Facebook should heed the lessons of internet history

“BIG TOBACCO” is what the bosses of several large technology firms have started calling Facebook in private and in public. The company has spent the past year fending off critics who claim it is addictive, bad for democracy and overdue for a regulatory reckoning. Being compared to the tobacco giants is one of the business world’s more toxic insults, but it is not the only unflattering analogy circulating. A lower blow is the suggestion that Facebook may become like Yahoo, the once high-flying internet firm that plunged.

Even a year ago the idea would have been unthinkable. The social-networking giant, which runs Instagram, WhatsApp and Facebook Messenger as well as its own core service, was thriving. But since January it has become mired in a series of controversies, misjudgments and missteps. It became clear that it had done too little to stop Russian interference in America’s election in 2016. It had to admit that it had shared the personal data of 90m users with outside firms without permission. It later suffered a data breach affecting 50m users.

The past week has brought more bad news. Mark Zuckerberg, Facebook’s chief executive, has been forced onto the airwaves to defend his second-in-command, Sheryl Sandberg, after the New York Times on November 14th published a report alleging that they had tried to downplay the extent of Russian electoral interference to the firm’s board of directors, and hired lobbyists and the kind of “opposition-research” firms commonly used in political campaigns, to deflect blame onto other firms and to tarnish critics. The revelations have cemented the idea that Facebook is “grossly mismanaged”, says an advertising executive. Its shares have fallen by 27% since the start of the year.

The comparison to Yahoo is imperfect. Even at its peak Yahoo never boasted a business as large and profitable as Facebook’s. And the competitive landscape was different. One of the main reasons Yahoo declined is because it lost out to a powerful rival, Google, in online search; Marissa Mayer, its boss from 2012 until its sale to Verizon last year, was unable to restore advertisers’ or employees’ confidence as users left. Today there is no company that truly competes with Facebook’s suite of apps, partly because it has hoovered up competitors such as Instagram, the wildly successful photo app that is at the centre of its future plans.

But people who watched Yahoo’s collapse see ominous similarities. Executive turnover was a leading indicator of its decline; before Ms Mayer was hired it went through four chief executives in three years. Mr Zuckerberg, who controls the majority of Facebook’s voting shares, is not leaving, but many top executives are. This year several have announced their departures, including Instagram’s founders; the boss of Oculus, a virtual-reality acquisition; a co-founder of WhatsApp; and Facebook’s general counsel and its chief security officer. “The number of senior people who have left publicly and denounced the company going out the door is unprecedented. This is Yahoo pre-Marissa Mayer,” says a senior digital-advertising executive.

In another echo, the run of negative headlines is harming employee morale. “Horrible” is how one employee describes the atmosphere at Facebook on Blind, an app where people discuss work. That raises two risks. Star performers may leave to work at less controversial companies, and Facebook could end up paying dearly for mediocre employees to stay on (as its share price falls, it has to hand out more in stock-based compensation to keep people).

How might things play out? Facebook is still strong but it is precariously balanced at the top of the industry, facing several big challenges in the coming year. Above all, it must grapple with the changing ways that people use its products, which could have a huge impact on its profits. Adults over the age of 18 are spending 31% less time on Facebook’s core social network compared with two years ago, which will translate into fewer opportunities to sell ads.

A big part of Facebook’s answer to this is Instagram, which executives see as a saviour. It is quickly ramping up the number of adverts users see there. Disagreements about how strongly to push advertising on Instagram are part of the reason that the photo app’s founders unexpectedly departed in October. Now ads are around one-fifth of all posts that users see on Instagram, which is probably double what it was a year ago. This could irk people, who may choose to spend less time on Instagram in future, just as they have done with Facebook itself.

Already users are spending more time on products that do not offer the same opportunities for advertising. “Stories”, the concept of posting sequential photos and videos of users’ days and experiences that Snap, a messaging app, pioneered and Facebook copied, are popular both on Instagram and on Facebook. But there is less space for advertising within people’s personal “stories” than there is on the conventional landing pages (called “newsfeeds”) where people scroll through posts and ads are interspersed.

Messaging apps such as WhatsApp are also growing in popularity but currently lose money. Facebook will inevitably roll out ads (which is again the reason why WhatsApp’s co-founders left), but it knows that it needs to be cautious about introducing ads in an environment where people go for private communication.

This transition away from public consumption of content on social networks to more private interactions is a substantial vulnerability for Facebook’s business. Mr Zuckerberg has acknowledged as much, comparing this transition to Facebook’s earlier shift from desktop computers to mobile and predicting that making money from stories and messaging “will take some time, and our revenue growth may be slower”. It is unproven whether these new products can ever be as lucrative as Facebook’s core offerings.

Facebook’s political controversies have not yet dented advertisers’ enthusiasm for its platforms but that may also change in the coming year. Many advertisers have long felt that Facebook is arrogant. Marketers with massive budgets are told to travel to its headquarters in Menlo Park, rather than staff volunteering to come to them, as is typical in the ad-sales world.

Such gripes aside, the marketing industry has two principal complaints. One is that Facebook is not working as well for them as it used to in terms of users engaging with their ads (even though it is raising its prices). The second is that it misleads its customers. Brian Wieser of Pivotal Research in New York, for example, has pointed out to the company that it was incorrectly promising advertisers that it could reach more 18-34-year-olds in America than actually exist there. Facebook has still not removed the claim, despite a class-action lawsuit against the firm for allegedly padding its audience numbers.

A senior marketer for a large American bank says Facebook has made mistakes on measuring engagement, reach, views and other data for no fewer than 43 products. All of the mistakes, he notes, worked in the social-networking giant’s favour. “If these were true errors, wouldn’t you expect at least half to benefit marketers?” he asks. He expects to reduce how much his firm spends on Facebook and predicts that other marketers will as well next year.

At the same time that advertisers’ faith in Facebook has been shaken, politicians in Washington are running out of patience with the company. It seems unlikely that a new law will be introduced that significantly curbs Facebook’s activities. But lawmakers’ scrutiny of the firm is causing it to be more cautious about how it uses data for targeting advertisements and about what information it makes available to outsiders. That will further diminish its attractiveness in the eyes of marketers.

Mr Zuckerberg and Ms Sandberg are under pressure to prove to users and advertisers that Facebook is not only trustworthy but worthy of their time and money. If they cannot do so, and the company’s share price continues its slide, it is possible that Ms Sandberg will be replaced in the next year. Mr Zuckerberg controls the majority of voting shares and is unlikely to go. He will doubtless have thoughts about Yahoo’s sorry tale. The onus is on him to show employees, advertisers and shareholders that Facebook won’t repeat it.