One of the toughest corporate strategies is managing a declining asset while investing in promising but nascent ones.
It’s such a well-known difficulty that famous books have been written about it. This management balancing act might be even tougher in technology. If a company has a slow-growing or declining tech asset, often it simply dies or gets taken over by a private equity firm.
It does seem, however, that Facebook Inc. is smartly managing one probably waning asset — its main social network — while it is building up assets such as Instagram and the “stories” format of personal visual diaries.
Advertisements in Facebook’s main social network and the feed ads in Instagram will most likely continue to account for the lion’s share of revenue for some time. But the company has seen the writing on the wall. It’s becoming harder for the main social network to attract new users, and it’s reasonable to assume that revenue growth from what the company calls its “big blue app” will tail off eventually.
The number of daily users of the Facebook social network and the company’s Messenger app increased to 1.6 billion people in the second quarter, Facebook said Wednesday, and the growth rate of 8% from a year ago is the second-slowest in the company’s history.
(The daily user growth was a bit slower in the first quarter.) In Europe, the US and Canada — which together generate about three-fourths of Facebook’s quarterly revenue — user numbers haven’t budged for close to two years.
Pinpointing the revenue growth of the main social network compared with Facebook’s other internet hangouts isn’t possible, but it’s clear that Facebook knows its other apps such as Instagram and WhatsApp are poaching people from classic Facebook. That means revenue growth will inevitably come increasingly from places other than the main Facebook social network.
To Facebook’s credit, it has been relatively sanguine about the asset that built the company becoming the equivalent to coal in the energy industry. It’s not the future. It’s an asset that will require clever management as it declines.
The company did spook investors during a conference call Wednesday, when the chief financial officer said revenue growth will slow. That’s not a new warning, but what was new was the implication that the slowdown would extend beyond this year, and executives said that growing limitations on how much personal data Facebook can collect and use for ads will weigh on advertising sales more than they had previously forecast. Those not-soothing words caused a small dip in Facebook’s share price in after-hours trading.
Mark Zuckerberg and his company have been trying hard to plow money into building the next big things. Operating costs in the second quarter increased faster than revenue for the fifth consecutive quarter(1) as Facebook pours money into video programming for its TV-like Watch section, for computer centers that support data-heavy products like Watch and the stories features in Instagram, and to hire more people to police its internet hangouts.
Facebook executives also told investors on Wednesday that privacy-related changes imposed by the US Federal Trade Commission will drive up Facebook’s costs and make it more expensive to introduce new products.
For now, Facebook has the patience of investors to spend generously, but Zuckerberg knows he can’t push it. Cleverly, he told investors months ago that he thinks it’s important to bring expense growth back in line with the pace of revenue. Facebook executives declined to repeat that pledge on Wednesday.
That disclosure — assuming that it sticks — essentially gave Facebook a year or more of wiggle room to spend like crazy to figure out how to make Instagram even more successful and how to combine the backbones of all its apps to give Facebook an internet hangout super-fortress and probably collect even more data on people as they surf around all the company’s apps.
It won’t truly be clear for some time whether Facebook has succeeded in making as much money from the growth assets like its chat apps, in-app purchases on Instagram and stories as it has from plopping ads into the constantly flowing jetsam on the Facebook social network. But give Facebook credit for doing what few companies have: balancing the slowing crumbling asset and stoking the promising ones at the same time.
(1) This figure excludes the cost of Facebook's $5 billionfine from the US Federal Trade Commissionfor consumer privacy violations.
Shira Ovide is a Bloomberg Opinion columnist covering technology. She previously was a reporter for the Wall Street Journal.