Facebook Inc. (NASDAQ:FB) has announced Q4 2017 results and the first glance of it makes us visualise the promising future of the world’s largest online social networking community. Led by Mark Zuckerberg, the company beat market expectation in terms of revenue in Q4 2017 but fell short of estimated profits by industry analysts. The fourth quarter revenue of Facebook rose to $12.97 billion, clocking 47% increase as compared to the same quarter last year. On the other hand, the profit of Facebook in Q4 2017 reached $4.23 billion, up 20% from the year-ago quarter but failed to meet industry analysts’ estimation of $5.73 billion.
The shortfall in reported profit may not be a great concern for Mark and investors of Facebook as it is due to the one-time tax of 15.5% introduced in the recent US tax reform. However, the greater concern for the investors is declining time spent by users on Facebook.
The company reported that despite the notable increase in active users base, the time spent by a user on the platform has declined by 2 minutes per day. The figure may look negligible, but when we do a simple math by factoring total user base, it’s whopping 50 million hours per day.
Th decline in the total time spent by Facebook users is the result of recent changes, such as reducing the volume of viral videos, to make the platform more personalised for users.
But that’s not the only reason why users have started shying away from Facebook and are spending less time than before. The biggest culprit is the rising dominance and aggressiveness of brands which are spending millions of dollars on Facebook advertising. It is eventually making users Newsfeed looks more spammy, unsolicited offers and promotional updates and less of a personalised digital play area to get engage with people who they really care about or like to stay updated about.
So, before we dig deep to explain how soaring revenue has turned evil for Zuckerberg, let’s quickly touch base the main highlights of Facebook’ performance in Q4 2017:
- Monthly active user count reached to 2.13 billion by the end of Q4 2017, up by 14% from the end of the same quarter last year.
- Daily active user base also increased by 14%, to 1.40 billion by the end of December 2017.
- Mobile has emerged as the dominant source of revenue for Facebook. The influence on Facebook users is increasing with each quarter. As a result, mobile accounted for 89% of advertising revenue in Q4 2017, up from approximately 84% in the same quarter last year.
- Facebook has employed little over 25,000 employees across the world.
By all the above performance figures it’s clear Facebook is scaling new heights with revenue growth and user base. On the flip side, the so called phenomenal growth has started showing signs of far-reaching challenges Zuckerberg may have to go through.
The Meteoric Rise of Facebook In the Last 5 Years
In the last five years, Zuckerberg steered Facebook with a single agenda of increasing revenue and profits. The revenue soared over 7X, from mere $1.59 billion in Q4 2012 to $12.97 billion in Q4 2017. The revenue growth was largely driven by big brands who spend millions of dollars to build their community, engage their community and influence the market through their Facebook community.
In 2012, the organic reach of posts updated on brand pages was recorded 16%, on an average. Which means, 16 out of every 100 fans of a brand page could see every single update brand was published on their Facebook page.
Zuckerberg not only allowed cash-rich brands to bombard users with as many updates as they want but also made the emerging brands struggle to reach a sizable number of their fan base. The brands, who were not ready to pour money on Facebook, failed to engage their page fans effectively.
Facebook’s strategy to strengthen their revenue books by squeezing money from as many brands as possible gave an opportunity to digital marketers and agencies to reach out brands that were struggling due declining organic reach. Millions of pseudo accounts and pages posting viral videos started mushrooming from nowhere. Most of these accounts and pages were managed by small and mid-size digital marketing agencies. These accounts and pages were created for the sole purpose of promoting agencies’ clients and their products/services by outsmarting Facebook’s algorithm.
Consequently, the number of monthly active users on Facebook platforms soared to 2.13 billion in Q4 2017 from just 1.06 billion in Q4 2012, more than doubling its user base in just five years. Interestingly, a sizable 10% of it, or 213 million, are pseudo accounts. To understand the gravity, the figure is bigger than the total number of monthly active users in the US.
On the other hand, 65 million brand pages are also churning out 120 million updates on a daily basis daily.
