Take-aways from Facebook’s quarterly report

This post will be about what I took away from reading Facebook’s quarterly report, presentation and earning call transcript.

  • There are 2.7 billion people using Facebook, Instagram, WhatsApp or Messenger each month with more than 2.1 billion people using at least one every day.
  • Stories have more than 500 million actives every day across all platforms
  • Mobile ad revenue by 30% year over year and made up of 93% of Facebook’s revenue this quarter
  • 3 million advertisers use Stories Ads
  • Interactive Stories Ads was introduced last month
  • Facebook daily active users reached 1.56 billion with growth in India, Indonesia and Philippines leading the way. I wonder how this number relates to the 2.7 billion figure mentioned in the first bullet. For instance, I use all the apps from Facebook almost on a daily basis. Will I count as one or four users?
  • “The average price per ad decreased 4% and the number of ad impressions served across our services increased 32%”
  • “Payments and Other Fees revenue was $165 million, down 4% year-over-year and down 40% from Q4 which benefitted from holiday sales of Oculus and Portal.”
  • “Turning now to expenses. Total expenses were $11.8 billion, up 80%. This includes a $3 billion accrual taken in connection with the inquiry of the Federal Trade Commission into our platform and user data practices. This matter remains unresolved, and we estimate that the associated range of loss is between $3 billion and $5 billion. Absent this accrual our total expense growth rate would have been 46 percentage points lower. Operating income was $3.3 billion representing a 22% operating margin. Absent the accrual, operating margin would have been 20 percentage points higher.”

Daily Active Users YoY Growth

Source: Facebook

DAUs year-over-year growth in fiscal year 2019 slowed down compared to Q1 2018.

Monthly Active Users YoY Growth

The same sentiment goes for Monthly Active Users

Revenue YoY Growth

In Q1 2019, the revenue YoY growth in America is the largest among geographies, even bigger than that of APAC

Average Revenue Per User YoY Growth

Average Revenue Per User YoY Growth in US & America is pretty impressive given how competitive the market is and the size of Facebook’s already massive business.

Operating Margin

Operating margin in 2018 contracted across the quarters compared to 2017. Even without the expected FTC fine, the margin would be 42%, lowered than that of previous first quarters in 2017 and 2018.

Thoughts

The numbers show that even though the growth slowed down in the first quarter of 2019 compared to Q1 2018, the business strength still seems to be pretty impressive, especially in APAC and North America. However, the company still has a lot of issues to deal with. The scandals related to the company are reported almost on a monthly basis. I suspect that ensuring the user safety and integrity of the platforms will be expensive and challenging. Plus, regulations and lawmakers are putting increasing pressure on Facebook. GDPR was mentioned repeatedly during the earning call in the sense that compliance with such regulations would negatively impact the business. In addition, Amazon has been growing fast as a fierce competitor in the advertising field, taking ads money from Google.

There is mention of cannibalization between Feed Ads and Stories Ads and Facebook building tools to help advertisers place ads in the most efficient and effective way

Now, we’re really applying that lesson to Stories. First, we need to convince marketers that people are using Stories, and I think having seen the mobile shift, their process – they’re getting that I think more quickly. But then we have to make it easy. So if you look at some of the tools and products I’ve talked about in the last couple of quarters, now you can – rather than us saying to you, go make a Stories ad you can just send us some pictures, some text, some very easy posts and we will create some Stories ads for you.

So our process is, we have one sales team selling all of these products; I think that helps us a lot because they already have those relationships. And we’re doing all we can to make it very easy to adopt the format. We also want to make this as automated as possible. So the long run view should be that you can give us maybe simple pictures, maybe simple videos, maybe an ad you’ve produced and we can do the placement for you. Because we think over time our systems will do a better job deciding where your ads should be placed and even helping you target. And so you’re seeing us build tools in that direction as well.

