18
Nothing Lasts Forever?
No technology company is immune to disruption
Although Facebook has clearly outlasted its doubters, including screenwriter Aaron Sorkin, Google’s Vint Cerf and Berkshire Hathaway’s Warren Buffett and Charlie Munger, Zuckerberg knows far better than most that the list of once great technology companies is long and illustrious. Companies that in their heyday were not only leaders in their category but influential over wide swaths of the entire technology ecosystem for significant periods of time. Companies like HP, Yahoo, Intel, Cisco, Nokia and Blackberry.
Failure can occur swiftly via disruption—as it did in smartphones where Google Android and Apple iOS went from less than 20% market share at the beginning of 2010 to more than 80% just three years later.1
Or, perhaps worse, failure can occur insidiously in the guise of slowdowns that push you to the edge of crucial, trend-reversing action, but never over.
Death, Taxes and the Eventual Decline of Technology Leaders
Even the very best can come to struggle. Apple’s year-on-year iPhone growth dropped to nearly zero in Q1 2016. Google contends with the curse of large market segment share in the slowing business of generating search clicks. And Amazon wages a constant battle with Wall Street to avoid expectations of profits even as revenues grow beyond $100 billion annually.
To have retained category leadership for a decade or more—as those three have—is a rare feat and a relative newcomer like Facebook is not immune to the forces that conspire to make that kind of long-term success so unusual.
Hope is not a strategy, so what’s your best plan to resist those forces? Attack yourself before someone—or something—else does.
In the 1980s and 1990s, Intel taught the master class on this principle when it jumped from the commoditized computer memory market into the relatively nascent microprocessor market and showed the world the power of self-cannibalization by building ever faster processors. It’s also how Apple went from a niche—occasionally near-death—computer company to the world’s most valuable enterprise by delivering a better computer we could carry in our pocket and removing the word “computer” from its own name. Netflix was so serious about attacking its own DVD rental model—which had disrupted Blockbuster to extinction—that they put a streaming video-on-demand service in their name from the very beginning. And Tesla’s $35,000 Model 3 is sure to cannibalize sales of its more expensive Model S, but if you’re looking to change the very nature of global transportation, that’s a small price to pay.
Playing Good Chess
Facebook—and Zuckerberg as its benevolently autocratic leader—have been very good at internalizing and acting on this most precious of Silicon Valley tenets by both protecting and expanding their neighborhood on the chessboard.
Has mobile become a big deal? Make the most engaging, most widely used mobile app in the world even as that reduces your traffic on the desktop website that was your origin. Maybe Facebook itself isn’t the only answer in social media sharing? Great, acquire and grow Instagram into the second most popular social media property. What if social media won’t be the biggest way people connect and share? No problem, spin out Messenger as an independent app and acquire WhatsApp, and grow each to a billion monthly active users. Is there a chance over the longer term that the mobile screen won’t be our last screen? Maybe, so let’s acquire Oculus VR and add a branch of VR and AR knowledge and consumer products to our business. Will new, more efficient models of extending Internet connectivity be necessary to connect the next few billion people? Most likely, so better have a Connectivity Lab that’s not afraid to consider satellites and unmanned aerial vehicles in solving the challenge. Are computers finally powerful enough to learn how to be intelligent in more tasks than before? Almost definitely, so make AI—both researched and applied—a key across your products.
Facebook has smartly shared what are not core assets (software, server, network and telecommunications infrastructure designs) in order to gain industry-wide acceleration in the performance and cost reduction of these technologies and closely held onto the assets that are core (information about people and their connections).
And they have done it all before they had to. Former Intel CEO Andy Grove would famously say that “you never make the hard decisions too early.” Zuckerberg has largely done an excellent job of facing difficult questions relatively early.
So far so good, but there is a reason that there is no place like Silicon Valley in the world—and the world has tried and tried: no matter how far to the proverbial west a young technology “man” has gone, in Silicon Valley there’s always another “man” willing to strike out farther and faster. And sometimes you don’t realize it until they’re too far west to catch.
