Expect Google and Facebook to tell very different stories this week
Google and Facebook never were really a digital media ‘duopoly’, writes the editor, but their divergent destinies could become much clearer this week.
It’s financial reporting season again – the trimonthly extravaganza in which public companies tell us how much money they’re making (or losing). It’s not only a chance to monitor how big media companies are performing individually, but also how the sectors they inhabit are faring, too.
This week is a big week for Google (holding company = Alphabet) and Facebook (recently renamed to Meta Platforms), each of which report fourth quarter/full-year 2021 earnings.
While the media community is often guilty of lumping Google and Facebook as a digital “duopoly” that each command huge online ad revenue, they are really quasi-monopolies that control search advertising and social media respectively.
However, the mega companies’ financial reports should leave no one in doubt that they are on very different paths as we finally look forward to a post-Covid world.
Alphabet was a massive beneficiary last year as marketers ramped up spending as Covid-19 restrictions mostly eased in most countries. The company is heavily dependent on advertising, namely Google Search ads, which was responsible for over half (58%) of its $65bn in revenue in Q3.
However, the recent wave of Omicron cases is hindering global supply chains and this week’s earnings report could be reflected in a slowdown of ad revenue growth for Alphabet (which was 41% year on year in Q3). The company was already reporting slowdowns in advertising from the car industry. There is no point heavily spending on advertising if you can’t fulfil existing customer demand – remember that Amazon turned off its own media spend when Covid first hit in 2020 because of fulfilment issues.
Alphabet’s stock price is down by 8% so far in 2022, while Meta (né Facebook) is down by just over 10% since the beginning of January.
While those are similar relative decreases in valuations, the story Meta tells this week is likely to be very different.
You may have heard this term “metaverse” being bandied about lately. The term is often attributed to sci-fi author Neal Stephenson, who in 1992 described a 3D virtual space.
Last October, Facebook founder/CEO Mark Zuckerberg chose to co-opt the term “metaverse” for his new grand projét, in which Meta would create a new Facebook Reality Labs division to sit alongside Facebook, Instagram WhatsApp, and Messenger.
We were then told during a bizarre presentation by Zuckerberg that Meta’s plan in the metaverse is to create an environment that more realistically resembles the way people communicate when they are face-to-face. You can watch this Financial Times interview with Meta mouthpiece Nick Clegg and judge for yourself how close this prospect is to reality.
But then Meta will likely use its earnings call this week to further lower expectations about its topline and bottom line over the next few quarters. Meta expects its investments in Facebook Reality Labs (FRL) to eat into its overall operating profit for 2021, but that these investment will continue over several years, too.
Meta said total operating expenses would be $70.5bn at the midpoint in FY21 – $10bn of which would allocated to developing FRL – and expand of $94bn in 2022.
This is serious money to throw at something that feels, let’s be honest, flaky. Facebook has famously struggled to launch new products and services – the company’s graveyard of failed ventures includes Facebook Dating, Facebook cryptocurrency (Diem, previously named Libra), Facebook Portal, and – guess what – its VR headset Oculus, the device Zuckerberg presumes we would all use to access the metaverse!
As I wrote at the time, there is a serious lack of ambition at the heart of Meta if the plan is merely to silo off the scandal-laden money-machine Facebook, instead of give the company the reform it so badly needs. All the noise about metaverse is a tacit admission that he simply has no plan to make Facebook a better business than the one that has become known for increasing divisions within society, misleading advertisers, and failing to protect its users’ privacy.
We will see how investors and analysts react to whatever Meta announces this week, but I would expect Zuckerberg to generate more noise with the appointment of a CEO for Facebook when Meta delivers its earnings on Wednesday evening.
But whatever the reactions this week, the long-term paths for each digital media giant are becoming increasingly divergent. Whatever supply chain issues are impacting Google and YouTube now will eventually be resolved. Businesses will still rely heavily – perhaps inextricably – on Google Search ads and Alphabet will still control 93% or more of the global search ads market.
The only meaningful change that will move the dial for these companies and the wider digital media market would be for lawmakers, courts and regulators to step in on antitrust. As my colleague Ella Sagar writes today, opinions vary significantly about what would be the impact on the wider media industry, should Alphabet get broken up in such a way.
However, Meta will still be led by Mark Zuckerberg and there is no reason to assume his mega metaverse gamble will pay off. Remember that Facebook bought Instagram and WhatsApp; he did not create these wildly popular services. He didn’t even create Facebook, according to allegations made by his contemporaries over the years (but always denied by Zuckerberg).
It has become a truism to say that media trends, such as the adoption of streaming TV and audio, were accelerated during this pandemic. But there is nothing this pandemic that has brought about a huge or fundamental shift in the way we consume media or how it is funded.
We are still arguing about the BBC licence fee, TV is still widely seen as the most effective way to spend advertising budgets, and newsbrands still command an outsized influence on culture and politics. Many office-based industries were beginning to deploy flexible/homeworking arrangements before everyone was forced to WFH from their sofas and hastily-bought IKEA desk chairs.
Despite their valuations, Google and Facebook are fundamentally no stronger and no weaker now than they were at the beginning of 2020. But we should expect these companies to begin taking very different paths as we emerge from the pandemic.