This article first appeared in The Edge Malaysia Weekly on February 14, 2022 - February 20, 2022

LAST June, the social media ­giant then known as Facebook became only the sixth company in the world — behind iPhone maker Apple Inc, software powerhouse Microsoft Corp, search supremo Google’s owner Alphabet Inc, e-commerce behemoth Amazon.com and Saudi Arabian oil firm Saudi Aramco — to surpass a market value of US$1 trillion (RM4.2 trillion). Its market value peaked at US$1.1 trillion on Sept 1.

Despite a hard pivot, tens of billions of dollars in research and development on a virtual network focused on social connection called the metaverse, US$19 billion in stock buybacks, a name change to Meta Platforms and an aggressive public relations campaign, it has been downhill ever since. On Feb 3, after it guided for slower earnings and a plunge in revenue growth, Meta’s shares fell 26.4%, wiping out US$237 billion of its value — the largest-ever single-day drop in market value for a listed company. They have fallen over 40% from their peak and the company is now valued at just US$612 billion.

Meta is as close to an icon of digital technology as you can get. Together with Google, it is one of the world’s two dominant advertising-based platforms. Amazon, which raked in US$31 billion in ad revenues last year, is a distant third. Founded in 2004 by 19-year-old Mark Zuckerberg in his Harvard dorm room, it is one of a handful of tech giants that are still founder-led. Microsoft, Google and Amazon’s founders have all since retired, Apple’s Steve Jobs died a decade ago and Tesla Inc’s helmsman Elon Musk joined the electric vehicle pioneer months after it was founded. Zuckerberg, now 37, is still seen as a boy wonder who took an idea from zero to a trillion dollars in just 18 years.

How did a trillion-dollar giant, indeed, one that is among the most watched on Wall Street, fall so far, so fast? What went wrong? Can it be fixed? What will it take to return it to its former glory?

If you are looking for clues to what has gone wrong, look no further than your smartphone and exactly what you spend time on these days. Facebook has long ceased to be cool. Its daily active users, a key social media metric, fell for the first time ever in the last quarter. Four years ago, TikTok, owned by Beijing-based ByteDance Ltd, began to capture the imagination of young people around the world. A ton of firms have for years tried short-form videos but none has ever come anywhere near what TikTok has achieved: high and growing user engagement. Once you are hooked on TikTok, you keep coming back for more. “People have a lot of choices for how they want to spend their time and apps like TikTok are growing very quickly,” Zuckerberg said recently as he explained why Facebook’s user engagement was in free fall.

The key to TikTok is its deft use of artificial intelligence and machine learning. As soon as you get on its platform, TikTok starts learning everything it can about you and the data it gathers is quickly put to work to inundate you with whatever you want and get you hooked as quickly as possible. Snapchat, Instagram Reels and YouTube Shorts may often have funnier and even better-produced short-form videos, but TikTok hooks you faster and makes the whole experience so good that you do not want to be anywhere else. Research group Forrester estimates that TikTok reaches 63% of Americans between the ages of 12 and 17, up from 50% in 2020, whereas Instagram has declined to 57% from 61% two years ago.

Even though TikTok has been drawing users away from Facebook, Instagram and Snapchat for a while now with ever-higher user engagement numbers, for the most part, advertisers stuck with the media they knew: Facebook. Now, they are leaving Facebook and Instagram because they do not have the same user engagement that TikTok has.

One reason Meta shares have fallen so far, so fast, and so many investors are rushing to exit is that Zuckerberg now publicly concedes that his firm’s near-term path forward is “not quite perfectly defined”. “TikTok is so big as a competitor already and continues to grow at quite a faster rate off of a very large base,” the Meta CEO said two weeks ago. “We’re seeing that people want to spend a lot more time than what we’ve seen from apps so far and that’s also reflected in the success that apps like TikTok have had,” he conceded. While the social media giant has duelled it out with competitors in the past by blatantly copying them, the way it did with Snapchat, or just buying them out like it did with Instagram, Zuckerberg now says he does not really know how to compete with TikTok. The Chinese app is “one of the most effective competitors we have ever faced” and, to counter its growing threat, “we are retooling our teams to make serving young adults their north star,” he added. “This shift will take years, not months, to fully execute.”

TikTok apart, Apple has removed Meta’s oxygen. The iPhone maker’s AppTrackingTransparency, or ATT, which grants users the ability to opt out of any type of targeting or tracking, has hurt Facebook and Instagram hard. How hard? Zuckerberg estimates that the impact from ATT will surpass US$10 billion in 2022. Essentially, ATT is shaving off 10% of Meta’s annual revenues. Meta had revenues of more than US$117.9 billion last year. “Apple created two challenges for advertisers: One is that the accuracy of our ads targeting decreased, which increased the cost of driving outcomes; the other is that measuring those outcomes became more difficult. These challenges are complex and interrelated,” Meta said in its earnings statement.

