The months leading up to and following Facebook's congressional hearings in April of 2018 have been a roller coaster for the company. The stock took a massive hit when they announced on the last earnings call that revenue growth would slow over the coming quarters.
Have all the scandals and bad PR truly inhibited the future of Facebook? Or is this just another stumbling block along the way for a company that will be around for generations.
Nicole and Jon dig into what moves the needle for Facebook's business: advertising. As Facebook continues to mature their advertising business and company as a whole, what ripple effect will this have on people and businesses spending time on the platform.
Facebook has undergone scrutiny and allegations regarding their business and Nicole and Jon cover many topics around them like:
- The congressional hearings and Zuckerberg's message to congress about advertising
- The "core" of Facebook's revenue
- How Facebook has successfully monetized Instagram and WhatsApp
- The influence of bots on the ad ecosystem
- Keeping ad platforms from being "spammy"
- Facebook's influence on the fabric of society
- Predictions of where Fecebook will go from here
Nicole and Jon believe that Facebook will continue to thrive even after all issues of 2018. But the big question is what will Facebook do next? Maybe a search engine? Facebook has been on the forefront of the social media industry for over a decade. But there are still many sectors they haven't delved into yet.
Reach out to us with any ideas, questions, or feedback on the podcast!
Transcription for Episode 15 of 'Shape the Conversation':
"The Facebook Roller Coaster"
"Well how do you sustain a business model in which users don't pay for your service?" - Senator Orrin Hatch
"Senator we run ads." - Mark Zuckerberg
[00:00:09] - Jon
That is now infamous exchange between Senator Orrin Hatch and Facebook CEO Mark Zuckerberg this past spring on the Senate floor when the Facebook CEO definitely got raked over the coals for a few days by Congress talking about everything from Cambridge Analytica scandal to Russia issues to everything you can imagine came up during hours and hours of testimony today. Nicole, we're going to put Facebook in our own spotlight and look at their roller coaster ride since that day a few months ago.
[00:00:42] - Nicole
It hasn't been easy for them since April.
[00:00:44] - Jon
[00:00:45] - Jon
But you know I think if you dig beneath the headlines a little bit you'll see some trends that show that you know Facebook's doing some good things to try to get a handle on some of the ad fraud and we'll go into all that and more today. So what do you say, let's get started?
[00:01:02] - Nicole
Let's do it.
[00:01:03] - Jon
[00:01:09] - Nicole
So I'm Nicole Mears.
[00:01:11] - Jon
I'm Jon Davis.
[00:01:12] - Nicole
And this is our podcast Shape the Conversation.
[00:01:14] - Jon
We work with a great team here Shape.io in Bend Oregon.
[00:01:18] - Nicole
We left jobs at agencies to build software for digital advertising teams and we'll be talking about working in marketing, growing Shape.io, and Facebook today.
[00:01:27] - Jon
Yeah. Generally topics that touch on marketing and how businesses are looking at marketing today we tend to focus on the digital aspect of that. So Google Facebook are a big part of that. So news in Facebook and changes in Facebook really affects us and our customers and honestly I think every business out there needs to pay attention to what Google and Facebook are doing because there is such a big part of companies marketing strategies out there today.
[00:01:56] - Nicole
Absolutely.So as Jon mentioned I mean Facebook has been raked through the coals and the most recent kind of development is they lost 120 billion dollars in one day. One single day.
[00:02:11] - Jon
In market cap
[00:02:12] - Nicole
In market cap.
[00:02:13] - Jon
Yeah not actual dollars went out the door.
[00:02:17] - Nicole
Still Zuckerberg's value took a big old hit.
[00:02:20] - Jon
Fair enough and full disclosure I do have a humble holdings of Facebook stock. Nothing that's going to sway any markets but I'm sure there's some you know financial rule that you have to disclose when you own some shares. So I do have some shares in Facebook but feel comfortable enough giving my unbiased opinion on all accounts here.
[00:02:41] - Nicole
So let's talk about it. Do you want to talk about the hit that they took, the why they took it, do you want to talk about their development? Where are we going with this?
