Facebook – death of a Category Leader?

Written by Paul Maher

Legendary author Mark Twain famously said, while on the run from debtors in the UK: ​​”The report of my death was an exaggeration”. He went on to live 13 more years and die an acclaimed writer.

Those who see the travails of one of the most successful category kings of its generation, Facebook, are equally off the mark. 

Not many companies can generate, let alone afford to lose, $60 million in revenue from a server outage and still brush itself down and carry on as normal. This does not mean however, the owner of category-defining social apps like Instagram and WhatsApp is not mortally wounded, nor that it is nearer the end of its rein than the beginning. 

With half of the world’s population claimable as its ‘users’ and sharing half of all US advertising revenues with fellow Boomer favourite Google, the future of Facebook remains to be seen. What recent events unquestionably show is just how powerful a franchise such companies can build.

When Category leaders like Facebook, or Apple start to wind up the flywheel, they push their competition so far back that catching up can take decades. Early acquisitions, often for amounts which look questionable, are a feature. Facebook’s 2014 purchase of WhatsApp for nearly $20bn, or $55 per user, stunned the market, especially in comparison to the $3bn Apple paid for the Beats headphone brand a month later. 

Bear in mind too, the Beats customers were paying over $100 per headset while WhatsApp users paid nothing for the service.

The cycle of Category leadership

Facebook has had a great run. The leadership team must scarcely believe their luck as they dominated category after category in the social universe and so much so they  had to coin a new category, the metaverse, to expand further their future blueprint. Meanwhile, however, the slow dead hand of time marched steadily behind, as has been the case with former Tech Category Leaders. 

Yes that was you IBM, HP and SAP. And yes, that will one day be Google and even some day Amazon. It’s the cycle of Category Leadership.

And how will this slow death play out? Perhaps the most obvious warning sign for Mr Zuckerberg, because let’s face it he is the only shareholder that really matters, is the awakening at last of legislators to the real business of Facebook. No more will Zuckerbarg have to explain to clueless officials how he provides, what some see as, ‘free internet’. Who can forget his  “Senator, we run ads” explanation in response to an enquiring politician’s astonishing ignorance about how Facebook made its money. 

The EU fined Facebook €225 million in 2021 for breaching rules it promised it would not. Lina Khan, the young British-born chair of the Federal Trade Commission, has filed worrying cases. It seems Facebook, in the light of recent whistleblowing allegations of child harm, has now  resigned itself to some regulation. But even this amount of incoming red tape is not even close to the real threats facing this and all Category Kings.

Relevance or death

The real danger facing Facebook, Amazon, neo banks, crypto currencies, quantum computing and every other Tech Category leader, is diminishing relevance. Facebook knew it was becoming ‘grandma’s photo album’ when it bought the new funky WhatsApp and Instagram apps. Now, these apps look decidedly rheumatic and tired compared to latecomers like Snap, TikTok and Signal. 

Worse, many of its advertisers, some 80% according to The Drum, are ‘mom and pop’ shops. They may still believe in Facebook Business, but they are smaller and are destined to stay small. Meanwhile, the important brands of tomorrow are diverting advertising dollars to direct to consumer strategies and building their own portals. Some, like China’s Shein, are truly innovating by blending hard-core ecommerce, social and user content.

Competition for attention was the real breakthrough of Facebook’s Point of View. Realising this earlier than anyone else set the flywheel of advertising dollars spinning. The attention of shoppers is the basic commodity to which Facebook added value. In a world where this commodity is ‘out-attentioned’, by Category-defining apps with more relevance, particularly to youth buyers – apps like Vinted and Shein – Facebook needs to reinvent itself once more. If it can.

Lucrative legacy

Some would say history shows how previous generations of tech category leaders threw off meaningful cashflow even as they were in their death throes. There is a very lively market in private equity firms who can amortize the dwindling revenues of former Category leaders. After all, without expensive coders adding new functionality and no marketing spend required to attract new users, legacy software firm revenues, even those decades old, comfortably beat the interest rates available at the bank.

But for Facebook, software was never really the top priority. Attention was. When this goes it goes fast. So while reports of Facebook’s demise are clearly exaggerated, it is now worth at least considering a black tie and a valedictory speech.

“Remember MySpace? Remember Words with Friends? Remember Facebook?”

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