The Two-Fold Crisis of Facebook, and What It Means for Advertisers

Facing an existential crisis on top of a near-term financial crisis, Facebook’s bet on Meta is more important than ever — but can they pull it off in time?

Photo by Dima Solomin on Unsplash

Facebook is no stranger to controversies and crises, but over the past two weeks, the social media giant is facing one of its worst periods to date. On February 2, in its first earnings report since the company rebranded as Meta last fall, investors were startled by a sharper-than-expected decline in profits and a gloomy outlook, per the Wall Street Journal. As a result, Facebook’s stock fell by over 20% last week, wiping out an estimated $230 billion in market value¹.

Examining Facebook’s current troubles reveals a two-fold crisis for the company: Not only was Facebook expecting a $10 million profit decline due to the new app tracking transparency (ATT) changes that Apple has been rolling out, the company also lost daily active users in North America for the first time ever, with TikTok being a noted competitor siphoning away user attention.

To its credit, Facebook is quite aware of both crises and has already been rolling out new products and features to address some of the underlying causes. The aforementioned metaverse rebranding is a major strategic shift that signals the company’s intention to get ahead of its problems, yet, questions remain whether the company will manage to execute the transition well enough to maintain its position as one of the duopoly in digital advertising, before it’s too late.

The Heavier-Than-Expected Impact of ATT

In April 2021, Apple introduced new App Tracking Transparency (ATT) features as part of its iOS 14.5 update, which resulted in heavy restrictions on the use of third-party data from apps, a crucial fuel for Facebook’s mobile advertising business. For the past decade, Facebook, along with many other app developers, has capitalized on Apple’s Identifier for Advertiser (IDFA) to track users across other companies’ apps and websites for targeting purposes. But the new ATT feature means that app developers now have to request permission to track their users in third party apps, potentially cutting off the crucial data that fuels the successful direct-response ad business Facebook has built.

At the time, some analysts downplayed the impact of the ATT features on Facebook’s ad business. Some cited the low opt-in rate of the ATT features at launch as a positive sign for light impact on the mobile ad ecosystem, while others pointed to its 56% increase in ad revenues during Q2 2021 as an indication that the damage would be minimal. Even as recently as three weeks ago, industry reports were praising the apparent resilience of the company’s ad business, citing a projected 32% year-over-year increase in spend in Q4 2021.

To its credit, Facebook has proactively changed its ad measurement methods and offered tips on how brands can improve their ad performance without IDFA-enabled tracking. Besides aggressively nudging advertisers into channels that improve attribution, Facebook has also been incentivizing shopping campaign options that create more first-party commerce data that falls outside the purview of the ATT restrictions. On the PR side, the company also touted its ad platform as a lifeline for small businesses to reach their customers and condemned Apple for hurting entrepreneurship.

Besides aggressively nudging advertisers into channels that improve attribution, Facebook has also been incentivizing shopping campaign options.

Despite all these efforts, last week’s earnings report revealed that Facebook is unable to shake off the ATT’s impact. A study from ad measurement firm AppsFlyer in October suggested that 62% of iPhone users were choosing to opt-out of sharing their IDFA, which explains the aforementioned $10 million profit loss that Facebook estimated, which accounts for about 8.5% of its 2021 revenue.

Still, the fact remains that Apple’s ATT changes impact all app developers, and compared to other mobile ad businesses that rely on third-party data, Facebook is best equipped to weather the storm and maintain its position in the digital ad landscape. After all, Facebook still owns a lot of first-party data on its massive amount of users worldwide, and has built up a decade-long relationship with digital media buyers. The company is putting together ways to improve conversion tracking with less third-party data, partly by making massive investments in machine learning to improve its targeting.²

In the meantime, the fight in the court of public opinion continues. During the earnings call, Meta CFO Dave Wehner complained that the permission-to-track feature favors browser-based ad businesses, such as Google (which pays Apple $15 billion a year to be the default search engine in Safari), because it “carves out browsers from the tracking prompts Apple requires for apps,” hinting at a new angle for its escalating anti-competitive argument against Apple.