[00:02:49] - Jon
Let's start with the hearing. Let's start with the quote that we led with and talk about, similar to where we talked about Google, ads are at the core of Facebook's business and a lot of the way they need to think about their business is how do we support the ecosystem around these ads so advertisers believe in these ads, businesses believe in the ads. And I think what I noticed as a big transition kind of through this period is that people now care just as much about the PR of their ads and where their ads are appearing next to as they do the raw numbers and performance. I think digital marketing has swung a little bit too much to being a pure numbers game and I think that has created a lot of advertisers to think we're really strongly about where they're placing their ads and is Facebook a viable source and I think Facebook needs to take that very seriously as a company. And I think they have over the last few months and I think you could definitely argue they should've been on top of this much sooner. No doubt there. But they are taking steps and being transparent with the market about their steps and I think the big drop that you mentioned really wasn't as much derive from those scandals as it was the news that revenue growth was slowing. Not stopping or not dropping but they're going to stop growing 20, 30, 40 percent year over year and that's going to maybe drop into the teens or single digits and that's what I think we saw the market react to.
[00:04:25] - Nicole
Yeah definitely wasn't an advertising thing there and in fact in the U.S. Canada has basically slowed. They've got no gain.
[00:04:33] - Jon
And that's been the case for the last few years.
[00:04:35] - Nicole
Couple of years. Europe's actually declined and then you see I think it's they brand them Pacific Asia and the rest of the world are growing but they're growing at a slower rate. So yeah I think that really spooked investors. And it's interesting though because it doesn't come from an ad play it doesn't come from an ad perspective that significant drop but where are we going to regain that value? Right. I mean I think they already are gaining some of that value back.
[00:05:00] - Jon
They have gained a little bit back since that initial hit and I think if you know you look long term so some of the stats from their Q2 reported earnings revenues of thirteen point two billion that's up 42 percent year over year. I mean that's a wildly big growth number for a company of their size and when you're talking about a company bumping up against the sheer physics of number of humans on Earth is one of their limiting factors to still see revenue growth like that is incredible and I think that eventually investors will come back to. And I think they're also in a really tough spot. They need to get a handle on some of these bots and they have and we've seen as somebody who works with them with their advertising API them taking renewed interest in every company that has access to the data. But the market's not going to like when you report less accounts on your platform than more. It's still very driven by daily active user metric and Twitter and Facebook are beholden to that stat and I think it's interesting that you mention they've kind of slowed or even dropped in Europe because Facebook's super savvy right. I bet you they knew this before anybody else before the market and they went out there and made plays like WhatsApp which is huge in Europe. I'd love to see Instagram numbers in Europe over the last few years I'm sure they're up.
[00:06:35] - Nicole
Well everything I'm reading is saying look those are the new frontiers. That's where they have to go because there's, and I'm probably wildly off on these numbers, but there's three point three billion Internet users and I think Facebook has two point one billion. And you know you hear that-
[00:06:51] - Jon
Using some of their... one of their properties-
[00:06:53] - Nicole
One of their properties and any growth that they have like they've already tapped out those big markets in U.S. and Canada with a lot of kids or a lot of you know people our age. I mean everybody who had disposable income is growing the rest of you know that seven point whatever billion it is people now that's not going to be as profitable as a market as what they've already achieved. So where they're looking at is yeah how do you monetize WhatsApp how do you monetize Instagram and is there a threshold of acceptable you know advertising that can be done because WhatsApp doesn't even have advertising to what I've understood right now.
[00:07:29] - Jon
They pay a small amount a year to use WhatsApp. Yes.
[00:07:34] - Nicole
And there's something though I think they were talking about a chat program where advertisers are now starting to pay to send direct messages to their users. And so like that's kind of the next frontier are we going to see more ads on Instagram is that gonna actually over time decrease usability. Those are all the things I think about when I think about this. Where are they headed? How are they going to make more money?
[00:07:54] - Jon
Yeah that 40-42 percent year over year growth one third of that comes from Instagram. So they're really really learning how to monetize that platform and usage on Instagram and in a real way.
[00:08:06] - Nicole
That's nuts. That's a lot of Instagram influencers and sponsors.
[00:08:12] - Jon
Yeah and I think it's interesting that you see them clearing out a lot of these bots and these fake accounts but revenue still up. So for me I think that shows that these bots weren't a huge part of that ad ecosystem I think ad fraud is definitely a part of all ad spend out there. I think the platforms are constantly trying to fight it. A lot of software out there trying to fight it but it's tough to catch all bots and everybody creating a new account in that way. But the reality is they don't seem to be the one driving the real revenue gain or growth as they're eliminating a lot of these bots clicks aren't going down for ads. And that to me is the sign of a healthy ecosystem or at least an ecosystem that's improving and one that I think advertisers can feel confident that now at least more humans are going to be seeing your ad than previously.
