Facebook and the conglomerate curse

From The Economist:

In 1997, in his first letter to shareholders, Jeff Bezos, Amazon’s founder, wrote that it was still “Day 1” for his firm. Day 2, he later explained, would mean stasis, followed by irrelevance. His rousing call to avoid complacency seems apt today. Silicon Valley’s five big tech giants, Alphabet, Amazon, Apple, Meta and Microsoft, have long been the bedrock of America’s stockmarket and economy, miraculously combining reliable growth and profitability. But after a torrid third quarter their market capitalisations have now collectively dropped by 37% so far this year. About $3.7trn of value has evaporated.

The law of large numbers made it inevitable that the tech giants would mature. Sales growth in the last quarter slowed to 9%—barely above inflation. As they have grown bigger, they have become tied to the economic cycle; a fact which the digital surge during the pandemic only temporarily masked. Penetration rates for smartphones, digital advertising and streaming are plateauing. With slowing core businesses, the giants are venturing onto each other’s turf, increasing competition.

Meanwhile, they are threatened by “conglomeritis”. The symptoms of this disease are bloating and egomania. Consider the recent orgy of spending on hiring, experimental ventures, vanity projects and building data centres. In March the five firms’ combined annual expenses reached $1trn for the first time, and the value of the physical plant of these supposedly asset-light businesses has reached $600bn, over triple the level of five years ago. Swollen costs and balance-sheets mean returns on capital have fallen from over 60% five years ago to 26%. Three of the five do not deign to pay dividends.

It is hardly unprecedented for successful companies to lose their focus, or to fail to control costs. In the 1980s rjr Nabisco’s executives splurged on jets and golf before being ousted by private equity’s barbarians. General Electric sprawled and had to be partially bailed out during the financial crisis of 2008-09. The best safeguards against such indiscipline are active boards and investors. When successful managers start to believe that they always know best, it is the board’s job to rein them in.

But here, the tech firms’ governance rules add a twist. Often they entrust disproportionate power to bosses and founders, some of whom enjoy special voting rights that give them near-absolute control. Such bosses often cultivate an image as visionaries, whose daring bets horrify myopic outsiders but end up lucratively transforming the world.

At the worst end of the spectrum is Meta, the owner of Facebook, run increasingly erratically by Mark Zuckerberg. Its value has dropped by 74% this year. Its core business is wobbly, attracting too much toxicity, too few young people and too little advertising. It has become clear that Mr Zuckerberg is betting the firm on the metaverse, an attempt to diversify away from social media, on which he plans to lavish 20 times what Apple spent to build the first iPhone. Because dual share classes give him 54% of voting rights, Mr Zuckerberg has been able to ignore the pleas of outside investors.

Link to the rest at The Economist

PG notes that one-hit wonders are more quickly exposed in the music business than in the tech business.

9 thoughts on “Facebook and the conglomerate curse”

  1. Meta, nee Facebook, is indeed a one trick pony and not a true conglomerate as the OP pretends. Yes, it is big and assembled from many previously independent companies but all the pieces operated in the exact same space (just like the BPHs). All their profits come from selling ads so despite presenting like a tech company they are truly in the ad business, not tech or even communications.

    To a large extent the same is true of Google but at least most of their acquistions (Motorola, the OS that became Android, Nest) have been attempts (mostly failed) to diversify their revenue streams beyond ads. The Android store has been of some help. But their failures and msrginal product lines far outnumber their successes.

    Apple came close to a similar state in the years they neglected the Macintosh but they eventually realized, when they hit peak iPad, they needed to either rework it or spin it off. They chose the former which they will desperately need if China continues on its downward spiral.
    Their biggest iPhone factory in China is currently in lockdown, again.
    https://financialpost.com/pmn/business-pmn/output-of-apple-iphones-at-major-china-plant-could-fall-30-amid-covid-curbs-source-2

    Apple is behind the curve in moving most of their supply chain out of China and the best alternative, Mexico, is already carved up. They are late to Vietnam and India but at least thdy are ramping up. But if tbey lose half their iPhone production the Mac and appstore money should keep them alive.