That’s how, over the last 50 years, Silicon Valley has gone from semiconductors led by Fairchild, PCs featuring Intel, websites led by Yahoo and social services dominated by Facebook itself to today’s smartphones and mobile apps, the attention for which is also primarily held by Facebook’s family of apps. Now we are on the cusp of an evolution to mobile messaging with its leadership up for grabs, and the only thing that’s certain about the future is that there will be another evolution after that. Only a few—Google, Apple, Amazon, Facebook—have continued to thrive through even one of these transitions, much less several.
Transitions in tech are like the Ides of March to Caesar: very dangerous to incumbents.
If it’s so dangerous to be the leader, where does a dutiful follower of Andy Grove’s “Only the Paranoid Survive” like Zuckerberg aim his paranoia, and what is he doing to prevent the long-term decline that awaits the vast majority of players in technology?
Threat Vectors: Internal
Facebook’s success has put it in the privileged—but tenuous—position of every leader: controlling their own destiny through great strategy and execution. You don’t just get a pound of strategy and execution from the supply closet, however, so retaining great people will be Facebook’s biggest threat vector. It starts, obviously, with Zuckerberg who is irreplaceable strategically and culturally. Sandberg, Cox and Schroepfer are next on the list because they vigilantly run the most important functions at the company (business, product and engineering) and—perhaps even more importantly—are cultural touchstones for many thousands of others at the company, stirring the desire to hurdle the bars necessary to stay ahead. It’s difficult to imagine replacing any of the people in this group, and consequences will follow if they were lost to the company—there is nothing accidental about Intel’s struggles after Andy Grove ceded the CEO role or those of Apple following Steve Jobs’ passing. The best Facebook can hope to do is to foster and build a next guard, and they are better equipped than most on this front. Facebook veterans like longtime Sandberg lieutenants Dan Rose and David Fischer on the business, Deb Liu on product, Jay Parikh in engineering, Gary Briggs and Caryn Marooney on marketing and communications and leaders that have recently arrived from outside the company, like David Marcus on product, have the rare combination of skills and culture fit to afford Facebook longevity.
A more insidious—and often harder to detect—internal concern for Facebook will be the cost, breadth and distraction of speculative future projects including virtual and augmented reality hardware and content, global connectivity and artificial intelligence agents. Exciting and necessary as it is to explore new frontiers, it is notoriously difficult to detect the moment when some of these efforts become too damaging to profitability and focus. When your ability to say no has subtly eroded to the point you can no longer rein in the chaos. When you’re starting to throw good money after bad, propping up an offering your passion for which irretrievably exceeds consumers’ awareness or interest. A thriving advertising business gives Facebook and Zuckerberg the means and intellectual air cover for these explorations, but over time this becomes a game of chicken between the growth of the core business and signs of sparks in the new fires Facebook is trying to stoke. Until Facebook has a second (search? messaging?)—or more diversified—business, Zuckerberg will continue to walk a gutsy tightrope. A similar challenge exists for Google, and we should expect to see the two increasingly invading each other’s business to have better hedges for their respective positions.
Threat Vectors: Shifts in People’s Attention
Outside the walls of Facebook, people’s interests and behaviors will play the biggest roles in Facebook’s fortunes. If Facebook’s leadership in broad sharing between people is challenged by the continued rise of Snapchat Discover (more likely) or the resurgence of Twitter (less likely), Facebook’s North Star Metric of engagement would clearly be threatened and, with it, its business. New features in Facebook’s News Feed, including Live Video, 360-degree video and Instant Articles, and entirely new platforms like Instagram are meant to protect against this kind of insurgency and have done precisely that as the time people spend with Facebook offerings continues to rise.
A related but different challenge would be the declining relevance of broad sharing itself, as marked by the importance of person-to-person and small-group messaging including Snapchat in the United States, We-Chat in China, Line in Japan and KakaoTalk in Korea. The growth of Messenger as an independent app and the acquisition of WhatsApp have put Facebook in the center of this shift and effectively protected their larger position. The bigger question will be whether Facebook lags in turning messaging into a profitable and growing effort useful for both people and businesses.
A third area to watch will be less what people are consuming and more how they are consuming it. A shift in dominance away from mobile screens would play away from Facebook’s biggest strength and reshuffle the deck in ways not guaranteed to leave Facebook ahead. It is widely believed that to the extent anything will evolve (more likely) or replace (less likely) the mobile screen, it will be virtual—and more likely augmented—reality. That is why Zuckerberg struck with the Oculus VR acquisition many years before these new media are likely to have a significant effect on attention and consumption. Ironically, it was this acquisition that has significantly scaled the entire industry’s attention to the technology, creating competition between consumer giants Facebook, Google, Microsoft, Sony and presumptively Apple to get to large-scale products—and the ability to redefine the landscape and protective moats—first.
