The very first line in Facebook Inc.'s business description in its annual report to shareholders is, "Our mission is to give people the power to build community and bring the world closer together," which is something only Facebook believes, if it even does.
A better summary would be that Facebook is the world's most ruthless and efficient operation at turning audience into dollars. And if it can be a little more careful about the ruthless part, that efficiency will continue to deliver amazing profits – and prove wrong the investors who are selling off shares this week.
Certainly, it's easy to feel that we're at a tipping point. The company has already been dogged by its mercenary approach to political advertising and the sewer of fake news its feeds became in the 2016 U.S. election. But in a way, that only served to show how amazingly powerful Facebook is as a vehicle to deliver a message. For every concerned citizen who still cares about the difference between truth and fiction, there was likely a potential advertiser who woke up to what Facebook can truly accomplish.
This week's news – that Facebook user data was apparently possessed and possibly misused by Cambridge Analytica, a firm that worked for the Donald Trump campaign, indeed crosses a new line. This was not Facebook amorally selling its services to an advertiser while keeping hold of its users' personal information; the data ended up in the wrong place, and to many, used wrongly. Investigations, fines, lawsuits, opprobrium will follow.
Will this, though, truly dent the Facebook business model? Will a meaningful number of the company's two billion users finally realize they're the product, not the customer, and dial down or drop out? It could happen. But the company's metrics are too amazing to conclude today, at least, that this particular tempest will have a material effect on Facebook's money-making.
The discussions around Facebook's business at the time of its 2012 initial public offering over whether the company could successfully make money (can they get people to use it on a mobile phone?) look like scrawls on a caveman's walls, they're so dated. Since going public, the company has done the two things it needed to do: continue to add new users, and sharply increase the amount of money it collects from advertisers for each one of those users.
As a result, its profit margins are bigger than ever – which is why it still sports a market capitalization of nearly US$500-billion, even after losing about US$50-billion in the past two days.
Facebook's "monthly active users" (MAUs) – people who used Facebook or Facebook Messenger in the prior 30 days – have grown from under 1.4 billion worldwide in 2014's final quarter to 2.1 billion in 2017's final three months. In each of the last five quarters, worldwide MAUs have grown anywhere from 14 per cent to 17 per cent of the prior year's number. While the number is in the single digits in North America and Europe, the MAU growth in its Asia/Pacific region has ranged from 23 per cent to 28 per cent, and Facebook now has more users there (499 million) than in North America and Europe combined (461 million).
While user additions have slowed in the developed world, average revenue per user (ARPU) is actually growing more quickly than elsewhere, with year-over-year gains averaging 38 per cent in the previous five quarters. Whereas Facebook collected US$13.70 per North American user in the final quarter of 2015, two years later that number stood at US$26.76. In Asia/Pacific region, however, it's just US$2.54 – for now.
This suggests a successful continuation of the Facebook model of building audience, then building revenue from each audience member. Advertisers pay because it works.
Returning to this week's scandal: There's no doubt the political outrage may lead to some attempts at greater regulation that may shave some pennies off each dollar that Facebook takes in. The challenges seem more likely to manifest themselves, however, in more cost and employees devoted to regulatory compliance; greater, clearer disclosure to users as to what information is going where; and more potential liability for misuse of data by outside parties. These are all easily implemented by Facebook, and the measures will probably give comfort to any users who are having second thoughts about their use of the site.
Importantly, the company has established itself as an affordable, effective means for the smallest of businesses to effectively market themselves. And before politicians place too great a yoke on Facebook, they'll surely start to hear about the negative effects on the economy if too many restrictions are placed on the company.
Actually, you might say Facebook has become too big to fail. And we will look back at this week's developments as a mere stumble on the path to more users, more revenue and more profits.
David Milstead