[00:09:11] - Nicole
Yeah I think one of the things that Facebook's doing to really kind of focus on growing that the usefulness or that impact on business is local users-
[00:09:20] - Jon
Yeah beyond just the ads, the ecosystem around the ads.
[00:09:23] - Nicole
Yeah. So a lot of what I was reading was saying that they're focusing on local business even more so now. So Facebook's always had a local business product and it's always been just best practice to have you know a Facebook page for your business and hopefully you're engaged, I think there are millions of pages that never get touched, but they recently talked about how they are going to start putting more focus on making those pages really a hub of information and engagement central with these local businesses so they're going to try to start driving more engagement through there. Now if you think about kind of the long play on it you can look at Google's trajectory with their local business listings and how they've become this, you know obviously, massive search engine trying to get people the most helpful information as quickly as possible. Now is Facebook's play to get everyone to start even more so than they are right now going to Facebook to look for that information to get that useful kind of helpful information. But that's one thing that they can do to engage businesses and get more people versus engaging or allowing bots.
[00:10:26] - Jon
One of the changes that kind of has sent ripples through the marketing world over the last few months is a news feed algorithm change that really limits the chances that a businesses post is going to organically appear in somebodies feed. So previously you followed a bunch of companies business pages they'd pop up in your feed pretty regularly now that reach is greatly diminished. You know you're seeing publishers report traffic coming from Facebook is way down on those types of posts. And I think you see Facebook understanding maybe the best way for businesses to use these pages is to update essentially or business listings with information they can leverage in other places of the app so I see it referred to as they want business pages to be more about utility than posting. You know they want, Okay now we've got this database of all these restaurants that we can eventually serve to people that are searching for it. I mean you've seen Facebook do very little in search. You know you see their product people talk about there's not many places right directly on Facebook to discover a lot of new stuff that aren't popping up in your feed.
[00:11:40] - Nicole
It's a really interesting thought and didn't quite take it from that perspective, but if they, I don't want to say forced, but if they get businesses to offer up more information not only can they take that and actually monetize it in some ways or use it to drive user engagement but they can also potentially spin off whole entire new apps where they're going after, I don't want to say Yelp, but they're going after similar kind of ideas with that business information or like you said they're using that business information for a variety of data purposes that even we're not the product managers we don't quite have that perspective in their heads quite yet. We'll see.
[00:12:19] - Jon
But you see Zuckerberg say over and over again like we're trying to focus on making sure time spent on Facebook is time well spent. And that means potentially making these shifts like this that more businesses were spamming these feeds than others. You know people just weren't engaging with the type of content that was being put out there.
[00:12:42] - Nicole
All right. So we're talking about overall platform experience keeping it from being spammy one of the cool things I think Facebook is doing specifically with their ad side of it because that's our jam is testing out augmented reality and seeing how they can increase user engagement and what they've found is they did a test with Michael Kors where you could actually try on sunglasses with a picture of you and so you know to swipe through their different models, put it on, and they had ten times the amount of engagement using this experience than they did without. Which is nuts. They're doing the same thing, they have a video creation kit now where they're making it easier for businesses local or big alike to make videos by just uploading photos, images, videos, and then overlaying like logos or text. And again they're seeing this massive increase in engagement in both of those areas video and AR because people want that experience. Now of course my mind immediately goes to B2B application right because that's definitely a very retail experience, the Michael Kors case study, but it's not there yet doesn't look like it and I didn't see any great examples but who knows it's something that's fun to think about.
[00:13:48] - Jon
Yeah that is also going to be an interesting thing to see how Facebook handles in terms of being a tool for B2B companies. I would say for us as a B2B product we don't see a lot of engagement on Facebook, we even when we put a lot of effort into Facebook people just aren't on there thinking business in a lot of circumstances. I think you see a lot of consumer products seeing more success on their e-commerce products on there. That's a whole other field that Facebook still could dive into. You know think about some professional version of Facebook where they let you start fresh with a new profile and they leverage their tech to build this new ecosystem. Now they have all this knowledge about companies you can say you work for this company and since they put all this work in making sure the business pages were designed for utility with all these data they now know all these things about the company you work for. Their scale gives them a lot of power and freedom and I think taking a step back looking at it from a marketer side, do you have major concerns about Facebook in the future? Is it something where it's just table stakes? If you're putting together an advertising plan for a product let's say even in B2B is there some consideration you're having there?
