The Unraveling of Facebook

To say Facebook has been in the news lately is an understatement. I added some additional commentary in my article a few months ago The Beginning of the End of Facebook – Part 2. A few main points I made in that article are worth repeating so I can build out a few more components from recent events. Here is the excerpt we will build upon.

Fast forward to today, and a few interesting things are happening.

Firstly, Facebook’s earnings yesterday revealed that daily user numbers dropped for the first time in the US and Canada. Both markets with a large user base who have been on Facebook the longest.

Second, Mark Zuckerberg made note that changes they made to Facebook led to a decrease in total time spent of 50 million hours. Average that out and it means about 2 minutes per user, however, I would postulate there were large groups of people who were the pockets of users who dropped their usage more than 2 minutes today, and I’d argue they are more consumers in western more valuable markets.

Thirdly, Facebook saw their slowest QoQ daily active user growth since 2015. And I have a hunch this trend will continue going forward.

So Facebook is facing slower overall growth. This was inevitable as they have just about saturated the global online population. They are seeing usage decline in the US and Canada, their most valuable market by far with an ARPU of $26.76 per user, which is 3x the ARPU of any other market. Mark Zuckerberg alluded that this usage decline was a result of changes they made to Facebook, but I highly doubt that is true. I think this has been a long time coming and the recent toxicity centered on Facebook because of the elections only made the inevitable happen sooner.

Right off the bat, I firmly believe Facebook will report a sequential decline in daily active users in the US when they report June quarter earnings. This will validate that it is not an anomaly like Zuckerberg said but a trend in declining usage by Western consumers. This is just the start of Facebook’s Unraveling.

Facebook is Not the Service it Used to Be
This is an important point. Facebook is not today what it used to be when it was ramping users, and people were addicted and enjoyed connecting with friends and family. It has changed dramatically and become less about connecting/staying in touch and more about a tool for brands and advertisers to trick consumers into helping them market their product or service. Or cluttered with them posting articles that fit their bias or beliefs or opinions and nothing else.

Your Facebook timeline is no longer what it was. The PR spin from Facebook about the timeline is how most people have such a large social graph that if they showed every post, then your timeline would be unreadable. That may be true. However, the algorithm is skewed toward those you interact with most in the assumption they are your close friends or family in the social graph. This works sometimes but not always, and in nearly every instance keeps you blind to the reason you enjoyed Facebook, to begin with, which was keeping in touch with friends and family and share things about your life worth sharing.

From my own observation, I’m in some Facebook groups and have regular conversations with folks in those groups many who are not close personal friends or family. I also, regrettably, still try to add some sanity to many of the fake news posts friends share thus making Facebook think I want to see more of this person’s posts. I regularly, REGULARLY, miss important things those I really care about post on Facebook.

Sure, I can create a priority list where I get notified when certain people post, but I don’t believe many people have customized Facebook this way, thus leading to the sentiment I so often hear from consumers in conversations about Facebook that it is a toxic environment.

Facebook is no longer what it was, which happened to be the reason people flocked to it. If the Facebook product of today were the original service, it would have failed massively as a social network.

Invasion of Privacy
Last year the Creative Strategies team completed a consumer study on security and privacy. As you can imagine, Facebook was a good chunk of subject matter in this study. I want us to get on the same page as to how most consumers define privacy.

As you can see from the results, the vast majority of consumers believe when a company says they keep their information private it means no third parties can access that data. In subsequent questions, we asked consumers if they understood the tradeoffs on using a free service like Facebook in exchange to see ads, and most understood that dynamic. The caveat was as long as the company provided the free service kept their data private. Which, in their mind, means third parties don’t see their personal data. To be clear, consumers are ok exchanging their personal information to the company providing the service but not anyone else.

Now, a major question is the degree that consumers believe Facebook keeps their data private. In general, I think consumers are abiding by a general understanding Facebook keeps their data private, but there are many who also understand Facebook’s privacy policy is ambiguous at best.

What you are looking is the results of our study where we asked consumers to rate specific companies ability to keep their data private. The higher number means most trusted. As you can see, about Facebook specifically, there is not much trust sentiment from consumers that Facebook either can or will keep their personal data private. They still use the service, just perhaps less now than they did a year ago.

Even if this Cambridge Analytica news can be interpreted that Facebook itself did not give their data away, consumers will still see it in the same light. Facebook has allowed, even if indirectly, third parties to exploit their personal data as they use the service.

The Burden of Facebook
Enter, what I’m calling the burden of Facebook. In fact, I think you can argue social media, in general, has become burdensome. We got drawn in, but the communal consciousness is getting burnt out. I have a sense this is happening and whether it is a blip in time or a long-term trend is the question. In essence, I believe we can surmise from a range of data points that consumers feel compelled to keep checking social media like Facebook, Instagram, Twitter, etc., out of fear of missing out. They may not actually want to be there, but often they feel they have to check in and keep up. It is true that a good portion of social media usage comes from boredom, consumers have nothing better to do so they check in on social media, but in either case, those are not great places to be for a services company.

This point is still mostly a western consumer one, but the shift from wanting to be on social media to the feeling of having to be on it is real. By calling it a burden, I’m interpreting the sentiment that is showing up in research on the topic, but that is the essence of what consumers are saying. In this privacy study we did, 71% of our respondents said they are now intentionally more selective of what they post on Facebook because of their privacy concerns. 54% said they are posting and engaging in the service less than they were due to privacy concerns. This latter data point emphasizes the burden I sense. They are not liking posts, or commenting, or posting stuff of their own but they are still going to Facebook just to see friends or family posts.

Long Term View
Lastly, I want to talk about the things that will be the tell signs that things are really unraveling with Facebook. Which is a fascinating point, since six months, ago, and before the US elections for sure, the sentiment was there was no better long-term stock bet than Facebook. Wall Street wasn’t just bullish on Facebook; there were super bullish. Now, bear narratives, reports, calls, etc., are coming out of the woodworks voicing real concerns from the sell side analyst notes. Yes, we take many of those with a grain of salt, but even some sell-side firms I trust are turning negative.

The key thing is if Facebook’s bottom line is impacted. And this could be a legitimate concern because Facebook’s most valuable markets by far is North America and it seems this is the main place where consumer behavior is changing. Facebook’s earnings the next few years will be the year we see if the growing concern, and negative sentiment of US consumers toward Facebook turns into any real impact on Facebook’s bottom line.

Advertiser sentiment is another key thing to watch. I could, and should, write a whole post just on my chats with advertisers since that along strengthens the bear case for Facebook. But advertisers have a growing concern that advertising on Facebook is bad for the brand because of the toxic sentiment growing. Most major brands are still not spending huge dollars with Facebook or at all, and most ads are more long-tail type ads like upstart brands, app companies, etc. But all this does is fuel the delay for the big spending brands to commit more dollars to Facebook and instead look for alternatives (like Amazon.)

Lastly, watch for talent drain. Right now in Silicon Valley, there is no shortage of opportunity for top talent. Facebook is a quality addition to any resume. Any of Facebook’s top talent can easily go work somewhere else. Facebook has a lot of millennials working there, and one thing we know about this demographic is they do, generally, have a penchant for social good. If they ever become convinced that Facebook is making the world worse, not better, there is a good chance they will seek other opportunities immediately. And, as I said, opportunities are plenty here in the valley.

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Ben Bajarin

Ben Bajarin is a Principal Analyst and the head of primary research at Creative Strategies, Inc - An industry analysis, market intelligence and research firm located in Silicon Valley. His primary focus is consumer technology and market trend research and he is responsible for studying over 30 countries. Full Bio

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