While it is highly unlikely that regulators would side with Facebook and ask Apple to reverse its ATT policies, applying pressure on the anti-competitive narrative may help stall Apple from doubling down other privacy features that could further hurt Facebook’s in-app ad business, thus buying some valuable time for Facebook to figure out new targeting solutions.

Applying pressure on the anti-competitive narrative may help Meta stall Apple from doubling down other privacy features that could further hurt Facebook’s in-app ad business

For all the headaches that Apple’s anti-tracking feature is causing Facebook, the damage it is inflicting on Facebook’s bottom line will mostly be a near-term problem that the company will likely resolve in time. However, success is far from guaranteed, and the changing landscape of social media poses a far larger existential threat to Facebook’s long term success.

The Existential Crisis of Shifting Attention

Facebook is facing an existential crisis. For all the outrage and controversies of the past few years, the company has always been able to count on the stability of its core business. Although the company reported that usage had begun to decline in North America last year, those losses have been more than made up for as its user base grows in the rest of the world, until now.

Last week, Meta’s most recent earnings report revealed its first-ever quarterly decline of daily users. Not only was user growth across Facebook, Instagram, and WhatsApp essentially flat last quarter, the main Facebook app lost 1 million daily active users in North America during Q4 2021. While Facebook’s overall user base is still over 2.8 billion strong, it is clear that user attention has started to shift away from Facebook’s family of apps on a global scale.

The main Facebook app lost 1 million daily active users in North America during Q4 2021.

More tellingly, this drop in users for its main app is a strong indication of Facebook’s increasing lack of relevance with young people. It is no secret that younger generations had largely left the flagship app in droves for the likes of Instagram and Snapchat. By October 2021, teenage users of the Facebook app in the US had declined by 13% in comparison to 2019, and were projected to drop 45% over the next two years.

A few years ago, Facebook was able to capture most of users abandoning the big blue app with Instagram, which managed to successfully integrate the story format that Snapchat popularized and retain user attention. But its efforts to combat the rise of TikTok with Instagram Reels have been far less successful so far.

Unfortunately for Facebook, there is a fundamental difference between integrating the story format to fend off Snapchat and adding short-form videos to compete with TikTok. While the story format provides a different user experience than the main feed that Facebook and Instagram were centered on, they are still a means for people to share their lives with friends and family.

The short-form video that TikTok popularized, on the other hand, centers around an algorithmic feed filled with content sourced from users that one doesn’t follow. Instead of receiving updates from people you know or choose to follow, TikTok prioritizes entertainment value far above social connections, with its data-driven interest graphs replacing the social graphs that Facebook prides itself on owning.

TikTok prioritizes entertainment value far above social connections, with its data-driven interest graphs replacing the social graphs that Facebook prides itself on owning.

Therefore, it would be difficult for Meta to incorporate short-form video into Instagram without jeopardizing its entire user experience. Of course, that has not stopped the company from trying. The most recent update to Instagram’s main-feed algorithm resulted in showing content from accounts that users don’t already follow — just as TikTok does in its main For-You page. This change has predictably drawn ire from some users, prompting Instagram to promise an option for reverting back to a chronological feed soon.

Still, the challenge remains for Instagram’s pivot from a visual-driven social app to an entertainment app without alienating its core user base. So far, Instagram has not been able to effectively compete against TikTok without significantly altering its main use case as a social platform. Forrester data showed that, in 2021, weekly usage of TikTok had surpassed that of Instagram among U.S. Gen Z audiences. In other words, for Gen Z, Instagram is already becoming the new Facebook app. And that’s bad news for Meta.

For Gen Z, Instagram is already becoming the new Facebook app.

As a result, Meta would have to find another way to recapture the attention shifting from social platforms like Instagram to entertainment apps like TikTok. And until they do, it should be no surprise that most creators will be taking their talents to TikTok instead of waiting around for Reels to catch up. Unlike the short-term damage inflicted by Apple’s ATT, this existential crisis has no easy solution. Five years ago, Facebook would have simply acquired TikTok long before it was able to gain the traction it had in 2019, but that is no longer a viable strategy given the regulatory scrutiny placed upon the company today.

Will the Metaverse be the Solution?