    Meta/Facebook has no such lifeline. Hence their big stock price decline.
    Zuckerberg’s mistdps are three:
    1 – trying to monopolize social media and only buying would-be competitors
    2- failing to buy into adjacent businesses that would add value to his platforms back when his stock was at its peak (buying content businesses was a no brainer but even that escaped him.)
    3- betting the farm, literally, on the pipe dream of VR. Not the first, likely not the last but probably the biggest failure.

    The “good” news is they won’t be worrying over calls to break them up anymore.

    None of the tree big companies suffer from losing sight of their core business but rather of monomania. Also note that tech industry advice coming from europe needs a lot of salt on the side.

    • One quibble, Felix, but thanks to the arcana of accounting it’s both related and impossible to quantify:

      Not all of the profits come from ads. Some of them come from selling personal information (however sanitized, if sanitized at all) to third parties — and trust me, skip tracers and collection agencies aren’t interested in purchasing ads…

      I will politely refrain from painting a different-but-closely-related division of PG’s former employer with the same icky brush. Oops.

      • 😀

        Curiously, this just came down this morning:

        https://www.windowscentral.com/microsoft/these-epic-infographics-show-how-microsoft-stacks-up-against-apple-google-and-amazon

        The individual thumbnails can be expanded into separate tabs for readability both at the linked sight and the source site. They are promoting a paid newsletter but they do offer free samples and a free week. They have Disney, Netflix, and Tesla free, too. (I need to go back and look them over in detail–they should illuminate the ongoing video tfznsition.)

        Of note, MS and Apple pay around 20% tax, Alphabet(Google) somewhat less, and Amazon much less…on much lower net, but still… They must have very good accountants. 😉

        Since these are based on SEC quarterlies they’re mostly credible.
        They highlight how single business dependent Apple (phones) and Alphabet(Ads) are versus Amazon and MS.

        I didn’t see Facebook but I didn’t sign up, either.
        (Then again…)

        And yes, they do sell personal information (and even some hardware–VR headsets and video phones) but really it is peanuts compared to tbeir other businesses which is why the real tech companies (Apple, MS, Amazon) don’t bother. Not worth the PR hit, it is actually worth more to *pose* as privacy champions. Also, Big Data may not be as valuable moving forward (for non criminal uses) if we can believe “AI” pundits.

        See next.

        The tech world is constant ferment.

        • This one is from yesterday, a sort of highlight of the State of “AI”:

          https://www.msn.com/en-us/news/technology/why-big-data-is-not-a-priority-anymore-and-other-key-ai-trends-to-watch/ar-AA13IjXz?ocid=EMMX&cvid=5bc6203184024c378cc5064cc2e3147c

          ““Big data is not a priority anymore, in my opinion,” said Stanford computer science professor Carlos Guestrin. “You can solve complex problems with little data.”

          Engineers are more focused on fine tuning off-the-shelf models, said Guestrin, co-founder of Seattle machine learning startup Turi, which was acquired by Apple in 2016. New “foundation” AI models like DALL-E and GPT-3 can hallucinate images or text from initial prompts.

          Such models are the basis for emerging startups that generate written content, interpret conversations, or assess visual data. They will enable a host of use cases, said Oren Etzioni, technical director of the Allen Institute for Artificial Intelligence (AI2). But they also need to be tamed so that they are less biased and more reliable.

          “A huge challenge of these models is that they hallucinate. They lie, they generate — they invent things,” said Etzioni, also a venture partner at Madrona.”

          Heh.

          “Hallucinate”.

          Maybe they *are* approaching average human thinking after all. 😀

        • Those (WindowsCentral) are terrific graphics. Too bad I’m not in a personal place to use (and pay for) them for analysis. I’ve always loved thinking about the (much, much smaller) businesses I’ve run this way, and it was always so bizarrely difficult to get other C-level types to understand the fundamentals of their business models sometimes.

          My teeny-tiny indie pub biz just doesn’t have the same thrill… 🙂 I have to get my jollies from the writing instead.

          • Thanks.
            That is one deadly chart!
            $27.2B Ad revenues.
            $0.2B Everything else (VR headsets and Videophones, mostly.)
            $9.2B in R&D. In *one* quarter.

            No wonder stock fell 75%.

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