2019 will be Facebook’s year of reckoning

2019 will be Facebook’s year of reckoning

My first column of 2019 is live in The Drum:

Facebook’s stock peaked at $218.62 on 25 July 2018. It will never reach that height again.

The social network will see declining growth rates – if not an outright downward trajectory – this year unless it makes two specific and significant changes.

The financial reasons

Take this slide from Facebook’s latest earnings report from Q3 2018 (the full deck is at Seeking Alpha).

Sure, the total number of daily active users (DAUs) is increasing. But look more closely. The number of US and Canadian DAUs has remained flat for a year. Growth has stopped. In Europe, the number has declined since January 2018. DAUs are growing only in other parts of the world.

Average revenue per user is more than $27 in the US and Canada and almost $9 in Europe – all places where usage has stopped growing or declined. Where Facebook use is increasing, the ARPU is $2.67 at most.

The decline in rich, developed countries and growth in poor, developing countries does not bode well. Squeezing more and more ad clicks out of rich westerners will only work for so long because ad blocker use is increasing.

Further, Pivotal Research Group in the US shared with me a December 2018 report based on Nielsen Digital Content Ratings data showing that the digital content consumption share of Facebook (including Messenger) is continuing to decline.

No matter how many in the third world start to use Facebook, their added value will never replace that of the now-stagnant first world – especially if China continues to block the platform.

The regulatory reasons

In a CNN opinion column last week, former New York assistant attorney general Sally Hubbard wrote that “Big Tech is violating the Sherman Act of 1890,” which aimed to break up monopolies in industries such as oil and railroads.

If antitrust regulators turn their attention towards Facebook, we could see Instagram and WhatsApp become separate companies. After all, tech companies are a collective oligarchy because of a lack of government oversight since the 1990s. But even then, the US government sued Microsoft for anti-competitive behaviour after the company exclusively promoted the Internet Explorer web browser in Windows computers.

Something similar could happen today. The US is looking into Facebook’s privacy issues, and the FBI has been investigating the company’s data breaches. The network could face a multi-billion dollar GDPR fine. A Canadian parliamentary committee wants the government to regulate Facebook. An Australian anti-competition watchdog will reportedly crack down on the social network. Individual states in Germany want to force Facebook to remove hate speech. An EU parliamentary committee wants to audit the company.

In addition, everyone except Facebook recognises that the company is both a media company and a tech company. I call Facebook a company that uses technology to build novel media platforms. (Just see a recent New York Times report on its “secret rulebook for global political speech.”) Media companies are liable for what they transmit – and even Facebook might not be able to afford the consequences.

It is simple maths to know that companies facing no regulation will have higher profits than when they must deal with government interventions. Lawyers cost money. Lobbyists cost money. Compliance costs money. Court and regulatory judgments cost money. These will all decrease profit margins – if not lower profits as a whole.

“Facebook is going to be forced to correct its approach to the GDPR,” Brave Software chief policy and industry relations officer Johnny Ryan told me in a prediction for 2019. “Many users have complained to regulators about its approach to consent, and these will work their way through the system. Facebook may be forced to delete user data or stop using user data for ad targeting.”

This year will also reveal what Damian Collins, the chair of the Culture, Media and Sport select committee of the UK’s House of Commons, will do following Mark Zuckerberg’s no-show during his recent investigation into fake news by a “grand committee” of lawmakers from nine countries.

Zuckerberg was perfectly willing to appear before US legislators – many of whom are elderly and think the internet is a “series of tubes”. But he was conveniently unable to travel to the grand committee or UK parliament to answer tough questions from people who know what they’re talking about.

That is how you look like a coward and lose all moral authority. In 2019, I expect that Zuckerberg will be subpoenaed to appear before the British parliament – if not others as well. The opposition Democratic Party now controls the US House of Representatives, so I would not be surprised if they also open an investigation into Facebook and the 2016 presidential election.

Read the rest in The Drum.

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