For the first time in its history, Facebook is in decline. Has the tech giant begun to crumble? | John Naughton

As long as the number of users kept growing, Mark Zuckerberg felt able to ride out scandals and criticism. He can no longer rely on that defence

Facebook was much in the news last week, although you may not realise that because it has been renamed Meta in the hope the bad vibes associated with its maiden name would gradually fade from public memory. (Google tried the same stunt with Alphabet and that hasn’t worked either.)

For a change, though, Facebook’s latest moment at the top of the news agenda had nothing to do with scandals and everything to do with its financial results, which were so unexpectedly bad that the shares dropped 25% at one point, taking $240bn (£177bn) off its market value, which in turn led to a 2% drop in the Nasdaq index.

Given that Facebook has hitherto been a licence to print money, so much so that at one stage (in 2019), when it was fined $5bn by the Federal Trade Commission, its shares actually went up as Wall Street registered that the ostensibly massive fine was actually the equivalent of a fleabite on an elephant.

But this time was different. Why? Three factors stood out from reports of Mark Zuckerberg’s conference call with stock market analysts: the impact of TikTok; Apple’s move to require iPhone users to consent to being tracked by advertisers; and the revelation that the hitherto unstoppable growth in the number of Facebook users has stalled.

Zuckerberg’s newfound obsession with TikTok must have puzzled many observers. After all, TikTok is not a social network. It’s a service that hosts short-form user videos, from genres such as pranks, stunts, tricks, jokes, dance and entertainment. It is owned by the Chinese company ByteDance, is understood by nobody over the age of 40 and has taken the world by storm. As a form of Chinese cultural imperialism, it makes Xi Jinping’s belt-and-road initiative look amateurish.

So why is it keeping Zuckerberg awake at night? The answer is that TikTok caters brilliantly to a demographic group – so-called young adults – that Facebook, with its ageing demographics (parents and grandparents), doesn’t seem to serve well any more. This explains its zeal to re-energise Reels (its ludicrous attempt to mimic the short-video genre) and to reprioritise young adults in its other offerings. But the real problem for Facebook is that TikTok is monopolising its users’ attention, which is where the money for surveillance capitalism comes from.

As Ben Thompson, the veteran tech analyst, puts it: “The problem for Meta is that its business isn’t based on surfacing content from your friends; it’s based on engagement and serving ads, which means any service that occupies your time and attention – and TikTok occupies a lot of it – is a fundamental threat.”

The second source of woe for Facebook is the impact of Apple’s “app-tracking transparency” (ATT) feature, introduced last year with version 14.5 of its iOS mobile operating system. This required iPhone users to give explicit consent for user-level and device ID-based monitoring by apps. Not surprisingly, users declined in droves. And the impact for Facebook has now become clear – in the form of $10bn in lost advertising revenue. That’s 8.5% of the company’s 2021 revenues, but, more significantly, a quarter of its overall profit for the year.

It’s easy to see why results like these might lead investors to reconsider their stock portfolios. But Facebook has had wobbles before and recovered. As a company, it has vast resources of cash and talent. Given time, it might be able to find a way of luring young adults away from TikTok and of navigating round Apple’s ATT. But for anyone who takes a longer-term view of these difficulties, the big story is that the company’s user base may have stopped growing. The figures revealed last week show that the number of daily active users fell by 500,000 and that the numbers of monthly active users seems to have levelled off at 2.91 billion. If this is the beginning of a trend, it’s really significant.

Why? Basically it’s all about network effects. Way back in 1990, Bob Metcalfe, the co-inventor of Ethernet, formulated a “law” that says the value of a communications network is proportional to the square of the number of connected users of the system. This law has driven every networking system on the planet and harnessing it has always been the goal of company founders.

The trick was to attract users quickly (by not charging for services) and to get to the point where user numbers are big enough to make it very difficult to break into the market. Facebook reached that point long ago and if you want a measure of its power at the moment, try working out what the square of 2.91bn is.

The reason the network effect is so powerful is that as long as the number of users is increasing, the company is riding a virtuous circle. The more users it has, the greater the incentive for new users to sign up. From the beginning, driving growth in the number of users has been Zuckerberg’s overriding obsession. It’s why he has always turned a tin ear to the voices of caution when the company ran into scandals and charges of causing societal damage.

But network effects work both ways. If user numbers start to decline, then the virtuous circle suddenly turns vicious, leading to a downward spiral. Maybe this is what TikTok is already doing to Facebook’s Instagram, for example. Zuckerberg is smart enough to know his position as master of the current universe may be transitory. Sic transit gloria and all that. Which may explain why he plans to be master of the coming metaverse.

• John Naughton chairs the advisory board of the Minderoo Centre for Technology and Democracy at Cambridge University


John Naughton

The GuardianTramp

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