In terms of how much of its incremental, I’m sure not all of it is. There’s – definitely has to be some cannibalization for people who are doing feed ads as they get Stories. But we’ve seen that over time as we move people we’re able to get increasing shares, hopefully, of their budget but it’s our job to earn that. We tell marketers all over the world that we want to be the best dollar, the best minute, the best euro they spend and it’s up to us to prove that ROI and we’re going to continue to do that.

To convince people to pay for something, first it’s better to prove that the goods in question have value. By making Stories cheap, Facebook makes it an appealing option in addition to the Feed Ads. Though there is concern over cannibalization, Facebook doesn’t seem to have trouble increasing the revenue or the advertising Average Revenue Per User.

Concern over Facebook’s new privacy-focused vision

A few days ago, Mark Zuckerberg shared with the world his privacy-focused vision for Facebook moving forward. I understand that it may make sense strategically for the company, but I have real concerns over the feasibility of the strategy.

Lack of trust

Facebook has been littered with scandals for the past two years. The trust between the blue brand and users isn’t particularly at its all-time high. There have been documented evidence on the exodus of users from Facebook or the significant decrease in activities. If the trust is already shaky, why would users trust Facebook with every aspect of their life by using their proposed super app? (The super app concept is similar to WeChat, which users can use to do many things while on the platform such as booking movie tickets, paying bills, transferring money to friends and families…). If we can’t trust Facebook with just daily communication, how can we entrust it with more aspects of our life? If you can’t trust a dentist to treat your teeth, would you trust that dentist if he said he could fix your eyes?

The audience

I think one of the reasons why WeChat is successful is because of the target audience. Coming from that part of the world, I can say from personal experience that we Asians tend to not care as much as Western audience about privacy. I think there is a reason why WeChat hasn’t been as successful overseas as it is in China. If it were marketed to Western audience, given its relationship with the Chinese government and Western users’ concern over privacy, I don’t think it would be a triumphant effort. Hence, to convince Western users to use Facebook for everything, the trust has to be pretty solid. It’s not there now for sure.

Regulatory hurdles

Facebook has attracted unwelcome attention from lawmakers recently. And for a good reason. Even if they had done nothing wrong, which is definitely not the case, I suspect that the road to the super app vision wouldn’t be without robust challenges from the regulatory perspective.

Essentially, it’s all well and good for Facebook to change its stance on privacy. However, the trust isn’t there. I would love to see more concrete actions to transition from a company whose more than 95% of its revenue is from ads to a company that values privacy first. I am not a believer at the moment since Facebook has used up the rope we gave them already. If they want us to trust them again, they have to do it the hard way. And I think they have to hurry as well as the world won’t stand still for them. If this is the vision that makes business sense, others will go for it as well.

If they are committed and succeed in the future, kudos to them. Until then, I choose to remain skeptical of the vision.

Facebook’s privacy-focused vision

Yesterday, Mark Zuckerberg released a blog post on a “privacy-focused vision” that centers on:

Private interactions. People should have simple, intimate places where they have clear control over who can communicate with them and confidence that no one else can access what they share.

Encryption. People’s private communications should be secure. End-to-end encryption prevents anyone — including us — from seeing what people share on our services.

Reducing Permanence. People should be comfortable being themselves, and should not have to worry about what they share coming back to hurt them later. So we won’t keep messages or stories around for longer than necessary to deliver the service or longer than people want them.

Safety. People should expect that we will do everything we can to keep them safe on our services within the limits of what’s possible in an encrypted service.

Interoperability. People should be able to use any of our apps to reach their friends, and they should be able to communicate across networks easily and securely.

Secure data storage. People should expect that we won’t store sensitive data in countries with weak records on human rights like privacy and freedom of expression in order to protect data from being improperly accessed.

Be that as it may that this vision can bring business and strategic benefits, meaning that Facebook has a reason to follow suit. Nonetheless, I have nothing, but skepticisms about this vision.

First of all, the majority of Facebook’s revenue comes from ads. By majority, I meant 98.5% of their revenue in 2018 comes from ads

Source: Facebook

When something is 98.5% of you, any claim that you will do something threatening that 98.5% part tends to raise genuine concerns about its legitimacy.

