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Facebook Recorded the Largest Single-Day Loss for Any U.S. Public Company on July 26th |
NEWS |
By the time the dust settled following Facebook’s quarterly announcement, the company’s stock price drop had erased roughly US$120 billion in market value—the largest single-day loss for any U.S. public company. Looking at various postmortems posted online about this historically bad day for Facebook, one might get the impression that user growth (or rather the lack thereof) is the main culprit, along with guidance that suggested similar results for the rest of the fiscal/calendar year. There is, however, more at work once you peel away some of the superficial layers—in particular, the bruising that Facebook has experienced from its more recent public relations issues.
A plateauing user base in the North American market raises a flag since the region accounted for nearly 49% of the company’s ad revenue in 2017 (ad revenue represents more than 98% of the company’s total revenue). Further, Europe (24% of Facebook’s ad revenue) saw a decline in both daily and monthly active users from 1Q to 2Q 2018, its first QoQ decline in the region going back to at least 2009, and there wasn’t a recent historical trend driving towards this quarterly decline.
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While both of these data points appear troublesome, the latter (Europe) was expected and was alluded to before the quarterly announcement; GDPR (started May 2018) is the culprit behind the net decline in both MAUs and DAUs from 1Q 2018 to 2Q 2018. In the North American market, growth is slowing due to saturation. The U.S. population has roughly 328 million citizens, while Canada adds nearly 37 million, which means Facebook’s MAU (at 241 million) is roughly 66% of this population. Granted, this figure includes multiple/fake and business accounts, but if we take this max figure, once you factor in individuals who do not use the Internet (Pew Research Center’s last estimate puts this figure at 11% of U.S. adults), that would push the penetration up to just over 74%, and if we further rule out individuals younger than 10, we’re looking at more than 85% of the likely target population. A more conservative estimate might be 75% of the potential viable population, which is quite high when you consider how challenging it is to get more than 50% of the U.S. population to agree on most things these days.
Some might question if this portends a coming tech malaise as others like Netflix within the Facebook, Apple, Amazon, Netflix, Google (FAANG) group reported weaker than expected results (again tied to subs for Netflix), although Amazon and Google/Alphabet both reported strong quarters, meaning that Facebook and Netflix conspired to bring down that particular grouping. Or this could be a larger concern for social media as Twitter reported declining MAUs—it’s also possible that this could point to difficulties in expanding the market for OTT video. While there is no easy and simple answer, there are a few things to consider further.
Not a Problem Yet (Aside from PR Issues) |
IMPACT |
Facebook has highlighted video as a key growth driver for the company, and coupled with the fact that Netflix started the trend when it recently missed its quarterly subscriber growth targets, it is worth taking a quick pulse of the OTT market in the United States. Starting with Netflix, while targets were missed, the trends still look positive, especially when you factor in the more mature U.S. market, which understandably has lower growth potential (subscriptions).
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In addition, if we view the wider OTT subscription market, the picture still looks strong heading into 2018 (early quarterly figures likewise look good). While traditional pay TV subscriptions continue to decline, some of this value is picked up by vMVPDs, so in many cases, pay TV churn is simply a change from managed to unmanaged networks. Note that the table below only shows OTT services tracked by ABI Research.
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What does this mean for Facebook? The company’s PR issues likely compounded what might otherwise have been viewed as a blip in Facebook’s growth trajectory, with some developments like GDPR deserving closer monitoring. While Twitter’s news could have played a role, its user base pales in comparison to Facebook, so it’s unlikely to have moved the needle too much—although Twitter, like Facebook, has also made a push into video. With regards to video, Facebook has also differentiated itself around live broadcasting (user), which in its implementation was rather novel and somewhat experimental, but it produced quite a bit of attention for the company despite proving to be a double-edged sword. Strong growth in views and interactions with its live broadcasts (compared to its more traditional video feeds) has been countered by broadcasted tragic and horrific events, making it difficult for Facebook to monetize this content given its unpredictable nature. While it is expanding into other premium content, Netflix is a shining example of the costs required here to create a differentiable catalog of original content (some estimates put it between US$12 billion and US$13 billion for 2018, up from an original projection of US$8 billion).
The high price for content production is another key factor to weigh when the stock market evaluates the longer-term potential of these services. So long as ARPU continues to rise (which to date largely remains the case for Facebook and Netflix), slower growth in subscriptions will continue to help offset these expenditures, but it becomes a more delicate balancing act as markets become more saturated and competitive.
Image Correction First, then Services |
RECOMMENDATIONS |
The metrics alone don’t seem to justify one of the worst days of trading for a U.S. public company, so we need to focus on the company’s tarnished image. While a mass exodus from Facebook on the order of past migrations from services like Friendster or MySpace is not anticipated, the company needs to address its PR issues if it wishes to get back into its users’ and investors’ better graces. Facebook also needs to determine if it wants to simply be a conduit that creates connections (and helps aggregate content) or an active player in creating content and services. A leaked memo (back in 2016) from a Facebook executive highlighted the importance of making connections, even with negative outcomes, so long as the net impact was beneficial. While this memo was later backtracked and said to be intentionally “provocative” (and not true to management’s true stance) in order to engender internal conversations, it still illustrates the difficult line the company is straddling, regardless if they truly believe the ends don’t justify the means.
Companies are increasingly crossing this line: cable operators and telcos used to be data pipes and content aggregators, but as companies like Comcast, AT&T, and Verizon acquire film studios, broadcasters, and services, they lose some of the cover that comes with being an intermediary by taking on the role of a content creator. The tradeoff comes from increased revenue opportunities and control, but as with most things that afford additional returns, it also brings with it added risk and responsibilities. If Facebook wishes to contribute to the content landscape as an active participant, then it must do so through the lens of all other such entities, which in today’s climate in particular means carefully considering one’s messaging and anticipating the potential reception it will receive.
On the topic of content production, Facebook has to be careful to avoid straying too far down that rabbit hole since competing with the likes of Netflix will be challenging. This isn’t to say that companies like Netflix are so monolithic now that it’s foolhardy to try (especially given Facebook’s massive user base), but it will come at great expense to do so, and for Facebook, it could end up spreading itself too thinly and away from its core competencies. For example, mandates like AT&T’s desire for HBO to ramp up its efforts to more closely compete with Netflix sound fraught with risk, but because HBO more closely parallels Netflix at a service level, it is a more reasonable endeavor. Netflix in some ways is taking a shotgun approach to content and producing an increasingly expanding array of shows and movies and then further funding whichever prove to be a success. HBO has historically taken the opposite approach and focused more narrowly on hit shows, but in a market where attentions can shift at a moment’s notice, having a wider breadth of content helps distribute this risk. When you focus on hit shows, a few bombs could severely impact your image (diversifying one’s content portfolio is becoming increasingly important, albeit more expensive). This is why Facebook might be better served by supplementing its streaming efforts with existing services to help establish itself as a centralized hub rather than a producer of content. But first things first, and that still means fixing its image. Until it does, it leaves a crack open for competitors. Even though the crack might be small, as the adage goes, “big things have small beginnings.”