Users Paid The Cost of Facebook’s Growth
All the above scenarios clearly explain how much focused Zuckerberg was on revenue growth. At the same time, he failed to visualize the increasing uneasiness among the genuine users who are the main force behind making Facebook making worth hundreds of billions of dollars.
In 2013, the situation worsened when Facebook made changes to Newsfeed ranking algorithm once again. Posts that were not seen by users were given a second chance to attract the eyeballs of irked users.
Zuckerberg did try to strike out a balance between ads and personal updates by reducing the organic reach of posts. Consequently, the organic reach of posts declined to just 6%. by mid-2014. In the following two years, by mid of 2016, the organic reach further declined to below 2%.
Industry experts, however, believed that the move was only to strengthen Facebook’s financial performance. The declining organic reach of posts resulted in brands spending more ad dollars on Facebook. It has once again flooded the Newsfeed of legitimate users with more of promotional updates instead of the personal updates from friends and followers.
By the mid of 2017, it became clear that Facebook was losing mojo, especially among teens. The study from eMarketer indicated that teens were dumping Facebook for Snapchat and Instagram. While it was a bit relief for Zuckerberg who acquired Instagram in 2012, Snapchat is still posing a big challenge.
Amid to all the developments, changes, growth and challenges, one thing became certain – Facebook is no more as lucrative as it used to be five years ago. While Zuckerberg was busy in keeping his investors happy from soaring valuation, he didn’t introduce any major change to keep users interest intact. The tweaked algorithm of organic reach helped the company on financial grounds more than it helped users.
Interestingly, Zuckerberg is aware of the challenges and side effects as well, and that’s why he has recently promised to ‘fix Facebook personally‘ to make it a better platform to interact. He said that Facebook would be going through a major overhaul in 2018 to make it more personalised and adorable for users.
Zuckerberg Needs to Act And Act Fast
The fourth quarter result of Facebook reveals the challenge Zuckerberg visualised recently and ‘promised to fix‘ before it came out in public domain. The declining time spent by users on the platform is a clear indication that Facebook’s is losing its grip on legitimate users who boarded the platform for constructive discussions, connecting with friends and family.
While Zuckerberg tried his best to play down the issue of declining time spent in front of investors, industry experts believe this could be just the tip of the ice burg Facebook may hit soon. Club it with the slowing growth in user base and we find that Facebook is staring at a grave problem. Though the total number of monthly active user grew 14% YoY in the fourth quarter of 2017, it’s actually less than 16% YoY growth Facebook recorded in the third quarter of 2017.
The US market has stagnated, and the growth in user base in the country for the last few quarters has been negligible. The scenario in Europe is slightly better but it’s concerning. China is still a walled garden and the only sizable market left for Facebook in Asia-Pacific, which has been leading the growth, in terms of the number of monthly active users, for the last few quarters.
But on the other hand, the contribution of Asia-Pacific in terms of revenue growth is still far lower than other stagnated markets. If we pay close attention to the fourth quarter results of Facebook, the ARPU in Asia-Pacific market has not been showing any sign of much improvement. For the last many quarters its hovering $2.5. In contrast, ARPU in the US & Canada the ARPU has clocked $26.76. Though at the worldwide level Facebook’s ARPU increased to $6.18, it was primarily due to the contribution of US & Canada market only.
The years of dependence on the US & Canada market for revenue and profit growth has put Facebook in a challenging situation. While the US & Canda region accounts for nearly half of the company’s revenue, the contribution of Asia-Pacific region is still less than 20% of the total revenue in Q4 2017.
In nutshell, Facebook’s overall growth by the end of fourth quarter unravels many colossal problems Zuckerberg will have to deal with, and that too pretty soon. The year has just begun and Zuckerberg finds himself surrounded by the challenges that may keep him occupied for the whole year. It’s going to be a defining year for Facebook, and for the Zuckerberg as well who will have to find a balance between revenue and engagement. It’s the time when Zuckerberg must revisit his strategies to redefine Facebook. For sure, it’s little too early to conclude either in favour or against Facebook, all we can do is wait and see how Facebook keeps its users glued to the platform and find new avenues for revenue to make the growth look more promising for the future.