From The Economist
There comes a time in every great bull market where the dreams of investors collide with changing facts on the ground. In the subprime boom it was the moment when mortgage default rates started to rise in 2006; in the dotcom bubble of 2000-01 it was when the dinosaurs of the telecoms sector confessed that technological disruption would destroy their profits, not increase them. There was a glimmer of a similar moment when Meta (the parent company of Facebook) reported poor results on February 2nd, sending its share price down by 26% the next day and wiping out well over $200bn of market value. That prompted a further sell-off in technology stocks.
Along with low interest rates, a driver of America’s epic bull run of the past decade has been the view that big tech firms are natural monopolies that can increase profits for decades to come with little serious threat from competition. This belief explains why the five largest tech firms now comprise over 20% of the S&P 500 index. Now it faces a big test.
Since listing in 2012 Meta has exemplified big tech’s prowess and pitfalls. For a glimpse of the caricature, consider the American government’s antitrust case against it first launched in 2020. It describes an invincible company in a world where technology is perpetually frozen in the 2010s: “this unmatched position has provided Facebook with staggering profits,” America’s Federal Trade Commission wrote in its lawsuit.
Examine the firm’s fourth-quarter results, though, and its position seems rather vulnerable and its profits somewhat less staggering. It comes across as a business with decelerating growth, a stale core product and a cost-control problem. The number of users of all of Meta’s products, which include Facebook, Instagram and WhatsApp, is barely growing. Those of the core social network fell slightly in the fourth quarter compared with the third. Net income dropped by 8% year on year and the firm suggested that revenue would grow by just 3-11% in the first quarter of 2022, the slowest rate since it went public and far below the average rate of 29% over the past three years—and below the growth rate necessary to justify its valuation.
Meta’s troubles reflect two kinds of competition. The first is within social media, where TikTok has become a formidable competitor. More than 1bn people use the Chinese-owned app each month (compared with Meta’s 3.6bn), a less toxic brand that is popular among young people and superior technology. Despite attempts by Donald Trump to ban it on national-security grounds while he was president, TikTok has shown geopolitical and commercial staying power. Just as the boss of Time Warner, a media behemoth, once dismissed Netflix as “the Albanian army”—an inconsequential irritant—Silicon Valley and America’s trustbusters have never taken TikTok entirely seriously. Big mistake.
The second kind of competition hurting Facebook is the intensifying contest between tech platforms as they diversify into new services and vie to control access to the customer. In Facebook’s case the problem is Apple’s new privacy rules, which allow users to opt out of ad-tracking, in turn rendering Facebook’s proposition less valuable for advertisers.
So are Meta’s problems a one-off or a sign of deeper ructions within the tech industry? Strong results from Apple, Alphabet, Amazon and Microsoft in the past two weeks may lead some to conclude there is little to worry about. Apple’s pre-eminence in handsets in America and Alphabet’s command of search remain unquestionable. Yet there are grounds for doubt.
The competition between the big platforms is already intensifying. The share of the five big firms’ sales in markets that overlap has risen from 20% to 40% since 2015.
. . . .
Even in e-commerce, where Amazon remains pre-eminent, serious challengers such as the supermarket giants (Walmart and Target) or rival online platforms (Shopify) are making their presence felt. In any case, Amazon’s thin margins and vast investment levels suggest that consumers may be getting a better deal than investors. Although a strong showing from the cloud division divulged on February 3rd may buoy the e-empire’s market value by more than half as much as Meta lost, the cloud business is unlikely to stay as lucrative for ever. Alphabet, Microsoft and Oracle are already trying to compete away some of Amazon’s lofty cloud margins.
. . . .
The second change involves how investors and governments think about big tech, and indeed the stockmarket. The narrative of the 2010s—of a series of natural monopolies with an almost effortless dominance over the economy and investment portfolios—no longer neatly reflects reality. Technology shifts and an investment surge are altering the products that tech firms sell and may lead to a different alignment of winners and losers. And, as in previous booms, from emerging markets to mortgages, high returns have attracted a vast flood of capital, which in turn may lead to overall profitability being competed down. Given the enormous weight of the technology industry in today’s stockmarkets, this matters a great deal. And the mayhem at Meta shows it is no longer just an abstract idea.
Link to the rest at The Economist
PG recently signed up for Walmart’s Free Delivery service. So far, he’s been able to get some ordinary household items delivered that are substantially less-expensive than the same/similar items offered on Amazon for PG’s Prime Account.
