COMMENT:
Facebook just reported its results to the market, and they were really good.
It made a $6 billon profit for the last three months alone, plus it had growth in daily users, rising revenue per user, and record revenue of $17 billion.
Yes, Facebook. That horrible blue website. Most people I know are moving away from it. How on earth are they still growing?
Facebook's stock leapt 4.5 per cent on the good results. But it has problems. So many problems.
A $100 million fine from the US government, a £500,000 fine from the UK Government, and oh yeah, another $5 billion fine from the US government over privacy.
It's also deeply embroiled in the upcoming US election, where it could get in a lot of trouble over spreading "fake news".
But let's focus on what matters: the core product. Facebook has always been about seeing what your friends are doing.
It shows you all that stuff in the news feed, and the news feed is getting worse, not better.
The news feed decay is caused by two things:
1. People quitting Facebook. Many of my closest friends and family have not made a Facebook post in years.
2. Friend relevance decay. I friended these people years ago, and let's face it, I don't actually know all of them very well any more. The more time passes, the less this feels like a gathering of friends, and the more like a school reunion. This matters to Facebook for two reasons. First, I care less about seeing what they are doing. But second, I feel weird about sharing my private stuff with these people. So I post less and less. They see occasional inoffensive holiday pictures and not much else.
This is a vicious circle. Facebook grew by network effects – you had to join because everyone else had. Its slow decline will be caused by their absence.
Early signs of a great migration are already in evidence.
Young people are using Facebook less. A 2018 Pew survey found US kids aged 13 to 17 used Facebook less than older people and, much less, they used other networks.
This means the core business of Facebook is, from my perspective, in decline. But never mind, Facebook has a lot of exciting new stuff to offer you.
Facebook has groups. You can join them and see people posting about a topic you have in common.
For example, I belong to a network based in my suburb where people post about lost dogs and spare lemons, and offer unused furniture that would otherwise end up at the tip.
I also sometimes post photos of my dog on a dog-themed group and I get a bunch of likes. It's nice.
But this is not exactly cutting-edge technology.
The internet has been offering forum software for a really long time. It's what bulletin boards were. Whirlpool, Reddit and many other hundreds of dedicated sites all still do it, and do it well.
There is nothing particularly special about Facebook as a host for groups – people simply already have an account there. If users drift away from Facebook, it is possible groups will migrate off the platform too.
But of course it's not just about groups.
Facebook also has something called "watch" that hosts videos, a marketplace where you can buy and sell things, a brand new dating service, and it's launching a news service with what it intends to be "high quality news".
Facebook boss Mark Zuckerberg explained the diversification this week, saying "it's not going to be that everyone is using News Feed, they're going to have, different people are going to care about different things, whether it's community, or marketplace for some or dating or news for others."
I am worried he is trying to make a Swiss Army knife – one tool that does everything.
Yes, that kind of knife can be handy when you are camping. But if you open your kitchen drawers, you don't see a Swiss Army knife in there.
You need one thing that can do everything only if your capacity to have different things is limited.
But we can and do have loads of apps. Apps that do one thing but do it well are very, very popular.
Instagram is a great example. It is separate to Facebook the service and it is going bananas, even though Facebook the company owns it. Whatsapp is the same.
The elements of the company separate to the blue website are truly booming.
Sounds like Zuckerberg risks taking Facebook's main site the way of Yahoo. Cluttered and unfocused.
And we know how that story ends.
Dating, news, and groups: none of these are the secret sauce.
The secret for Facebook's growth is geography. Growth has more or less tapped out in their original markets. But it is booming in the rest of the world.
Addressing investors this week, Facebook's Chief Financial Officer shouted out to "India, Indonesia, and the Philippines" as the main causes for Facebook user growth.
As the next chart shows, the US and Europe showed almost zero growth in the past two years, while Asia-Pacific has risen by around a third.
Maybe one day the company will move to India, because that's where its single biggest group of customers now is, estimated at 270 million.
Indonesia and Brazil are huge for Facebook too.
The problem for Facebook is that while an American user is worth $34.55 to Facebook each year in advertising revenue and other payments and a European user is worth $10.68, a user in Asia Pacific is worth only $3.24.
If growth at home turns down, they would need to add ten users in Asia to make up for each one they lose in the US.
For now, they are adding enough users fast enough that they can grow their revenue fast.
The question is whether Facebook is a fad.
Is it like yoyos? If so, then what we will see in these countries could be similar to what we've already seen in America and Australia. It will be very exciting at first.
Then the excitement will fade.
- Jason Murphy is an economist. He writes the blog Thomas the Think Engine
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