Economics

Market Pressures Squeeze Facebook From Two Directions

You know you’re having a bad day when you lose $150 billion in two hours. That’s what happened to Facebook in after-hours trading on July 25, 2018. David A. Kirsch, an entrepreneurship professor at the University of Maryland’s Robert H. Smith School of Business, says the social media giant is getting squeezed from two directions. “You’re getting pressure on margins on the bottom line, and pressure on growth on the top line,” says Kirsch, co-author of Bubbles and Crashes: The Boom and Bust of Technological Innovation (Stanford University Press, 2019).

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Facebook Squeezed
By Original: Facebook, Inc.Vectorization: Tkgd2007 [Public domain], via Wikimedia Commons

Facebook Squeezed from Below

The bottom line pressure is part of a larger reckoning that Kirsch sees in Silicon Valley, where public sentiment is starting to shift against high-growth darlings like Facebook. "All of these big tech companies have been living a charmed life when it comes to their public image," Kirsch says.

While critics take aim at big oil, big pharma, big banks, big agribusiness and other industries, big tech largely has escaped the wrath. “Where has big tech been in all of this? Just sitting with a Cheshire Cat grin on their faces, laughing all the way to the bank,” Kirsch says.

Recent judgments against Google, chaos at Tesla, and fallout at Facebook with Cambridge Analytica have helped to wipe the smirk off their faces. Kirsch says questions surrounding data management and consumer privacy will force long-term, sweeping changes across the industry.

"We are the product, and people may at some point get tired of being the product," he says. "And if they do become tired of being the product, then the business model is no longer sustainable."

Kirsch says Facebook has lived for many years in a "free-range state," where the company was able to make money off the scale of the platform without any responsibility for the content of the speech. "Now they’re having to take some responsibility for the speech on their platform," he says.

Artificial intelligence can assist with flagging hate speech, libel and "fake news." But platforms like Facebook eventually have to hire humans to vet content if they want to publish responsibly. "And that costs money," Kirsch says. "Their margins have to fall."

Squeezed from Above

The second factor driving Facebook’s fall could be market saturation. "Facebook has been growing at very, very high rates for quarter after quarter, year after year," Kirsch says. "The numbers are staggering."

The growth eventually must taper, especially with new restrictions from sources like the General Data Protection Regulation (GDPR) in Europe. The question is how far stock prices will fall before Facebook hits bottom and rebounds.

Overall, Kirsch says, the company's position remains strong. "What could replace Facebook?" he asks. "For the time being, I don't see any threat. From that perspective this is just an adjustment."

Article By Smith Brain Trust, University Of Maryland’s Robert H. Smith School Of Business