14 thoughts on “Metamorphosis: Facebook and big-tech competition”
For those of you who can read the whole article, does it mention Facebook’s Oculus 2 at all? They seem to be selling steadily (at least on Amazon) but I’m not willing to dip my toes in because they’re from Facebook. Some sources say Oculus is outselling Sony’s Playstation VR.
But I’m really just anticipating the time when there’s a current day equivalent of a holodeck adventure writer 🙂 Yet another reason to pay attention to IP rights and licensing.
This is what you want to look at:
“…how’s Zuckerberg’s big pivot to the metaverse performing so far?
As expected, Reality Labs reported massive, growing losses — more than $10 billion in 2021 alone.
Take a look at the net losses for Meta’s Reality Labs for the full years 2019 through 2021:
2019: Net loss of $4.5 billion on $501 million in revenue
2020: Net loss of $6.62 billion on $1.14 billion in revenue
2021: Net loss of $10.19 billion on $2.27 billion in revenue
The losses for 2021 are in line with what Zuckerberg said last year he expected to invest in Reality Labs. And the losses will likely only get bigger this year. Meta’s CFO said on the company’s earnings call Wednesday he expects operating losses to “increase meaningfully” in 2022. ”
Meta’s problem is they’re a one trick pony–ad sales–in a saturated market, social media. They are trying to reinvent that same market by replacing the underlying open platform–the internet– with an expensive proprietary one. Doubtful.
Mind you, the buzzword of the day, METAVERSE, is quite real and there’s money to be made, but it’s not in an Avatars in VR “Second life” like in the silly movies. We’re in the “metaverse” right here, right now: METAVERSE = COMMUNITY. No need for $1000 worth of gear to join in.
Anyway, outside of Facebook, the near term prospects for VR “ain’t so hot”.
Over at MS, the only company with a (marginally) profitable AR product there are rumors from business insider that their third generation headset has been cancelled. They still have an an active $10B contract for advanced helmets for the US ARMY but production has been delayed. Likely for political considerations. The currrent pro-union regime isn’t very tech friendly. (If you look at the FTC chief announcement last week that they would take the lead over DOJ in analyzing the MS purchase of Activision for $68.7B cash–normally an “of course” announcement–the PR release reads like an IdiotPolitician™ campaign rant. Considering the state of global gaming, the end result will be a grudging rubber stamp.)
Sony? They’ve announced with great fanfare their second generation headset but it’s pure vapor…no price, no release date, no games mentioned. Just that it will be tethered to their $500 PS5.
Last report I saw, STEAM player statistics showed tiny and declining VR game activity.
Meanwhile, the gaming pundits keep wondering why MS, with the most powerful gaming console of all doesn’t bother with VR. Instead, they are aiming for the opposite end of the gaming market with their GamePass subscription service ($25M subscribers), cloud gaming that works via android, browser, PC, and last-gen consoles, with *SmartTVs*, and a streaming box on the way.
Nadella’s MS is a tightly run ship raining profits faster than they can (carefully) spend, $60B+ a year, growing 30% last year, yet they ignore VR and are slowing investment in AR.
And Apple, the richest of close followers making even more money than MS remains “rumored to be working on consumer AR glasses still three years away” since 2015. Meanwhile, they’ve been similarly rumored to be “working on” a smartTV, a car, and most recently “hiring ex-XBIX engineers for a gaming console.
Mind you, holodeck research is ongoing…at a snail’s pace. Latest news from late 2021 has a color display room you can walk in. Other efforts are focused on gloves that let you “touch and fell” holographic objects. Still far from anything not gaming oriented and even that is a money pit.
Long before that, though, we will see a big market for a daylife H.U.D. probably as a set of AR glasses phone accessory evolving over time into glasses that replace smartphones and eventually AR contact lenses. Starting next decade. Maybe.n
Good story fodder but not a market to look at anytime soon.
Still, it is pretty much mandatory to explicitly retain all IP rights and only explicitly license the ones that might bring revenues *today*.
(BTW, how did MS buying Activision, all cash, strike you? Gamepass is getting more compelling daily.)
Thanks for this! The TLDR channel looks interesting, too.
When I think of the Activision catalogue I have to agree that GamePass is looking more and more lucrative. Plus, from what I can tell, XBOX has a better reputation than Activision. Below you mentioned company gossip / PR, and it occurs to me that I’ve always known the name Bobby Kotick — for negative reasons — and I honestly couldn’t name the guy in charge of XBOX (it’s Phil Spencer). Almost as if Spencer might just be busy Getting Stuff Done.
That said, I still haven’t had time to personally test GamePass. So I decided my eldest nephew can serve as my unwitting guinea pig: I gave him a subscription for Christmas.