Through this lens, the Meta rebranding last fall became a timely attempt for the company to stay ahead of the attention shift by betting on the budding metaverse concept. If the metaverse, along with its various entry points, is going to be the type of all-encompassing platform on which we socialize, shop, and consume content in the future, then Facebook is hoping that becoming a metaverse platform owner will solve its existential crisis, eventually.

Facebook is hoping that becoming a metaverse platform owner will solve its existential crisis.

For what it’s worth, Facebook has survived similar crises before. In 2018, Facebook suffered what was then the largest loss in market value in the history of the stock market to the tune of nearly $120 billion, following a similar scenario of weak earnings and slowing user growth, only to recapture most of that value within a year as story ads took off. In addition, Facebook has the right kind of founder-led company structure for CEO Mark Zuckerberg to implement his plan, and he has shown repeatedly that he is willing to endure turmoil in the stock market to pursue his vision.

Still, Zuckerberg’s big bet on the metaverse may take years, if not a decade, to pull off. Depending on how quickly the company loses audience attention to TikTok and other platforms, especially MMO gaming platforms, it may not have enough time to build out its metaverse platform before its profitable ad business starts to shrink, which would, in turn, restrict its capital investment in building the metaverse. Reputational issues could continue to cloud Meta’s prospects as well, despite its supposed early-mover advantages. The company was early to the crypto movement with the announcement of its Libra project in 2019, but the initiative was marred by partner disputes and regulatory scrutiny, and ultimately was shut down before ever being launched.

Depending on how quickly the company loses audience attention, Meta may not have enough time to build out its metaverse platform before its ad business starts to shrink.

And that is not to mention Meta’s competitors in building the metaverse, with companies like Apple, Google, and Microsoft ready to launch (or re-launch) consumer-facing AR/VR headsets that will compete against Oculus, as well as gaming companies with metaverse ambitions (i.e. the likes of Epic Games and Roblox) already working with brands to test out immersive virtual experiences. The bottom line is, if Facebook can’t find a way to effectively compete with TikTok, there’s little guarantee that it could beat the fierce competition in the race to build the metaverse either.

What This Means for Brand Advertisers

For all the doom and gloom that this two-fold crisis foretells for Meta, for now the company’s suite of social apps still remain as some of the most brand-friendly digital channels for advertisers. Despite the ATT handicaps, Facebook’s first-party audience data still works great for brands and awareness-driven campaigns, and its capabilities to deliver audiences on a global scale remain unparalleled.

If anything, the ATT changes mostly hurt the D2C upstarts that principally rely on cross-app targeting to find their customers, and move them into Facebook’s growing suite of native shopping channels, while leaving the app-install ads to Apple’s App Store. Theoretically, the withdrawal of D2C brands from bidding on in-feed ads could result in lower-priced inventory for established consumer brands, but in practice, the feed may just get filled by more shoppable units.

Looking ahead, however, Facebook’s weakened grasp on younger users means that brands would be smart to hedge their bets and diversify their digital media mix. Similar to the format shift from permanent posts to stories, the shift from story to short-form video as a main attention driver will require brands to experiment with new types of creatives and engagement strategies. Historically, advertisers tend to play catch-up with audience attention, but smart brands know the value in staying one step ahead to test things out as monetization tools on these new attention-aggregating channels mature.

The same principle also applies to figuring out the roles brands may play in the metaverse, where media opportunities may be even more creator-driven. Today, the increasing time and attention spent in gaming are severely under-utilized by advertisers, so testing out gaming channels would be a great place to start for most brands to prepare for the metaverse.

Lastly, finding the balance between maintaining a degree of control over your brand narrative while embracing the creative power of your biggest fans may be the most important step towards future-proofing your media strategy. Brand advertising is becoming increasingly value-driven and, one way or another, brands must plan for a collaborative, consumer-driven strategy, regardless of Meta’s prospects.

Footnote:

1. Interestingly, as Meta’s stock price stumbles, the company’s market cap now falls below $600 billion, which could actually help it dodge new antitrust scrutiny, as that also happens to be the number House legislators picked as the threshold for a “covered platform” in a package of competition bills aimed at Big Tech.
2. While this apporach will likely result in a sizeable increase in capital investment, which hurts its short-term profitability even more, it is also a trade-off that Meta has the resources to pull off.