companies is significant.
Although it has since cleaned-up its act and ended these partnerships (only after being found out), it undermines Trump’s international strategy, and the fact Facebook is the only big US tech company not to have given up on entering China does not help (Facebook is still nowhere near becoming available in China, but it has recently announced it will build an ‘innovation hub’ in the country and it is working with Chinese companies as a possible way in). The Associated Press reported that one of Zuckerberg’s talking points written down on a sheet of paper during his testimony to Congress earlier this year said to respond to any suggestions that Facebook should be broken up by claiming it would ‘strengthen Chinese companies’.
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In the UK, some British MPs have called for a new tax to be imposed on Facebook and other social media companies to fund the policing of data misuse. The UK government is to publish its white paper on internet safety later this year when a clearer picture will emerge over future regulation for social media and other digital firms.
Facebook starts focusing on newer, less-profitable products
Pressure on margins over the next couple of years will also be compounded by Facebook focusing more on products that have not yet been properly optimised, believing that investing in new products can keep user engagement alive and create new innovative ways for advertisers to reach their audiences. But for now, most of them are unlikely to make any meaningful revenue for the business.
Much of this is concentrated outside the core Facebook platforms and on its other photo-focused social media platform, Instagram, and its two internet messaging apps, Messenger and WhatsApp.
Stories, a concept borrowed from rival SNAP, is a big part of its immediate plans mainly because it offers full-screen adverts that users engage more with. While more popular on Instagram at present, the roll-out on Facebook has not seen it include adverts as of yet, with Facebook claiming it will take time for advertisers to adjust to new features and that it is being deliberately slow monetising new aspects of its platforms.
Instagram evolving faster than Facebook but both share one ad ecosystem
Instagram is the best hope of Facebook offsetting any stagnation in growth on its core platform. Instagram is growing at a faster pace and it recently hit a new milestone with over one billion active users. Facebook has significantly grown the Instagram operation since acquiring it for $1 billion back in 2012, adding not only Stories but other features such as IGTV. The firm claims its infrastructure has allowed Instagram to grow to twice the size it would have been able to on its own.
IGTV is one half of its strategy when it comes to video, partnered with Facebook Watch. IGTV has its own standalone app but also works inside the core Instagram app, and is focused on optimising videos for mobile. It has 25 million business profiles with two million advertisers able to access over one billion MAUs at present, and optimising photo and video adverts will be key to effectively monetising Instagram.
Meanwhile, Watch is geared to providing video that encourages people to engage with one another whilst watching (allowing them to message each other whilst watching) or getting people to get together to watch videos, feeding in to its increased focused on community and engagement on the core Facebook platform.
Although it is a separate business with a different user base, the company sees Instagram and Facebook as ‘one ads ecosystem’, and says Instagram presents an ‘opportunity for discovery’.
Facebook starts monetising messaging apps: Messenger first with WhatsApp later
Private messaging has revolutionised communication around the world, and Facebook has two of the most popular platforms under its control. However, making money from providing a free call and text service has not proven easy, although there is little argument that the potential is huge.
The development of Messenger has been more organic as the service spawned out of Facebook and gained traction by naturally attracting users on the core platform, but WhatsApp came at a huge cost for Facebook, buying it for $19 billion in 2014. Considering all of that, some may be unhappy to hear that Facebook is ‘furthest ahead in Messenger’ and that it is still very early days in terms of making some serious money in this space.
There are over 1.3 billion MAUs using Messenger, and the aim is to promote interaction between businesses and consumers, with over eight billion messages being sent between the two on a monthly basis (including automated ones). Again it will be a slow burner, but Facebook believes that new products like click-to-messenger ads have been welcomed by advertisers.
Further out, Facebook will start looking to evolve WhatsApp into a profitable service. The immediate focus is on improving the user experience, but it has tentatively started to build the app’s ‘business ecosystem’. At present, three million people are trialling WhatsApp for business in the hope that it can become a popular group communication tool for the corporate world – it is already well known it is the app of choice for UK politicians to natter on.
Facebook’s never-ending fight against data misuse and fake news
‘Security is not a problem you ever fully solve,’ – Facebook.
It’s a tough time for Facebook and there is a long way to go before attention on the social media giant subsides. Although it has overhauled its security, attempted to root-out fake news and stop the misuse of data the public perception for the immediate future will be that it is never doing enough – possibly a justified question when it still makes billions in profit each year with over $40 billion in the bank.
Others are looking to pounce on Facebook’s woes too, with SNAP having launched an alternative to the ‘Log in with Facebook’ buttons that people use to log in to other websites using their Facebook details centred on improved data security. The ‘SNAP Kit’ only uses minimal consumer data and has already been adopted by popular apps like Tinder and Giphy. Meanwhile, a group of high-profile cyber security experts have launched a crowdfunding effort to create ‘Openbook’, which would be built as an ‘open source, zero tracking, zero spying, zero ads’ basis. While launching a direct rival to Facebook which even plays on its name seems odd, it is gaining traction, being led by individuals like Philip Zimmermann, who invented the encryption programme PGP to become renowned amongst cryptocurrency and blockchain enthusiasts.
Still, the Cambridge Analytica scandal seems to have had a minimal impact on how consumers view and use Facebook, while advertisers are still paying more as Facebook’s effectiveness continues to improve. Apart from the increased spending that the leak has required, Facebook has come off relatively unscathed from this point of view so far. Still, that doesn’t detract from the severe slowdown in growth of new users and what effect that could have over the longer term.
Governments and regulators, however, are far less satisfied with Facebook’s response to the leak, and what will eventually come out of the swathe of investigations in the US and Europe is impossible to predict. The company has made several promises to ensure its platform is not inappropriately used to influence the string of elections pencilled in over the next couple of years, including for the European Parliament and in other major economies like Brazil and India.
Facebook has so far managed to persuade the majority that it has at least started to take the right steps in addressing its downfalls, but the company will be permanently under a cloud of doubt moving forward. Facebook can go out of its way to demonstrate how it is preventing the likes of fake news and data misuse, naming and shaming businesses and introducing new security features, but no matter what it does it will never be able to fully convince the world that its platform isn’t being used in some way or another to manipulate elections, propagate fake news or harvest data for illegal gains.
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