GamePass is one of the few subscription services I can think of in the last 20 years that tempts me, especially because they do allow you to buy the games at a discount. I was thinking about that factor when I was trying to find out if all seven seasons of the Clone Wars animated series would ever come out on Blu-Ray. Someone pointed out that Disney won’t allow that right now, because Disney+ is trying to keep as much content exclusive as they can for the moment. Being able to buy versus rent forever is a huge draw for GamePass. Just on paper alone, it honestly looks like Microsoft is playing to win here.
Agree on the AR glasses being the most promising future tech to be on the lookout for.
I got on Ultimate because it includes Gold, Cloud, and PC and I had a year+ prepaid GOLD which got converted month for month.
Cloud quality varies according to local ISP quality which for me is adequate.
The PC side lets me (someday) play the original Elder Scrolls and Fallouts.
As for buying games, that most applies to the third party games that rotate in and out. First party games not only show up day and date, but also stay forever. (Subject to licensing issues: cars, in the case of Forza.)
I got to try and play the new Flight Simulator and Forza horizon. Ridiculoys graphics, and great gameplay if you’re into those.
I’m looking forward to STARFIELD and a few of the revivals to come from the 50 teams cooking up games for MS GAMES.
Buying Activision brings in their backlist for console and PC plus the dormant IPs.
And (relevant to the metaverse hype) the communities from the online live games like World of Warcraft, COD, Starcraft, etc. Once the deal closes MS will have 11 of those, at a minimum. Several of which will be “free” to play even without Gamepass.
If you do want to try Gamepass, look for the special offer that pops up from time to time for 3 months for $1. Normally it’s one month.
I’ll look for that discount. But I’m carefully avoiding letting myself get tempted by upcoming games, because I need to upgrade my graphics card. Shopping for those can be an adventure in itself in the days of coin miners and supply chain issues…
1- Cloud gaming works quite well, even on old consoles and via browser. No console needed.
2- The Series S is a very good system, especially for Gamepass. It is now available all over and even being discounted (~$279). I expect it’ll hit $249 this year, possibly $229. It will play all new games at 1080-1440, at 60fps. It has the exact same CPU as the Series X and the GPU has all the same features, just scaled down for the lower *render* resolution. It will however upscale to 4K just fine. I have the SX my sister the SS. On the same display they are pretty much indistinguishable to normal eyeballs.
3- You’ll not find a comparable video card at Series S prices. (And the controller is bluetooth/PC compatible.) This has always been true of XBOX: I bought the original because it was cheaper than the cheapest recommended card for MORROWIND. The same was true for OBLIVION on the 360 and FALLOUT 4 on XB1. Besides, playing from my recliner on the big TV beats my PC monitor every day.
Sometime Real.Soon.Now. Gamepass cloud streaming won’t need even the SS. Just a SmartTV and a controller. That is why MS doesn’t bother with VR headsets; they want to reach the much larger family market that can barely afford $15’a month, not the affluent that can drop $1000-2000 for a complete VR system. More money with the masses.
Whoa, I misunderstood that cloud part! Until now I thought the cloud hype referred to storage. That I could play from the cloud is actually a game changer. I should have paid closer attention to that part.
I haven’t played on a console since high school, but now I’m interested. My plan was to hook up the video card to my 4k TV, so the setup you describe is “cutting out the middle man” as it were.
Also I’m seeing several games on the Series S site I was delaying checking out until I upgraded my card. Decidedly a bargain compared to the gfx cards on Newegg.
Excellent sales job 🙂
Not my intent.
Just a bit of anecdata.
On cloud gaming: XBOX has had cloud storage since the days of the 360 (~2010). Since the XB1 era all saves are automatically backed up. You can login to any console with a given game on it and resume from your saves at will and for most games play from either PC or console. Since ~2013.
Cloud gaming in general (MS, Google, Amazon, NVIDIA) is about playing off remote servers and streaming the video down.
Quality will vary according to your ISP and distance from MS data centers, which nobody can control. As a result, MS only offers cloud gaming as a “beta” *feature* of Gamepass. And where the others brag about 1080p streaming (and most commonly have to dynamically scale down) MS only guarantees 720P. Unless you have excellent service multiplayer shooters are iffy but most everything works. The system is getting regularly updated and someday we’ll get fiber to the house, right? (sigh)
Beware reviewers: they typically have very low latency internet. You can test yours at Netflix’s FAST(dot)com website. Mine is dirt cheap 40Mbps.
As is, I use it mostly on a very cheap ATOM laptop with Fallout76 to move loot between characters. Many use it on their phines to get a quickie session while waiting in places where others read.
