For Facebook, it’s been two years of constant bad news. Data leaks, poor security protocols and unhappy advertisers doubting the company’s statistics. The continued rumblings of the Cambridge Analytica scandal, topped off with hearings in Congress and European parliaments. Talk of tighter regulation for “big tech” and politicians calling for the break-up of Facebook, plus campaigns to delete the Facebook app. And most worrying of all for Mark Zuckerberg, persistent rumours that younger users are abandoning the platform for rivals.
Yet, the social media giant keeps reporting growing user numbers and soaring profits. It's latest financial result carry just one blemish: it will set aside $3 billion to $5bn to cover a potential fine by US regulators, because of its data sharing with Cambridge Analytica.
Still, quarterly revenue was up by more than a quarter, to a massive $15.08bn; the money set aside for the fine was the only reason why Facebook made profits of “only” $2.43bn. The number of monthly users grew by eight per cent, to a staggering 2.38bn people. All up, the company’s current performance seems to be yet more proof for the social network’s seeming invincibility.
But how is Zuckerberg’s platform doing it?
There are a few factors at play here: both ad impressions and the price per ad are growing strongly. Even if one of these factors were to slow down, Facebook would still be be able to ramp up the growth of the other, says Joseph Evans, analyst at Enders Analysis. The company’s “real strengths come from the fact that it has an extremely broad base of advertisers – seven million active advertisers as of this year.”
Facebook’s near-universal reach means it can deliver for any audience, in extremely effective and measurable formats. “Facebook is managing this impressive trick of combining a consistent flow of negative press with amazing financial and solid operational results,” says Evans. Advertisers don’t have many alternatives to Facebook: no other social platform combines its reach, targeting and effectiveness.
Most new users are now coming from developing countries in Asia-Pacific, says Jasmine Enberg, a senior analyst at eMarketer, although she adds that Facebook also sees marginal user growth in its largest ad market, the United States, and in Western Europe.
While rumours have been circulating that users might be leaving Facebook after the Cambridge Analytica scandal, the results show that in total that’s not really the case. “There is no mass user exodus,” says Jessica Liu, an analyst at Forrester Research. “User behaviour changes very gradually and user disengagement will be slow.”
Indeed, the results suggest that Facebook weathered the Cambridge Analytica scandal well, as most users and advertisers stuck with the service regardless. The main risk now is the renewed regulatory scrutiny, says Evans. It’s not just potential fines from consumer watchdogs that are a worry. More significantly, legislators could decide to put hard limits on how personal information is used, or require serious investment in content moderation, or even mandate functional or legal separation of its different business lines. "This could have the sort of big, negative effect on Facebook’s bottom line that we haven’t seen so far,” he says.
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While some advertisers may have temporarily pulled spending from Facebook after the string of recent scandals, overall the bad news has not made any impact on ad revenue growth. Enberg expects Facebook’s US ad revenues to rise by 20.6 per cent this year, including on its secret weapon, Instagram. That’s a slower growth rate than in previous years, but it’s not because advertisers are quitting the platform – rather, because they are shifting spending from the News Feed to Stories, which monetise at a lower rate, she adds.
And even where Facebook users are leaving, it’s often Facebook’s very own Instagram that is scooping them up. Facebook group as a whole is likely to keep adding users in all regions, Evans says.
This focus on the combined usage of its “family of apps” rather than the number of users for individual platforms has been Facebook’s latest strategy in reporting earnings. “That makes it easier to hide weakness in any one service and could encourage people to think about Facebook as a single entity,” says Enberg. That’s in line with Facebook’s claim of a new privacy-focused vision, she adds, which is likely to include increased integration of its apps.
Zuckerberg admitted in his congressional testimony last year that no company competes with Facebook on every front, although competing products that are more focused and do one thing well have always been a problem for the company. In messaging, Apple’s iMessage is a key rival to Messenger, as it’s bundled with every iPhone and has no advertising or data collection.
TikTok, from Chinese company Bytedance, is often mentioned as drawing users away from Facebook, particularly among young people – but it’s not yet clear whether that’s really the case; it’s worth bearing in mind that Bytedance recently was found to have its own problems with data protection and privacy violations.
Perhaps the most significant competitors for Facebook are online video services, particularly Google’s YouTube, plus services like Netflix, says Evans. “For the most part, these don’t offer the same thing as Facebook, but at the end of the day Facebook competes with everything that takes up leisure time – even a phenomenon like Fortnite leaves less time for social media usage among its devoted players,” he adds.
In other words, Facebook is not unassailable, or at least less bulletproof than in the past. Previously, Facebook could or at least tried to buy any app that looked threatening, as it did with Instagram and WhatsApp, and tried to do with Snapchat. Now with much stricter antitrust regulations, Facebook is under much heavier scrutiny, and any major acquisition related to its core business will be extremely difficult to sell politically.
Still, Facebook’s future is by no means bleak. Instagram has proved to be an incredible ad product, and innovations like stories, where video ads promise to be more viewable and reduce “purchase friction” mean it still has growth in the tank, says Evans.
Facebook is also continuing to innovate – for example by improving video offerings such as Facebook Watch. The launch of Instagram Checkout in the first quarter was also “an exciting moment for Facebook,” says Enberg, and may be a glimpse of what’s to come. “It could increase user engagement by allowing people to purchase products directly within the Instagram app and create another revenue stream for Facebook outside of advertising,” she adds.
This article was originally published by WIRED UK
