End of an Era: Will Social Media Stocks Stop Rising?
Shares of social networks are rapidly falling, the main market players are massively laying off employees. Elon Musk talks about the possible bankruptcy of Twitter. The situation is explained by a number of reasons - from problems with monetization to political pressure.
This year has led to a record drop in social media stocks. Meta shares (recognized as extremist and banned in Russia) have fallen by 73% since the beginning of the year, to the level of early 2016, showing the worst dynamics among all securities of the S & P 500 index. If last summer the company’s capitalization reached $1 trillion, then in November 2022 it was about $240 billion. Back in October 2021, Meta co-founder Mark Zuckerberg was the third-richest person in the world, and now he has moved to 29th place. The other day, in a letter to employees, he announced his intention to lay off 13% of the staff - more than 11 thousand people. These are the first such large-scale reductions in the entire 18-year history of the company.
The capitalization of another major social network, Snap, has also decreased by more than three-quarters since the beginning of the year. Twitter is on the brink of bankruptcy. Experts are predicting the end of the era of social networks with might and main, linking this with a change in society’s attitude towards these media platforms. Does this mean that social media stocks will no longer rise?
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According to Forbes estimates, Mark Zuckerberg’s fortune has decreased by $104 billion over the past year, to $32.8 billion. The co-founder of the company admits to a mistake: during the COVID-19 pandemic, he hoped that the growth of people’s activity on the Internet would continue after the pandemic ended . “I made the decision to significantly increase our investment,” he says. “Unfortunately, the situation did not develop as I expected.” As Zuckerberg emphasizes, the growth rate of online commerce is almost back to pre-pandemic levels. Added to this was a slowdown in the economy, increased competition and falling advertising revenue.
Meta’s troubles are often attributed to large investments in the Metaverse project, which has yet to take off. It was reported that the company has already lost $9.4 billion on this project amid a 49% decline in profits due to falling advertising revenue. The very change of Facebook’s name to Meta last year was meant to highlight this pivot to the metaverse, which so far has come to nothing.
In fact, the company’s difficulties began long before the construction of the metaverse began. In 2018, Facebook was already losing more than $100 billion in capitalization due to the fact that Cambridge Analytica got the opportunity to collect user data on the social network, which then used it for political advertising. Facebook was then forced to admit that several million users had left the platform. The company agreed to pay a $5 billion fine.
The capitalization of the well-known social network Snap has also decreased by more than three quarters since the beginning of 2022 . The reason for the October collapse (by 25%) was the data on revenue for the third quarter, which turned out to be lower than expected. Back in late August, the company announced plans to lay off 20% of its 6,000 employees. As reasons for the difficulties, Snap names the difficult situation in the economy (the US is on the verge of a recession) and increased competition. More specifically, it was about reducing the advertising budgets of companies that advertise on this social network, including due to the increased cost of raising capital.
Large-scale cuts are also taking place on Twitter. After the acquisition of this network by Elon Musk, it was announced the dismissal of half of the 7.5 thousand employees. The entrepreneur explained this reduction by the fact that the losses amount to $4 million per day. There were reports that 90% of the employees in the Indian division were laid off (there were about 200 of them in total), although India, thanks to its large population, can provide tens of millions of new users. Musk filed bankruptcy for Twitter in November.
Apple attacks
One of the main reasons for the fall in social media shares is the crisis of their monetization model based on targeted advertising sales. In April 2021, Apple made it harder to track user activity on iOS devices. The company has changed privacy settings so that users can prevent apps from tracking their device to personalize ads. By November 2021, most iPhone users did just that. Because of this, it has become more difficult to track the effectiveness of advertising campaigns in social networks. Meta’s then COO Sheryl Sandberg bluntly stated that the new rules introduced by Apple reduce the accuracy of Facebook ad targeting and also make it harder to measure the effectiveness of such ads. But, according to analysts, Snap, which is aimed specifically at smartphone users, has been hit especially hard.
Apple, of course, presented this innovation as a step towards users, but observers immediately suggested that it should help the company’s advertising business. The Financial Times estimated at the time that Apple’s decision would result in Snap, Facebook, Twitter and YouTube losing $10 billion in ad revenue in the second half of 2021 alone. And in February 2022, then-Meta CFO Dave Weiner estimated a $10 billion loss just for his company. Apple itself denied that it’s advertising business would greatly benefit from innovation.
