Today’s Facebook Stock Drop Is Only the Beginning

Jaap Arriens/SIPPL Sipa USA

Surprised about Facebook stock falling almost 20% on disappointing earnings outlook? Investors seemed to be. But they shouldn’t. I hope I’ve been clear that I think Facebook is a bad acting company with a predatory organizational culture. Google exercises monopoly power that needs to be reined in. But it’s fundamentally different from Facebook, both in its actions, organizational culture and its effect on the larger civic and Internet ecosystems. I say all this just to put my cards on the table. But I think I’m on firm ground and cognizant of my biases when I say that Facebook’s business troubles are just beginning.

Here’s why.

As I wrote back in the Spring, much of Facebook’s competitive advantage is based not only on its use of data (that’s obvious) but on uses of data that would have a hard time withstanding public scrutiny. Facebook executives today are claiming that the softening of the company’s growth outlook is due to their new focus on “security”. Basically, cleaning up the fake news mess and making sure slimeballs are no longer downloading all your personal information means new spending and less aggressive growth. So they’re making a bit less money but it’s in the interest of becoming better corporate citizens. That should be good in general and also good for the business longterm.

I don’t buy it.

Facebook’s degenerate corporate culture and, specifically, its uses of data which may be technically legal (or were) but can’t withstand public scrutiny are at the heart of its business model.

Back in the winter, I started hearing from Facebook advertisers who were seeing not only declining advertising efficiency but increasingly erratic analytics. There’s no real way to see inside the black box of Facebook’s algorithms. But this was happening in the climate of the scandals over Cambridge Analytica and the related controversies that have sullied the company’s image. It was only a surmise. But it was a strong surmise that Facebook data monkeys were trying to rejigger the system on the fly, trying to make the engine run with efficiency without forms of data or sources of data they were no longer able to use or suspected they’d soon lose access to. Imagine changing your internal combustion engine to an electric motor while driving cross country. It may not be quite that drastic. But these are big changes which are being done while the engine is running and which you’re trying to keep as quiet as possible. Unsurprisingly, it created bumpiness in the internal purchasing markets through which you purchase ad space on Facebook.

When I was calling around to people in the industry to get a better sense of what was going on I noticed a pattern: people in what’s called the DTC (Direct to Consumer) market were seeing problems; people in persuasion advertising saw some weirdness but were confident things would be fine. The costs were still low. And it’s Facebook: they’ll figure it out.

But here’s the thing. Take it from someone who’s spent a lot of time dealing with the cutting edge of digital advertising for more than a decade – trying not to get cut. The DTC types are the ones with a much firmer grasp on the analytics and the granular effectiveness of ads – much more than people who do persuasion. Persuasion is a much more amorphous thing in general. But the ways today’s advertisers judge persuasion come out of the same analytic framework, the same soups of data, as the targeting. In some cases, they’re relying on measures of “reach” and impact that literally come from Facebook. DTC marketers have the very concrete fact of acquired purchasers and return purchases over time. If there’s a problem those are the folks who are going to see it first. And back in the Spring, they were seeing it.

Why weren’t we hearing more about it? Or why wasn’t the trade press hearing more about it? Partly it’s because Facebook is or was the golden child. But there was another big factor. No one wants to be the person who stands up and says, “Hey I’m not selling as many mattresses as I was.” Or, “People on Facebook aren’t signing up for my monthly shaving kits anymore.” Because maybe it’s just you and you’re going out of business. There’s also the fact that a lot of these companies are fueled by repeat infusions of VC money. If you say there’s a problem, even if it’s not just your problem, that doesn’t help at the next board meeting or the next investment round one bit.

But by the summer, the word was getting out. Here’s a report from the trade publication Digiday from June 7th. “Pivot to traditional: Direct-to-consumer brands sour on Facebook ads”.

Part of the argument was that prices had risen dramatically, as much as 100% over the previous year. Some suggested this was a product of Facebook’s success: as demand had grown for Facebook’s ad inventory, prices had gone up. That’s common sense and a decent problem to have if you’re Facebook. But look a little deeper and a key issue – I suspect the key issue – was efficiency, the black box of the Facebook’s algorithms’ ability to put your ad in front of a future customer at the right place at the right time.

Here are a telling few paragraphs.

“We’re trying to move away from Facebook as fast as we can,” said Fulop [Brooklinen], who said CPMs on the platform are double what they were a year ago. “We’re fighting in this little slip of real estate with everyone else out there and it’s hard to cut through. You’re paying an impression-based auction so you are essentially bidding against anybody and everybody that wants to compete for that space, so it’s become a hyper-competitive environment.”

Digiday spoke with 10 direct-to-consumer companies, and all of them report their marketing mix has de-emphasized Facebook for other digital alternatives — including Facebook-owned Instagram — but seven of them also say they are expanding into traditional vehicles. The reason: Prices are getting high for audience segments and the feed has become a very cluttered space.

“We can’t work fast enough to maintain the stability of the pricing,” said Fabian Seelbach, svp of marketing at DTC company Curology, which sends customized acne treatments to consumers. “The effectiveness for Facebook has gone down and got particularly bad in late April and early May, which is why we are shifting significant spend.”

Now, don’t get me wrong. I’m not saying Facebook is the next MySpace. Facebook makes money hand over fist. It’s so vast as to be part of the structural architecture of the Internet itself. I do not think it’s going anywhere. But people are fooling themselves if they think today’s sell-off is a temporary reverse or the result of a short-term investment in ‘security’ that doesn’t impact the core business model.

Facebook’s predatory corporate culture and dubious uses of data are too deeply embedded in its business model to be easily extracted. And it may not be possible at all, not while sustaining the fantastical profit levels the company and its stock prices are based on.