You have likely read that Facebook stock plunged twenty percent this morning on news that user growth has slowed and revenue slightly dipped. Just as Netflix disappointed a few weeks ago, the story here is the same: the tale of an infinite future was disrupted by the reality of a finite present.
Why the huge reaction?
As I argued in Selling Social Media, bubbles are best understood as affective cascades. The normal functions of fundamental or technical business logic are bracketed in these cases as long as the positive feeling produces results that seemingly backstop the narrative. Bubble research suggests that bubble investors are often rational — they simply assume that the bubble will continue to inflate.
Facebook has been in Wiley E. Coyote mode for a while now. Between Cambridge Analytica, Zuckerberg’s public appearances, and weakening fundamentals, the facts against the bubble have been building up. The reaction can be sudden because the ideological function of the bubble amplifies affective responses. Psychoanalysis really does have some important ideas to offer communication research, one of them is that signifiers are often retroactively re-signified. What does that mean? You may have already known that Facebook had reached maximum size, but you chose not to believe it. When you shift your belief, all that evidence that you discounted will mean something different to you.
Remember all those editorials that FB earnings in April were evidence that people still loved the platform? Information takes time to be assimilated by the market mechanism.
Isn’t this a big deal because Facebook is so large?
No. This mistakes market capitalization for revenue. Facebook is roughly the size of a few large television channels combined. But still substantially less than the truly major entertainment companies: Comcast and Disney. The revenues of firms that fill your basic needs or provide backbone services are vastly larger than Facebook.
The Big Limits
As Netflix has demonstrated, demand is not infinite. There are 120 million TV households in the United States. 100 million of them already have Netflix. There won’t be a lot of new growth here. Facebook has been irresponsible with feed management and sales. Their stats that induced the great, and deeply flawed, pivot to video were wrong. The brand safety movement among firms buying advertising is very real. You can write as many editorials that you want that random, uncontrolled, programmatic will continue for ever, and you will continue to be wrong.
Here is the big limit: advertising won’t exceed 2% of GDP. And that is being really optimistic. The Economist Schumpeter blog noted this a few months ago, most valuations of web firms were premised on a dramatic increase in the total investment in advertising. News flash: unless people start clicking way more adds, or people decide to watch commercials for fun, this simply won’t happen.
The paradox of targeting also sets in here as more precisely targeted ads will reduce the carry through revenue from inefficient mass market ads. As a built in feed back controller, it is really smooth. At the same time, if your plan depends on selling more ads, you have some real problems.