Zuckerberg celebrates as the shine on his empire fades
In 15 years will he be remembered as an Augustus or an Ozymandias? And if Facebook survives, what will it look like?
Mark Zuckerberg is fascinated by Augustus Caesar. On the one hand, he has said, the young emperor brought 200 years of peace to the world. On the other hand, “that didn’t come for free, and he had to do certain things”.
If Zuckerberg sees something of himself in that description, he must more and more be hearing that little voice behind his ear that whispers, “you are mortal”.
Sunday marked 15 years since Facebook first launched in Zuckerberg’s Harvard dormitory room. For a tech company that is pretty venerable, and therefore pretty vulnerable. If Facebook was able to become a globe-spanning hegemon in that short time, destroying numerous rivals, perhaps it can also be destroyed in its turn. Fifteen or even 30 years from now will Zuckerberg be remembered as an Augustus or an Ozymandias? And if Facebook survives, what will it look like?
“Almost any child born today will outlive any company we know,” says Scott Galloway, a business professor at New York University who has studied the biggest US tech firms extensively. “The half-life of companies is decreasing because the pace of change is escalating. Probably nine in 10 companies we know of today will be gone in 50 years.”
Indeed, of all the companies listed in the Fortune 500 when it first launched in 1955, only 53 remain – a survival rate of less than 11%. So, in the long run Facebook, like all of us, is probably dead. For now, its business selling targeted adverts on the news feeds of Facebook and Instagram is healthy enough; its latest earnings exceeded analysts’ expectations. But its growth in the lucrative first world is bottoming out, and it has not found a way to extract the same revenue from developing markets.
Galloway says it also faces an “existential threat” in the form of voice recognition technology, which he thinks will change the way we use the internet once again, and in which Amazon has a clear lead. Facebook’s greatest weapon is its utter strategic ruthlessness. Imagine if Blockbuster had bought Netflix before it got big – as it once had the chance to. Today we would regard it as a leader in video streaming, brave enough to reinvent itself when its industry was dying. Facebook sees Netflixes everywhere, and moves quickly to crush or acquire them before they can do to it what it did to MySpace.
So far, it has bought 77 other companies, prompting Craig Barrett, ex-chief of Intel, to praise Zuckerberg for following his dictum that “only the paranoid survive”. Just look at the recent scandal over its secretive market research programme, which involved paying teenagers £15 a month to give it complete access to their iPhones behind Apple’s back. We know that in 2014 similar data gave Facebook insight into WhatsApp’s rapid rise in the months before its acquisition. This time, Facebook was willing not only to risk a privacy scandal but to endanger its access to the iPhone itself.
Sure enough, Apple’s furious response temporarily crippled the apps that Facebook employees use to order lunch, catch shuttle buses around their campus and test out new products.
Nor is it shy on acting on such tip-offs. Galloway calls Facebook’s purchase of Instagram “the best acquisition in the history of tech”, though he says it should have been barred by competition authorities. The $122m that Facebook was fined by the EU for misleading it about the company’s intentions for WhatsApp looks inconsequential next to the $19bn it paid for the messaging app.
Where Facebook cannot buy the competition, it outspends them, pushing and prodding its giant audience towards copycat products. Not all of these bold moves actually pay off: its investment in virtual reality has merely given it a big seat at an empty table. But Facebook can afford to spread its bets. These scattergun investments contain the kernel of a long-term plan. Zuckerberg has talked of a new wave of social media, based on private messaging rather than public broadcasts and content that disappears after sending rather than lingering forever.
Executives have signalled that much of Facebook’s growth will come from ads between disappearing messages. Designers have festooned Facebook Messenger with more new features than an Afghan jingle truck, from money transfers through location sharing to word games, eventually requiring a complete redesign to “minimise confusion”.
Then there is Zuckerberg’s proposed merger of Messenger, WhatsApp and Instagram into one unified system. This would be technically challenging and would draw the attention of antitrust regulators. But it would create a private messaging service bigger than almost any other, which could lock billions into the same online network. As well as deepening its trove of data it would allow it to build something like China’s wildly successful WeChat – a messaging app that also serves as a portal to mobile payments, games, shopping, taxis and almost anything else.
The overburdening of Messenger suggests that Facebook harbours this dream. Sucking in WhatsApp and Instagram users would help it become reality.
“Facebook has a big chance to become a one-stop solution for users,” says Coolio Yang, chief executive of Kantar Media CIC in China. “You see your friend recommend something on Facebook, click on it and just buy it [from within the app]. It makes sense.”
He doubts that Western web users are ready to switch to messaging entirely, but thinks the merger would help Facebook make more money from ecommerce, opening up a new revenue stream beyond advertising. That, incidentally, might finally allow Facebook to cash in on WhatsApp’s popularity in the developing world. Not a bad plan.
Such a shift would face two big barriers. First, Facebook has made powerful enemies, from Apple and Google (who control the smartphone operating systems it uses to reach users) to the European Commission. Its profits may suggest it escaped 2018 financially unscathed, yet its political risks and the costs associated with mitigating them are real and growing. Even if no major markets ban it, their scrutiny will increase costs and limit its freedom to buy up rivals.
The larger barrier may be Facebook itself. For all its grand pivots, the company’s business remains perilously narrow. It still only gets 1.6% of its revenue from payments and fees, with the rest from ads. Compare that with Amazon, whose advertising business is just one part of its gigantic range of services but which has already grown to 20% of the size of Facebook’s.
The problem, according to Matti Littunen of Enders Analysis, is that Facebook’s internal culture has turned it into an ad-maximising machine. Instead of letting its new investments diversify its business, it may cannibalise them to prop up its core product, seeing them mainly as new sources of personal data. “If it comes to a situation where building something new would actually hurt the advertising business, my intuition is that they would always choose to preserve the advertising business,” Littunen says.
To wean itself off that money, Facebook would need “a completely different attitude” to its users, one it has shown no real appetite to acquire. Brian Wieser, an analyst at Pivotal Research, says he does not incorporate any diversification into his model because Facebook has “no meaningful history” of pursuing it. It would be an irony if Zuckerberg’s empire was fatally weakened by its own efficiency.
Wieser expects merely a gradual “revenue deceleration” down to the line of the rest of the advertising industry. But if Facebook wants to still be dominant in 30 years’ time, and not just survive, it may need to start thinking much more seriously about life after ads.
– © The Sunday Telegraph