Here is the problem. ATT does not affect only Facebook, Instagram and WhatsApp but also Google, Snapchat’s owner Snap Inc and Pinterest, which reported record revenues and profits for the last quarter. Yet, Zuckerberg implied there may be something nefarious going on. While Apple is indeed forcing other platforms to adhere to the same rules, it might be giving Google, which pays Apple US$15 billion a year to be the preferred search engine on its iPhone, a little more leeway than others. If Apple is secretly helping Google because of its search deal, why did Snap and Pinterest report stellar results when they do not pay any money to Apple and have no search deal?

Meta’s problem is that it is far more reliant on advertising than Google. Over 98%of Facebook’s revenues are from advertising. In contrast, only 81% of Google’s revenues are ad-related. Google has 10 units — including cloud, YouTube, Fitbit watches, Pixel phones, Nest devices — that have over US$1 billion in annual sales. So, when ads are hit, whether it is due to an economic slump or ad-based platforms being prevented from harvesting too much private data from users, Facebook suffers more. The difference is in just how the two actually gather the data, which is then used to sell ads. Facebook follows you around from website to website all day as you surf the web, sucking in as much data as it can. Google’s algorithms and its ad technology are such that it does not need to track you on every website. It can track you for around a third or less of the websites and still have enough data to allow it to sell as many ads. Facebook, says Silicon Valley venture capitalist Chamath Palihapitiya, “is just an app that sits inside an ecosystem that is subject to the rules of smartphone platform owners — Apple and Google.”

Can Meta do anything about TikTok? Until recently, Facebook was growing revenues at 30% to 40% a year, so investors were happy to pay a high multiple for its stock. Now Meta is guiding investors that revenues will only grow 3% to 11% in the current quarter. In an inflationary environment, 3% is the rate at which stodgy old companies grow. The Proctor & Gamble Co grew revenues by 5% in the last quarter. In another era, “Facebook would have just bought TikTok long before it was able to get the traction and engagement that it has today,” notes Neil Cybart, who writes the tech blog Above Avalon. “In 2016, Facebook tried to buy Musical.ly, which later merged with TikTok to become the current platform,” he says. Now, with the Department of Justice and Federal Trade Commission scrutiny, it is unlikely that it would ever be allowed to do a major acquisition, let alone one that kills off a competitor.

Yet, there may be a silver lining for Meta. The Biden administration recently began a national security review of apps — such as TikTok — that had ties to countries like China. Two years ago, then President Donald Trump had threatened to ban TikTok on national security grounds. That forced ByteDance to start negotiations to sell the app, first to software giant Microsoft, then to another software firm Oracle, with retail giant Walmart as a minority partner in both deals. But the sale got bogged down in legal suits and, in November 2020, Trump lost the election. Biden has since revived the scrutiny of TikTok.

As Beijing put the squeeze on its own tech giants last year, Bytedance offered the Chinese government a stake in its holding company and a board seat. If Washington restricts TikTok because it now has a direct link to Beijing, it will allow Meta to regain lost ground. But if Beijing allows the sale of TikTok to Microsoft-Walmart or the Oracle-Walmart consortium, it will only make things even more problematic for Zuckerberg.

For now, Meta is focused on making its next big bet — the metaverse — a success. To do that, it needs to woo thousands of top software engineers. Top talent cannot be lured by just big salaries or bonuses. They need to be given generous stock options. Recruiting and retaining top talent is easier when your stock is going up 30% a year and Wall Street is long-term bullish on you. It is much harder when the stock is slipping the way Meta shares are right now. Zuckerberg, for his part, is pump-priming Meta stock with tens of billions in stock buybacks. Yet after US$19 billion in buybacks, the stock is down 40%.

If he is too focused on the metaverse, where it could take seven to 10 years before any meaningful profits could be reaped, its core Facebook and Instagram businesses will suffer. Zuckerberg conceded that Instagram had so far struggled to make money from its Reels short-form videos. “The history of tech is filled with companies that got comfortable with their flagship businesses and simply floated off to irrelevance,” says tech commentator Alex Kantrowitz. Meta’s CEO knows Facebook is not in great shape and even Instagram’s growth is tapering off. The bet now is that Zuckerberg can build a brand-new business from scratch the way he did with Facebook, says Josh Brown, CEO of Ritholtz Wealth Management. “He has the cash flows to invest a lot of money but [the question is,] can he catch lightning in a bottle a second time?” he says. “Very few people have been able to do that twice.” Steve Jobs did that when he returned to Apple after a decade-long hiatus.

Fifteen years ago, Google and Facebook were the disruptors upending old media. Now they are the ones getting disrupted. Corporate behemoths decline gradually, then suddenly. Meta probably still has a few years to change course, tweak its strategy and reinforce its old core business. Microsoft’s stock languished for a decade but in 2014, after a pivot to the cloud, it surged ten-fold. Adobe Inc’s stock similarly flatlined for years until 2012 when it began a 20-fold climb following a similar pivot. After last quarter’s debacle, Meta now faces a challenging, slow crawl back up. Until last week, the metaverse was a long-term project for the company, says Kantrowitz. “Now, it’s the metaverse or bust.”

Assif Shameen is a technology writer based in North America

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