Second of all, Facebook’s track record on keeping its promise isn’t that great. For the last two years, it will be a hard ask to find a tech company that is involved in more scandals than the blue brand. I came across this disturbing article from Buzzfeed on Facebook. Here is what it has on decision-making at Facebook

Zuckerberg and Chief Operating Officer Sheryl Sandberg do not make judgment calls “until pressure is applied,” said another former employee, who worked with Facebook’s leadership and declined to be named for fear of retribution. “That pressure could come from the press or regulators, but they’re not keen on decision-making until they’re forced to do so.”

Buzzfeed

On Facebook’s attention to privacy

One former employee noted that Facebook’s executives historically only took privacy seriously if problems affected the key metrics of daily active users, which totaled 1.52 billion accounts in December, or monthly active users, which totaled 2.32 billion accounts. Both figures increased by about 9% year-over-year in December.

“If it came down to user privacy or MAU growth, Facebook always chose the latter,” the person said. 

Buzzfeed

On their denial to admit problems:

Other sources told BuzzFeed News that Facebook executives continue to view the problems of 2018 fundamentally as communication issues. They said some insiders among leadership and the rank and file could not understand how Facebook had become the focus of so much public ire and floated the idea that news publications, who had seen their business models decimated by Facebook and Google, had been directed to cover the company in a harsher light.

Buzzfeed

On a new feature called Clear History:

“If you watch the presentation, we really had nothing to show anyone,” said one person, who was close to F8. “Mark just wanted to score some points.”

Still, nine months after its initial announcement, Clear History is nowhere to be found. A Facebook executive conceded in a December interview with Recode that “it’s taking longer than we initially thought” due to issues with how data is stored and processed. 

Buzzfeed

By now, you should see why I am skeptical of Facebook’s new vision. We all have to take a side and so does Facebook. It just happens that taking advertisers side means Facebook is not on ours as users.

Facebook & Privacy First Mentality

Quite a week for Facebook

It has been quite a few days for Facebook. First, two days ago on Techcrunch:

Facebook has confirmed it does in fact use phone numbers that users provided it for security purposes to also target them with ads.

Specifically a phone number handed over for two factor authentication (2FA) — a security technique that adds a second layer of authentication to help keep accounts secure.

Then, a bombshell was dropped yesterday. Per Wired:

ON FRIDAY, FACEBOOK revealed that it had suffered a security breach that impacted at least 50 million of its users, and possibly as many as 90 million. What it failed to mention initially, but revealed in a followup call Friday afternoon, is that the flaw affects more than just Facebook. If your account was impacted it means that a hacker could have accessed any account that you log into using Facebook.

Facebook’s track record in data security and privacy hasn’t been particularly stellar recently. 2018 is not 2010. Facebook doesn’t have the same dominant position as it used to in the social network market any more. Users have plenty of alternatives and substitutes to spend their time on. These scandals, coupled with its role in the “free speech vs hate speech” row, don’t do any good to Facebook’s image as well as its appeal to users when privacy has become more and more pressing as a concern to users.

Privacy & regulations

I have been resigned to the fact that there is no anonymity on the Internet and that complete privacy isn’t possible. Yet, when users trust a company with their data, whatever the data is, it’s the company’s responsibility to protect such data. As many important aspects of our lives take place on the Internet, the need to feel safe online is more overwhelming than ever. Without feeling safe, how could users feel comfortable using a service? Privacy and data security will be, if not already is, expected by default of companies. It’s not a nice-to-have feature any more. It’s a do-or-see-your-competitors-get-ahead game.

But companies are not in the business to lose money. If they are not legally required to bolster their security, don’t expect them to. That’s why companies fought hard against GDPR or privacy laws passed in California this year. And this is where I don’t understand the criticisms of some towards regulations such as GDPR. Yes, no law is perfect, especially in the beginning. That’s why we have amendments. GDPR is not an exception. It is a great first step to give power back to users and force companies to be liable for their actions/inactions.