[00:15:17] - Nicole
Of course, I mean I do to some extent I do think it's table stakes no matter what I think even if you're not like you said regularly actively posting or even if you're not one of those brands that has the budget the aware with all the big giant teams to create these incredible immersive experiences you have to at least have a presence there because if people are just shouting at you on Facebook and you ignore everything then that's going to look worse than not. Now from an advertising perspective, that's just a presence perspective that's an advertising perspective, it's tough for me to answer that question because like you said we've had we've had mixed results. It tends to be you know when we we really try to go broad with our targeting you know and attract a lot of people, now it's still focused targeting, but it's when we try to go broad we see a lot of engagement but really ever comes of it and when we go super specific we might get you know hundred eyeballs on it but maybe we get a lead or two out of it so it's a balance for me. I even struggle with wanting to create these really great immersive giant campaigns that are awesome and fantastic but you know at the end of the day if you can't get any eyeballs on it or you can't get the right eyeballs on it then...
[00:16:31] - Jon
Yeah. It's like a lot of things in marketing sorta it depends.
[00:16:35] - Nicole
Yeah the universal answer, It depends.
[00:16:37] - Jon
But if you're running a digital marketing company or looking to offer those types of services I imagine these last few months have been tough on you thinking about people you know #deletefacebook these types of movements you know I feel like you read so many articles that are like, people aren't on Facebook anymore, Facebook is dying, or Facebook's uncool now. But then you look at the stats and the actual real world engagement and it seems like Facebook's only becoming more of a fabric in society only more of part of the fabric of society and where we're going in their ability now to expand into different markets and to buy other larger companies and to experiment with things like AR and VR. They're going to you know affect your life whether you do have a Facebook account or not.
[00:17:31] - Nicole
Absolutely and I think it's still out I'm probably going to wildly misquote this number but it is something like you know people are still engaging with the app eight to ten times a day. I think the percentage of people who actually deleted facebook after that whole thing went down was tiny insignificant. And my favorite and I think I've told this before too is I will tell people all the time when they get creeped out by adds how to stop doing it how to get them to stop targeting with that specific ad and rarely do people take that action and why is because I also give them the disclaimer that if they stop or they really significantly reduce the amount of information that Facebook or that Google has on them that that targeted out experience is going to be so untargeted. So you might be a dude getting makeup ads.
[00:18:24] - Jon
Yeah I think that's always the line that these platforms have really tried to walk that line between weirding people out with some of the tracking and really what they know and leveraging what they know about you and it's tough you know like are people willing to sacrifice that type of security to get less relevant ads? Yeah I mean people are probably willing to have slightly less targeted ads and I think that's something at least on the display end that I think marketers and advertisers should get used to. What draws me to platforms not Facebook like Google is that search aspect of it. You know it's very different from display advertising it's much less susceptible to ad fraud. It's a lot more qualifiers go into a search and an ad click then I see an ad on Facebook and I click that. And to me that's the big uncharted territory that Facebook is yet to even go into is search. And I think that's a lot of these changes with business pages that I see like in my interpretation the initial rumblings of Facebook starting to think about hey how can we get involved with search. They see Google and Amazon. They're playing for some big bucks on the search side. Facebook knows a lot about you and could potentially be a part of that discovery process and you see their product people even hinting about it. But does Facebook even want to take on an Amazon in search? Even going in that arena like they're potentially positioned to partner up with Amazon in a real way to take on Google for some product searches.
[00:20:14] - Nicole
The question in my mind is not if because I think they will extend is when and how do they make it a completely innovative and unique experience because the thing is going up against Google search like search for search, there's been so much behavior ingrained in us with Facebook being a social network that I don't think I would naturally... I think I'd Bing something before Facebooked a local business maybe not. I don't know maybe that shifts but I really want to see them whether they do partner with Amazon or whether they do something completely different, does it change game because they change the game the first time around.
[00:20:51] - Jon
And I would argue you see stats like searches that contain "near me" in them greatly increasing with frequency. Facebook's in a great position to answer a lot of those near me type queries and searches and that's why I think if you're an advertiser you need to continue to think about how Facebook fits into your your media buying and even for us. We found it not to be effective in the past. We're constantly thinking about it. Are there ways we can get back into it has some things changed that maybe make it does help for us as a B2B. But if you're B2C this is where people are spending their time and Facebook's only going to have more data to create different advertising experiences and even invent new ones in AR/VR. That's where there's been a lot of bad press and the stock has taken a hit. But if you look at the business fundamentals the kind of like old school financial people will look at their pretty rock solid like their earnings per share are still pretty good. And here's another installment we had the "Guess how many people work for Google" on the Google episode. So here's Nicole's chance to guess what is the current employee count of Facebook? Google's for reference was 89,000 employees as of Q2 2018.