In addition to the difficulties with Apple, social networks continue to suffer from specific political problems for them. Some advertisers, including Audi, General Motors, Pfizer, have announced a suspension of buying ads on Twitter (Audi and General Motors are competitors to Tesla in the electric car market, so the claims may not only be political). Musk himself claims that Twitter’s ad revenue has dwindled due to pressure on advertisers from “activist groups.” However, according to the analytical company MediaRadar, the advertising revenue of the social network began to fall even before the completion of the deal for its acquisition by Musk.
Some, however, find great prospects for Twitter precisely due to the political component of its business. According to billionaire Ronald Baron, there are platforms where you can see someone’s photos, and Twitter, in contrast, can become a place for discussing major social issues. This puts Twitter at the very center of American domestic political strife, which can do business more harm than good due to constant suspicions of political censorship. Twitter has a particularly controversial reputation in this regard, which in January 2020 not only deleted the personal account of the current US President Donald Trump (with 88.9 million subscribers), but also began to delete his tweets in the official presidential account.
Proponents of Twitter becoming the main place for political discussions, including Ron Baron, call it a “digital town hall” (from the English town hall - this is how politicians meet with voters). However, townhalls take place in public buildings: city halls, schools, libraries. It is unlikely that everyone will agree that the place of such discussions in the digital space will be an unaccountable private company that will not let the “wrong” politicians go there, not to mention the “problem” voters. Musk himself, even before buying Twitter, spoke in the spirit that he did not plan to earn money on this social network, but was going to restore freedom of speech. But he is in no hurry to return Trump’s account.
“Problematic content”
However, politics is only part of the problem. Until now, most social networks have been built on the popularity of bloggers, and not on the quality of content. If someone was well-read on Facebook, then the algorithms offered the same content to all users indiscriminately. In the early days of social media, this helped them grow because it allowed them to scale quickly. However, many users are no longer satisfied with such irrelevant content. In the fourth quarter of 2021, Facebook lost about half a million users. And by the end of 2022, the company, according to forecasts, may lose 1.4 million, especially among people under the age of 25.
To remedy the situation, in 2022, Facebook switched to a recommendation model of content distribution. That is, the user was promised to show first of all what corresponds to his interests. This feature, of course, has long been part of the algorithm suite of any social network, but now Facebook will focus on it. YouTube, Amazon with its product recommendation system, online movie theaters (Netflix, Hulu and others), sites that sell books, etc. have gone down the same path even earlier. This should increase audience engagement. The advantages of this approach were realized in time in TikTok, where the user is recommended videos based on their interests using algorithms. However, as noted American entrepreneur Michael Mignano, platforms with this approach will decide not only what users will see, but also what they will not see. We are talking about “problematic or polarizing content.” What is problematic and what is not, again, the social networks themselves will decide. Thus, according to Mignano, the need for large teams of moderators will decrease - algorithms simply will not show unwanted content.
However, the success of TikTok is due not only to the recommendation model for providing content, but also to the initial bet on the video format (in the case of TikTok, on short videos). Zuckerberg called video a “megatrend” back in 2017 , but it turned out to be impossible to remake Facebook, which was originally focused mainly on text and images. Meanwhile, videos are estimated to generate 1,200% more shares than text content and images combined. In February 2022, Meta launched the Reels short video service for a global audience, but it has not yet become a real competitor to TikTok.
As for Elon Musk, he is exploring new sources of income. In particular, he decided to allow Twitter users for $7.99 to receive a blue verified user mark for their account, which was previously available only to famous people and celebrities. True, this also caused rejection among some users - to leave the social network if the blue mark becomes paid, the writer Stephen King promised. To bounce back, Snap also began offering paid services in June 2022, now for $3.99 a month, for example, you can change the app icon.
Despite the difficult times for social networks, analysts at Motley Fool emphasize that this is, if not a new, but still a rapidly growing industry. If at the end of 2021 there were 3.8 billion active users of social networks, then by 2025 they are expected to be 4.4 billion. Plus, social networks have sources of income other than advertising, including e-commerce. In addition, a competitor dangerous to American social networks - Chinese TikTok - may soon be banned in the United States under various plausible pretexts. Financial consultant Martin Tiller also points to an obvious trend: young people watch almost no TV, so advertisers will continue to go online anyway. And there they are unlikely to pass by social networks.