On Facebook’s Unique WeaknessAugust 1st, 2018 · 30 comments
An Anti-Social Response
Last week, Facebook reported weaker than expected second quarter earnings and warned investors to expect diminished growth. As a result, its stock promptly fell 19%, wiping out over $120 billion in market capitalization. No publicly traded US company has ever lost more dollar value in a single day.
This seems like bad news for the social media giant, perhaps the first indication that its struggles over the past couple of years are catching up to its bottom line.
But not everyone agrees.
Earlier today, business columnist Farhad Manjoo wrote an optimistic piece for the New York Times titled, “Stumbles? What Stumbles? Big Tech Is as Strong as Ever.”
As Manjoo writes:
“[T]here is something deeply incongruous at the heart of the supposed ‘techlash’: It is not really making a huge dent in the tech giants’ financial performance.”
But what about Facebook’s massive price plunge? Here’s Manjoo’s response:
“In a strange way, the social network’s troubles only underscored its dominance…Pretty much everyone who studies Facebook believes that it will hold its grip on the culture and the advertising industry for the foreseeable future.”
Manjoo supports this assertion by quoting RBC Capital analyst Mark Mahaney, who argues: “[Facebook] is one of the most profitable business models I’ve ever seen, and that really hasn’t changed.”
A Different Opinion
I agree with Manjoo and Mahaney’s assertion that Facebook remains massively profitable.
But I disagree strongly with their conclusion that Mark Zuckerberg’s behemoth should be considered in the same blue chip league as other dominant tech giants like Apple, Amazon, Microsoft and Google.
While Facebook’s value might be comparable to these other companies at the moment, it suffers from a unique weakness that I don’t think is discussed enough by the professional investor class: it’s dispensable.
In my experience researching and writing about the intersection of technology and culture, I’ve noticed that a substantial fraction of Facebook users seem indifferent, or, at best, only mildly positive about the service.
They don’t mind it, and perhaps even experience some small benefit from its features, but they would also be completely fine if you removed it from their life. I know this, in part, because I’ve helped thousands of people do exactly this.
The most common reaction I encounter when asking people what life is like after quitting Facebook? A shoulder shrug.
It turns out you don’t need Facebook to maintain a vibrant social life (if anything, it might make things worse), and there are better ways to keep up with the news or find entertainment. This service does help you remember your friends’ birthdays and monitor the political opinions of high school classmates — but does this justify a larger market capitalization than ExxonMobil?
Now compare Facebook to the other tech giants currently dominating the stock exchanges. If you shut down google.com, forced Amazon shoppers to return to brick-and-mortar malls, or outlawed Apple and Samsung smartphones, people’s lives would be significantly harmed.
The services offered by these companies, in other words, are indispensable for large portions of the population — and this provides them a foundation in the marketplace that I don’t believe Facebook shares.
(This doesn’t mean, of course, that companies like Google, Amazon, Apple and Samsung are untouchable. They must still aggressively fight off competitors and fear bottom-up disruption, but the markets they dominate are stable and unlikely to dissipate any time soon.)
I haven’t done the research to back up this assertion with complete confidence, but I’d wager that in the history of modern capitalism, there’s never been a company that has been so valuable while simultaneously being so dispensable as Facebook is at the moment.
Given all the recent chatter surrounding social media, technology, and culture, this seems like an observation worthy of note.