If you’re interested in Cloud gaming, the default $1 first month will let you experiment via android, browser, or PC XBOX app. No need to jump at any hardware, subject to the ISP caveats.
Last caveat: the Series X consoles are capable of a long list of features like variable frame rate, up to 8K displays, up to 120 fps, etc that require higher end displays and full HDMI 2.1 support to shine. The Series S supports the same but at lower resolutions. On older TVs limited to 4K/30 most of the SeriesX features go unused and Series S is actually a better match unless you want the optical disk and added storage. If you don’t have an older XBOX the optical disk won’t buy you much but the extra SX storage is useful and upgrading it is, for now, pricey. You can, however, store local games on external USB drives and play older BC games off it, just not new ones; those need the built-in SSD.
Finally, Amazon has the SS full time, Walmart around here, too. Microsoft store, of course, but also the SX from time to time, all at list. No need to pay scalpers these days.
Oh, and youtube has plenty of full resolution video clips of various games so it’s easy to see what the hardware can do. The most impressive are the HELLBLADE2 gameplay clip and the Matrix Reloaded xbox video on IGN. Horizon, Flight Sim, Halo, and Gears 5 also have serious eye candy.
Many PC gamers are giving up on trying to hunt video cards and going console. It may work for you.
Big tech competition is actually good for consumers. 😉
BTW, if you like the TLDR family of channels you may like VisualPolitikEN and the DW sites. It’s refreshing to see news analysis without red/blue imposed bias.
Try this one:
$250B lost stock value is…significant…
Ten times Sony’s own $25B single day disaster.
remember AOL, Prodigy, etc? (I don’t remember all their names). they were as big in the space at their time as Facebook/Meta has been recently. A social network has very strong network effects (you join the one your friends are on), but that has a flip side, kids may not want to be on the one their parents are on, so it’s not unusual for the big popular one to switch every few years.
Now, this round, Facebook accumulated a LOT of money, so they may ride out the change if they are smart, but demonizing half of your potential users doesn’t seem like a smart thing to do for the long term.
It would be nice if some of the new “scrappy upstarts” would think about interoperability rather than lock-in, so that the social network space could evolve to be more like email/sms where you can message anyone no matter what provider they use. But I’m not holding my breath.
Don’t forget Second life, which is still around, albeit with just 700,000 users from a peak of 1m back in 2005.
Facebook is producing a lot of money but they’re also spending lots to little effect.
Their Cash stash is fairly large ($58B) but hardly world class. (Google $142, MS $130B, Apple Amazon $80B, Apple $68B way down on purpose, staying ahead of inflation).
I wouldn’t fret Zuckerberg’s dreams.
The reason Facebook stock is tanking is because social media is evolving (devolving?) back to its roots into distinct specialized communities rather than a single one size fits all platform.
The player to keep an eye of is Discord (and MS, who tried to buy them) when they IPO.
Their approach is via separate communities and monetization is via paid subscription rather than ads.
Speaking of MS, they have been dropping hints lately about their unnoticed social media presence which dates back 16 years (XBOX LIVE, recently rename XBOX Network). They also own Linkedin, Minecraft, and five online multiplayer games (and adding six more with their purchase of Activision) plus 250M+ monthly users of Teams, without VR. Any old phone, tablet, or Lapstp/PC will do. And that’s *without* a serious consumer version of Teams
Of note: a couple weeks ago MS clarified that XBOX Network is *not* a free speech platform. It is a moderated *gaming focused* community with clear rules and enforced moderation and effective *parental controls* (they were the first to do both, back in ~2005).
While Facebook *talks* grandiose proprietary dreams, MS has been quietly building a relatively open, interoperable metaverse built around their gaming, business, and communications system. Nobody seems to notice because they don’t do gossip, spam, or serve out ads or PR in their communities.
Interoperable social media?
Likely. And not just via startups.
MS already does it, particularly in gaming.
They support Discord, Amazon’s Twitch and cross platform multiplayer with PC and other consoles.)
But it takes two to tango.
(MS encourages cross platform gaming, Nintendo allows it, Sony as a rule, doesn’t.)
Facebook won’t be superceded by any single thing.
Nor will it vanish in a puff of smoke and brimstone.
It will simply be relegated to what it does best: gossip.
Mitsuo Iso’s Den-noh Coil is probably the most realistic representation of how VR headsets could work in the real world. Orbital Children, his equally fun but far more esoteric sequel (shades of 2001), takes place in an off-world future. Netflix has both series.
Problem is today’s hardware is inadequate and the usual chicken-and-egg content issues.
And, unlike VCR and DVD, porn isn’t an early adoption driver. 😀
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