No one thinks this is 'the end of Facebook' ... yet investors sense blood in the water

Stephen Lam / Reuters

There is no law that requires Facebook continue to be the dominant social media app in our lives.
The history of social media is a history of apps that have eventually stagnated and mostly disappeared.
The environment is sending negative signals about engagement, users, advertising, the stock, and regulation.
Investors sense blood in the water. “We are admittedly struggling to identify a catalyst to change the narrative,” Barclays analyst Ross Sandler said recently.

I opened up Facebook the other day and the top post in my news feed was from a friend I haven’t seen in more than 10 years. She was asking if anyone could recommend a doctor in a Southern seaside town 80 miles from where I live. “Does anyone know a good osteopath?” she wrote, “I'm in agony and mine has left the area! Thanks x”

jaws movie poster ZUCK Universal Pictures / Jim Edwards / BI

My friend got lots of advice on a new physician, but I breathed a heavy sigh: This isn’t fun. This isn’t what I come here for. This isn’t the vital, exciting, surprising - often enraging - experience that Facebook used to be, when news and people’s reactions to news dominated the news feed.

It was boring.

Yet, this is exactly how Mark Zuckerberg’s wants Facebook to work now. Since he decided at the beginning of this year to dial down posts from news organizations and boost content from friends and family, the content that is increasingly dominating my Facebook - and yours - is hyperlocal, personal, and … trivial.

On his most recent earnings call, Zuckerberg acknowledged the change would have a negative effect on the amount of time people spend with the app. “I expect the time people spend on Facebook and some measures of engagement will go down as a result,” he said. “We estimate that these updates decrease time spent on Facebook by roughly 5% in the fourth quarter.”

Since he uttered those words on January 31, Facebook stock has been in a jagged decline, from $187 per share to $160, down 14%.

It’s premature to talk about “the end of Facebook,” of course. The company has 2 billion users. It is not MySpace.

But there is no law of physics that requires Facebook continue to be the dominant social media app in our lives. In fact, the history of social media is that all these apps eventually experience some sort of decline or stagnation, often as new ones come along but sometimes simply because the masses decide one platform is suddenly uncool, and they move away. TheGlobe.com, Friendster, Path, Livejournal, YikYak, Secret, Tumblr. Twitter and Snapchat have both seen their user-base growth slow.

Is that what we’re looking at now, the end of Facebook, at least as a dominant force in our lives?

Wall Street now expects Facebook to be regulated

The environment contains some severe negatives:

Negative signal on advertisers: In an attempt to rein in some of the outrage around the way Facebook harvests data from users and sells it, Zuckerberg also announced he would end the “Partner Categories” program that allows advertisers to target users based on their own third-party data. It’s likely that Partner Categories was not a big business for Facebook, but nonetheless it still represents a pulling-in of the horns.
Negative signal on engagement: If Zuck’s turn away from news in the news feed does reduce engagement, look for the stock to be punished after the next earning call.
Negative signal on GDPR and ePrivacy: The EU is about to inflict a huge surprise on Facebook as all its European users will be required to re-give permission for all the data Facebook takes from them. 20% of all Facebook users are European. There are more Europeans on Facebook than Americans. These users are likely to reduce what they share with Facebook, and thus their engagement with it, once Facebook is forced to comply with the new laws.
Negative signal on US regulation: Zuckerberg now says he expects to be regulated. “I actually am not sure we shouldn’t be regulated. I think in general technology is an increasingly important trend in the world. I think the question is more what is the right regulation rather than ‘yes or no should we be regulated?’” Wall Street also expects that to happen.
Negative signal on the stock: Zuckerberg's voting control of the stock - even as he personally sells down his stake in the company - means Facebook is his personal kingdom. It is not a company primarily interested in performing for its investors. And Zuckerberg makes mistakes.
Negative signal on users: #DeleteFacebook became a trend a few days ago. When that trend hit Uber a while back it lost 5% of its market share in weeks.

Again, none of these moves are likely to “kill” Facebook, but they could certainly take the shine off it to an extent that it becomes like email. Something that everyone has, but you try to limit your use of it.

This is the defining issue among stock analysts right now. “We are admittedly struggling to identify a catalyst to change the narrative from regulatory back to innovation,” Barclays analyst Ross Sandler and his team told their clients recently.

Most analysts rate the stock a “buy.” But they hate the story.

“It’s unlikely many users fully comprehend the magnitude of personal data Facebook and others have aggregated"

“A recent survey indicated 79% of consumers in the EU didn't know that GDPR was coming, but once informed, 82% of them said they plan to take advantage of their new rights (i.e. to see, limit, or erase their data). This, combined with the continued public scrutiny around data privacy speaks to how there is a negative feedback risk that users will choose to materially reduce FB’s access to their data,” Morgan Stanley’s Brian Nowack and team told their clients.

Worse may yet be to come. The Cambridge Analytica scandal is a big deal not because anyone did anything illegal but because most consumers are clueless as to how much data - and therefore power - Facebook has on them. And when they find out they do not like it.

“What users chose to share with Facebook is only a small portion of what the company knows about its users. The company aggregates tons of data, from third-party brokers and ad tech companies (e.g Liveramp), to put together a
startlingly deep picture of users,” says Lloyd Walmsley and his Deutsche Bank team. “It’s unlikely many users fully comprehend the magnitude of personal data Facebook and others have aggregated.”

That could drive further regulation - another negative - against Facebook.

“It is clear that the extent to which data has been collected and the way it has been used is a big surprise to consumers. If anything, this has the potential to be more pernicious either because (a) it drives a consumer backlash against the online players or, worse, (b) it is a catalyst for tighter regulation in the US (perhaps along the lines already on the cusp of being implemented in the EU),” Thomas Singelhurst and the team at Citi told their clients.