A common criticism that I came across towards GDPR is that it makes it too expensive for small companies and startups to comply, widening the moat or competitive advantage gap between giants such as Google/Facebook and SMBs. Well, if a company with a deep pocket and better security measures has 10% of its 500,000 in user base breached, the impact is 50,000 users. If a small company with fewer recourses and much weaker security measures loses all of its 50,000 users, the impact is the same as in the first scenario. Hence, breaches at SMBs can have significant damages and ramifications as well.

Sure, the best case scenario is to have different levels of compliance applied to companies of different size. I’d love to see that happen. Nonetheless, without privacy regulations, imagine how much companies would care about our data and how much of a mess it would be. Despite having HIPAA in place, every year has been a banner year of cybersecurity in healthcare in the US and healthcare organizations spend 3% of their IT budget on cybersecurity. Verizon reported in their 2018 Payment Security Report that only 40% of all interviewed companies in North America maintained full compliance with PCI. Despite all the scandals related to data security in the past, Facebook still lets more unfortunate events happen. To be fair, I don’t imagine having impeccable security is easy. However, would companies even try to secure your data without any legal requirements?

Progress happens when we raise standards. Would cars be more environmentally friendly if we hadn’t enforced regulations on emission quality? If a university wants to raise its standard for incoming students, will it lower or raise the requirement for GMAT/SAT? Will a drug be safer for patients if the FDA enforces more or fewer tests? Big companies have the means to comply with stringent privacy regulations. Small companies/startups, though difficult, have more access to capital funding. Plus, public cloud providers are investing to have their infrastructure compliant with many compliance regulations (See more here for AWS compliance and Azure compliance). Regardless of size, companies have to take privacy seriously and consider it an integral piece of the puzzle, a competitive advantage if done right or a threat to their competitiveness if ignored.

I left Facebook and am about to leave Instagram too

Ads prompted me to leave Facebook and probably Instagram as well

A little bit over a year ago, I decided to deactivate my Facebook account. At the time, it wasn’t mentally healthy for me to be on the application any more. It sucked me  into politically divisive posts, meaningless sponsored content, time-consuming endless rolling and jealousy from posts by those whom I know. At first, the change was tough, but it gradually got easier and now I don’t even feel like coming back to Facebook. (One tip: don’t sign in your Messenger app as you will be automatically signed in on your Facebook account as well)

The same scenario is happening right now with Instagram. I am not on it as often as I used to any more. It’s hugely annoying when you have to see one ads every three posts. The ads are not even relevant. I even took the time to complain to Instagram on the frequency and irrelevancy of the ads, but of course, they don’t listen. At this rate, I am probably going to leave Instagram as well soon in the near future.

Changing preferences

Personally, I have seen a change in how I consume these social networking apps. I no longer have the urge to know what people in my circle are posting on a daily basis. Usually, people post to share (boast) beautiful pictures of food, fancy places, travel or relationships. Of course, I am interested in knowing good things that happened to my friends. I am happy for them. On the other hand, I’d like to see more on their daily struggles and less fancy aspects of their lives. But of course, such stories are not told on Instagram or Facebook. Plus, we are prone to jealousy of others after their feel-good pictures. At this point of my life, I don’t need to muster any effort to avoid jealousy. I’d love not to have it in the first place.

Nowadays, I prefer individual conversations with friends either on Whatsapp, Hangout, iMessage or Viber. These conversations allow me to know more about them without distractions, annoying ads or jealousy.

Low expectation for Facebook

I think that Facebook needs to turn it down a bit in trying to monetize their apps. Pushing ads down users’ throats will destroy user experience and eventually, negatively affect the appeal of the apps to advertisers. So far, they haven’t done any of that. The crazy bombardment of ads on Instagram pisses me off. Additionally, after the recent departure of Instagram’s co-founders, all original founders of Facebook’s most notable acquisitions (Whatsapp & Instagram) left because of disagreements, reportedly, with Facebook’s executives and lack of independence. These founders prioritize products and user experience. Their departures speak volume on where Facebook is headed to.

