Facebook: Entering middle age like a durable baseball player
It's been 13 years since Mark Zuckerberg first wrote code that became Facebook, a time span that usually qualifies a tech company for middle age.
But if Facebook is entering middle age, it's doing so like a durable baseball player - a CC Sabathia, or even a Bartolo Colon: losing a little power while steadily expanding in girth. Facebook's revenue grew 49% last quarter, strong growth for a company that brings in $28 billion a year – and yet its slowest rate in six quarters.
But how about that girth. Facebook's monthly users increased by 4% from the previous quarter to 1.94 billion, thanks to surging growth in Asia. Should user growth continue at this pace, Facebook would pass the 2 billion milestone sometime in June. Daily active users, meanwhile, grew faster, by 4.6%, to 1.28 billion. Pretty soon, the number of people who show up every day on Facebook will be larger than the number of people who wake up every day in China, with its population of 1.39 billion.
The Facebook story right now is less about revenue growth than audience growth. The company warned in November that ad growth would slow “meaningfully” this year as the company had already stuffed newsfeeds with as many ads as it thought it could get away with. Ad revenue at Facebook grew by 51% last quarter, down from the 57% rate for all of 2016.
Facebook has made this warning before, only to be proven wrong. In June 2015, Facebook warned of a slowdown, only to see revenue accelerate through the year. That may be because the ad load inserted into each newsfeed is only one factor determining Facebook's ad revenue. Another is total users: Facebook can still sell more ads overall if the number of users grows, which it clearly is.
A third piece is the price per ad, which rises if the demand for newsfeed ads exceeds their supply. By clamping down on the ads a user has to scroll past in her or his newsfeed, Facebook is effectively driving up the cost per ad served. In the first quarter of 2017, the price per ad at Facebook increased by 14%, up from the 3% rate in the previous quarter. Google's cost-per-click, by contrast, declined by 19% in its most recent quarter.
In many respects, Facebook's first quarter looked just as impressive as most in the past two years, a period that has seen Facebook's stock nearly double. And yet this latest financial report – with its $8 billion in revenue and its $1.04 per share in profit easily beating estimates – caused the stock to fall as much as 4%. Whenever a surprisingly strong performance is greeted with a selloff, it's usually a sign that investors are edgy about the future.
In Facebook's case, the concerns are twofold. Facebook warned that the rise in operating expenses, equal to 40% in the first quarter, could end up being as much as 50% for all of 2017. In a call with analysts, Facebook CFO David Wehner again dropped the buzzkill about revenue growth ebbing “meaningfully,” plus this extra downer: “There are going be a number of initiatives we believe are valuable to the community and to the company in the long term that are going be net negative on our operating margin.”
In plain speaking, that means: Revenue decelerating, costs accelerating. Not an aphrodisiac for investors, even if it's a supposed elixir for middle-age robustness at Facebook. The plan all along was for the Mantle of Revenue Growth to pass with some kind of elegant ceremony from Facebook to Instagram, and from its aging shoulders to WhatsApp, and Oculus, etc. And while there is no hard reason to think this won't happen as planned, the timing of things is feeling a bit unsure.
Alphabet went through something like this, with all its boasting about moonshots to keep growth coming for years to come. But the myopia inbred through generations of shareholders leaves little patience for such plans. In a fit of fiscal discipline, Alphabet began disclosing how much money its Other Bets – an amorphous name for a bunch of initiatives investors never really understood – was losing. Which predictably led to Larry Page cutting back on those Other Bets.
To his credit, Page conceded to a practice Zuckerberg seems too afraid to try. Along with those Other Bets, Alphabet discloses non-advertising revenue like Play and Cloud. These non-search sources of revenue at Google rose 49% to $3.1 billion, according to Alphabet, approximating in one quarter what analysts expect Instagram's revenue will be for the entirety of this year. We can't be sure, though, because, even though Zuckerberg is cribbing YouTube's monetization model from Alphabet, he shies away from Alphabet's willingness to disclose financial metrics.
This fearfulness is part of what's hurting Facebook in the eyes of its shareholders. If Instagram is going to be the successor to the Facebook app in the relentless mission of driving new revenue, when is that going to happen? “In time” was a good enough answer when Facebook's ad revenue was growing above 60%. It's less satisfying now that ad revenue, inclusive of Instagram, is growing below 50% (and could fall even lower, if Wehner's caution proves accurate).
The $3 billion-$4 billion that analysts expect Instagram to make this year sounds nice, but consider that, during the five years since Facebook has owned the property, its revenue growth hasn't much exceeded that of Twitter, widely considered a financial disappointment even if its impact on the world is greater than that of Instagram. Maybe Instagram is profitable inside Facebook while Twitter spews red ink. But we don't know, just as we have no idea whether WhatsApp and Oculus are losing as much money inside Facebook as the Other Bets are inside Alphabet.
What Facebook has going for it, which no other company can boasts of, is scale. A modest word, scale, but in the era of Facebook, scale is destiny. Instagram has 700 million monthly users and WhatApp has more than a billion users. Both have at their disposal the advertising base and the ad-targeting infrastructure that Facebook built up with its founding app. All three of these apps have well over double the US population on their respective platforms. Look at how well the fractious US populace is being governed. Now look at how well Facebook is managing its empire of users, and you get a sense of what Sandberg, Zuckerberg & Co has accomplished.
Order, however, is a day-to-day affair. Facebook may be a middle-aged tech company at 13, but it's a novice as the quasi-governmental being it's clearly striving to be. When I compared Facebook's daily audience to China's population, I did so because both are grappling with the complexities of managing the lives, online or off, of a vast number of people, maintaining the peace among their often conflicting interests. One has a tiny bit more experience than the other does.
As Facebook approaches 2 billion users, its future growth will depend less on that next billion of the world's population and more on being a bigger part of the lives of us, its counted users, we who neigh, happily or otherwise, inside its well-managed corral. Video is a good example of this. Rather than a long verbal rant, we can experience the sounds and images of the lives of our Facebook friends. And this is why the violence of Facebook Live is disconcerting, even turning away some longtime active users.
Scale is a boon for Facebook. It's an unprecedented avenue for advertisers and a rare opportunity for its investors. But it's often a bane for others. Facebook tweaks its newsfeed algorithm to show more video, and print publishers suffer. Any benign controversy Zuckerberg considers one of many issues to address – fake news, or violence broadcast on Facebook Live – is, if and until when they are solved, a real, deeply palpable and too-often hurtful force in the lives adversely impacted by them in the real world Facebook still aspires to make better.
Forget the promise of targeted ads, Facebook's success today is another season for bounty – for the company, for its advertisers, for its shareholders. For too many of the rest of us, scale is far too often the enemy of the individual.