[00:22:28] - Nicole
I'm scrunching my face trying to come up a number here.
[00:22:29] - Jon
I know what you're thinking really really hard.
[00:22:36] - Nicole
[00:22:38] - Jon
Pretty good. 30,275. And this number is up greatly from the people they've added to help like manually check content and flag content. They've got a huge team of smart people still generating profits. They're going to weather this storm I think and they're going to come out the other side and they have properties like Instagram that are disruptive products in their own right and would be one of the top five advertising behemoths in and of itself. So I think analyzing the last few months where we've come since the testimony what are the big few things you're looking at from Facebook over the next few months or do you have any predictions you think are going to come out?
[00:23:33] - Nicole
I think you know I believe that there's going to be continued focus on their, not just privacy, but all of the surrounding you know privacy advertising the amount of control access etc. I think there's still going to be hopefully a continued focus by consumers on that and I think that will push Facebook to do some really hopefully innovative things and things that are really good for the consumer. I absolutely believe that Facebook stocks are going to rebound. You know I don't think that's a question. It's maybe not going to get up you know regained 120 billion in the next year but it'll get back there and my other predictions are going to focus on doing some really innovative stuff. Otherwise well I mean they have to look at how do they continue to increase the revenue per user that they're getting.
[00:24:24] - Jon
And that was a big step in our Molly Meeker episode we talked about how a few years ago the average revenue per user for Facebook was around 16 to 18 dollars a year. Today it's almost thirty four dollars a year.
[00:24:37] - Nicole
Well it's interesting because I was almost going to say you know if they want to continue growing and if they want to continue building. But here's the thing like they may be happy not being stagnant right. But like you said they know that they're going to see declining user gains. They know that they're going to see a decline. So maybe it's not the same growth play in a massive value acquisition that they've had over the last two years since they've been 2008? Right? When I started college I can't weather the years but maybe you know maybe it's not such an aggressive play like maybe it is taking kind of like the Google Play like taking a really significant investment and looking at how do you create the extra big river.
[00:25:16] - Jon
The ecosystem that feeds the ads. In looking at it in terms of where does this put Zuckerberg focus our big Zuckerberg believer I think he's the guy to lead the company. I think he has probably got distracted over the last few years and lost sight of a lot of data oversight and data responsibility and what app developers got access to what I think he let a lot of that go unchecked by him. I think this has kind of brought his focus back to it and a real existential threat for his company is people losing faith in the platform treating its users you know with some dignity and respect and not just as another number of their whatever billions of users. I think it's probably going to mark a big evolution but it might not. You know like we might be back here a year from now and as long as revenues are up like the market is going to continue to believe in it and I think as long as they're offering something close to the experience they do today and they have 30000 employees working to make that better every day I'd known people out of work there are really smart people. They're going to be tough to unseat especially when you see a company like Google was basically thrown in the towel trying to go after the social network aspect of day to day life.
[00:26:43] - Nicole
All right. So I think that's a good place to wrap it up. One thing that I wanted to leave you guys with because I think it's actionable not just from a privacy perspective but also you can use it in your business on a day to day aspect. Is Facebook released what's called the 'Info and Ads Tab'. And that was around kind of, not just Cambridge Analytica and the Russia scandal, but I mean it's huge value application there. So you can now go look at any businesses ads that they're currently running. Well it has a fantastic business application because you can now go to all of your competitors and see what ads they're running and see how they were approaching their audiences and use that for yourself to create better ad experiences for your customers.
[00:27:26] - Jon
And also be aware they can do that to you too.
[00:27:28] - Nicole
[00:27:29] - Jon
So I think again this is more accountability in advertising which is a good thing. All right so remember to rate reviews subscribe wherever you get your podcasts. Next week we've got another interview with Julie Harrelson who leads Cascade Angels a VC fund here in Bend Oregon. And until then, over and out.
[00:27:53] - Nicole
(🎼 Thanks to Music Flow Teaching for the intro and outro music, if you are in Central Oregon you should look them up for in-home creative music lessons. 🎼)
Jon Davis, CEO
Spent years as a PPC consultant and agency analyst before focusing onmaking software.
Nicole Mears, VP of Marketing
Nicole is a former PPC analyst, department head, and product manager. She now focuses on marketing and customer success for Shape.io.