Right now, Facebook is still the king. They own four apps, each of which has more than one billion active users. But when users’ behavior changes over time while they keep feeding us useless and irrelevant ads, I doubt that such dominance will be sustainable. On top of that, Facebook will have to deal with the issue of hate speech vs free speech, something that I don’t think can be fixed anytime soon.

 

 

Peter Thiel’s interview

I was listening to this interview with Peter Thiel while in the gym yesterday (Yes, I like to listen to podcasts, interviews and John Oliver while sweating it out! Weirdo me). There are two points that stood out for me.

A bit of context, Peter Thiel was the founder of Paypal and recruited what would be known as the Paypal Mafia, a group of individuals who would found successful startups. Peter is known for being a wildly successful entrepreneur, investor and contrarian thinker who challenges assumptions and established thinking.

He didn’t think Facebook would be that big

Peter was one of the first investors in Facebook when the company was at $5 million valuation. He said in the interview (around minute 7:20) that he didn’t think it would be as big as it eventually became. It would be worth his investment if Facebook just dominated the college student market. We all know how it turned out.

I sometimes beat myself up a little bit for not seeing far ahead in terms of companies that I analyzed or missed. But if the great Warren Buffett missed Amazon, Google and for many years, Apple (he is now one of the biggest shareholders of Apple) and if Peter Thiel couldn’t figure out Facebook’s eventual great future, then I guess it’s OK for any of us to be…human.

First meeting with Mark Zuckerberg

Peter Thiel talked about the first meeting with Mark around minute 4:20. He recalled that Mark went to the meeting with Sean Parker and Sean did most of the talking. Having watched a few of Mark’s interviews and speeches, he doesn’t appear to me as an exceptional salesman. Yet, people often claim that if you don’t have sales skill, you can’t be an entrepreneur. While it may be true in most cases, it’s not definitive. Mark and Facebook still getting the money without doing most of the talking was the proof of that.

Point is that I increasingly believe that every advice is contextual. Most of the time, there is barely one-size-fits-all or hard-and-fast advice. What works for one person may not work for others. One piece of advice is like a tool in your arsenal. One tool cannot do everything. It serves only a specific purpose in a certain set of scenarios. Constant learning gathers many tools at your disposal and learning what tool to use in a scenario is probably what makes a person succeed.

Twitter, Facebook, Free Speech and Business

Today, two top executives from Facebook and Twitter met with the Senate. I haven’t checked the news yet, but my guess is that they talked about how to prevent future intervention into American’s elections by a foreign entity using social media and how to stop fake news while preserving the First Amendment right.

First Amendment is a huge issue in the US. It is touted as the bedrock of the country’s democracy and society. The Amendment refers to one’s freedom to voice one’s opinion without restrictions. Though it may sound inherently logical and simple, it is much more complicated in reality. We deal with people of different perspectives every day. It’s almost impossible to please everyone with our opinion or action. On an individual level, it may not be a big problem, but in some businesses, it is. Enter Twitter and Facebook.

Twitter and Facebook are essentially crowd pleasers. They want as many to use their platforms and for as long as possible. A big user base will attract advertisers and their dollars. To attract and keep users, these platforms feed users what they want to see based on their previous activities on (and off?) their sites.

The problem they are facing now is that when someone exercises their 1st Amendment by posting some false information, should it be taken down or should it be left there? Take it down and users on the other extreme end of perspectives will accuse these platforms of abuse of power and oppression of free speech. Leave it there and other users will be angry about the so-called “fake news”. How can a piece of content be classified as “purely false information” or “legit but controversial information”? Even if such classification is possible, will the management team at these social media firms have the courage to take actions?

This is a big problem for social media platforms whose monetization model relies much on their popularity. But trying to be popular with everyone is causing them trouble. Executives have to spend hours in DC. Users aren’t pleased with their actions or lack thereof. Reputation is tarnished. Personally, I don’t see how this issue can be solved for Facebook or Twitter. I don’t think AI will be of much help in this case. Mentioning AI just shuts down the conversation and stops further questions.