2018 must be a bitter sweet year for Mark Zuckerberg, Facebook’s founder and CEO. He has at once become the world’s 3rd richest person, while at the same time the firm is receiving growing calls for his ouster. The bitterness has turned increasingly sour, as Facebook’s growth in monthly active users stalls along with corresponding revenue, sending the company’s share price into a precipitous free-fall, marking the worst-ever stock drop in market history, whipping away $119 billion in market value. In many ways, despite the fact that this marked decline may be temporary, it is very much the company’s own doing. Like Twitter’s recent course correction, where it ejected more than 70 million fake or abusive users, social media platforms are beginning to see the error in user growth at any cost, showing how the quest for monthly active user (MAU) growth may very well lead to a Pyrrhic victory.
When Facebook was perceived to be a new form of public utility, users hoarded the platform like so many moths to a light. Indeed, the platform’s growth model continued unabated to more than 2.2 billion users worldwide, making Facebook the undisputed king of social media and the networked economy. While some users and observes were put off by Facebook’s early foray into ad-generated revenue with embedded videos and hyper-targeted ads, investors nonetheless flocked to the firm with its initial public offering (IPO) in 2012, making it one of the most valuable tech companies in the world. The second Facebook went public, the veneer of social good that shielded the affable founder-CEO, who aged before the public eye, and protected the firm began to wear off. Wall Street demands a very different type of result – growth and profits at any cost – which forced not only Facebook’s hands, but other social media platform’s as well. These firms answered Wall Street’s call with the promise of continued exponential user growth totally reimagining screen-based engagement, albeit on smaller screens, with the spread of smart phones and tablets, and for much less time, with the corresponding erosion in our attention span.
Chasing user growth at all costs while concurrently developing tenuous business models centered on monetizing user data led Facebook and Twitter to commit some seemingly unforgivable (and unforgettable) sins, at least in the meantime. Facebook’s long period of silence following the Cambridge Analytica scandal, which revealed a startling misuse of customer data and a shockingly systematic influence campaign, in which Twitter was also embroiled with the millions of bots and abusive accounts many of which have been purged from the platform – a purge of nearly the size of Twitter’s U.S. user base, or 20% of the 336 million total. While the markets were initially much more forgiving of Twitter’s correction, due in no small measure to its voluntary nature, Facebook shareholders were none too pleased with the announcement of disappointing revenue growth prompting a 19% share price correction and the worst valuation drop of a single firm in history, eradicating $119 billion in market value and $15 billion from Mr. Zuckerberg’s net worth. Indeed, as Facebook’s CFO, David Wehner, revealed during an investor call that the firm will prioritize privacy and security where it will spend billions of dollars gaining back market and regulatory trust a stock selloff ensued, supporting the argument that for maximizer investors, a growth model based on as much as I can have, as fast as I can have it still reigns the day.
Are Facebook investors and analysts much too skittish and is their selloff unwarranted given Facebook’s dominance of its market segment? Or, has the realization that user growth will invariably reach a saturation point – a veritable point of diminishing growth and engagement – after which point, Facebook and other firms that track this type of metric, such as Netflix, which also saw an adverse market reaction due to disappointing subscriber growth figures, will invariably falter. Indeed, user growth alone is a damning measure of success, because your very lifeblood can quickly turn creating the type of vicious cycle Facebook and Twitter are now enduring. Meanwhile, the type of precipitous market drop is mirrored by growing demands for tighter regulation and possibly hefty fines levied by an increasingly activist and punitive EU, armed with GDPR among other data privacy and information security laws. Indeed, by this measure, Google’s record $5 billion EU fine on antitrust grounds shows that the EU is not afraid of dropping the carrot in favor of a stick, especially if it scores a point in the acrimonious trans-Atlantic era.
While U.S. lawmakers proved their technological naïveté when Mr. Zuckerberg was summoned to Capitol Hill, his EU summons has yet to be personally answered. Many questions remain unasked and many more without riposte, such as what was the extent of Facebook’s election interference, how many privacy-shattering backdoors were opened and remain so? What remedies, if any, can be provided and should they be accompanied with punitive and or compensatory measures? In the end, Facebook, like so many social media firms that have grown up in its wake, may be reaching the limits of a revenue model based solely on user growth, especially for a phenomenon that was sparked by an almost organic word of mouth rush. Ironically, the more these firms grow beyond organic network effects, which have been replaced by Twitter bots and ravenous ad buyers and influencers, the more risks these firms face and introduce to the markets. In 2018, Facebook has faced its first real challenges for which growth is not the answer, but organizational rectitude is.