Threat Vectors: Product Effectiveness and Revenue
In their current state, Facebook depends almost entirely on its mobile advertising product for its revenue. The reason the business is healthy and growing is that its advertising products are effective for businesses of all sizes all across the world, but a decline in advertising effectiveness would be a big threat to revenue and therefore to all dreams current or future that Facebook has in pursuit of its mission. That loss of effectiveness could come from issues in Facebook’s own products (declining value as the amount of advertising grows or prices going up as inventory becomes constrained) and/or improvements in comparative digital advertising products including those from Google, YouTube and new entry Snapchat (fast becoming a top-tier player with eMarketer projecting nearly $1 billion in revenue for Snapchat in 2017). Facebook’s highly diverse customer base of over 4 million advertisers of all sizes is a natural hedge against any systemic failure of the system, and a consistent stream of new offerings, including full-screen interactive Canvas ads based on Instant Article technology as well as so-called “shoppable” video and 360-degree video ads, is meant to deliver more value for more advertiser objectives.
More broadly, an inability to grow—or, if necessary, acquire—the best new products will stunt Facebook’s pre-eminent position with consumers (by going deeper with its existing users in developed economies or being the provider of products to new Internet users in developing countries, which will count in the billions), the source of the industry’s interest in its advertising business. The strength of its business and reputation as enabling acquisitions to succeed have put it in a good position to augment its offerings, but you’re only as good as your last effort, and a failure to maintain the growth of its core business or to help an acquisition flourish will not only create a revenue hole for that generation but put the future acquisitions necessary to recover in question.
Threat Vectors: Host Platforms
A dependency that’s easy to overlook in Facebook’s tremendous success in mobile is that it has two landlords who are not entirely incented to make them successful. Apple’s iPhone iOS and Google’s Android are host to essentially all of Facebook’s mobile engagement and therefore revenue. These systems are not “open” for any app developers to connect unfettered with consumers (the way the web works). Instead, they are gated by Apple’s App Store and Google Play and by their respective terms and conditions, which are entirely at Apple’s and Google’s discretion. Of the two, Google is both the biggest competitor to Facebook as well as nearly 80% of the unit volume in mobile platforms, and the introduction of terms on the Android platform that are onerous to Facebook’s functionality, especially around the nature of advertising, would be a direct hit to the heart of Facebook’s business and revenue. While Facebook, Apple and Google exist in a triangle of mutual assured destruction—the phones need Facebook’s apps, which are the biggest and most engaging, and Facebook needs both platforms—even a subtle disturbance of the operating conditions such as Apple or Google levying a tax on advertising in apps not using their native ad systems, would be bad news for Facebook.
Threat Vectors: Regulatory
Getting its wings clipped by government intervention seems like an abstract threat to Facebook until you take a closer look. Whether it is having its availability taken away outright (as in China) or intermittently (e.g., Vietnam) by communist governments or operating under constraints for reasons of data protection and privacy (e.g., European Union Data Protection Directive) or content filtering (e.g., German rules against the use of Nazi symbolism, certain Islamic countries’ rules against the depiction of Muhammad)—any or all of these can make Facebook’s pursuits more complex, limited or outright impossible. Particularly difficult would be regulations that significantly constrict the availability of data about people to improve Facebook’s matching of advertisers to consumers or mandates—such as the rules governing media in the United States—that would throw off the News Feed algorithm’s unfettered ability to maximize for user engagement. Facebook has taken great care to be actively involved with and responsive to the local regulatory conditions in all countries and knows that the only way forward is through genuine engagement and collaboration, a function housed in Sheryl Sandberg’s organization and the subject of significant focus for Sandberg herself. The long game of partnership, politics—and, for Zuckerberg, even learning Mandarin—is Facebook’s path forward in this complex minefield.
Imagining the Impossible
Taking a look at that competitive picture, Zuckerberg will have to continue to allow for the possibility that his current winners may be burning platforms. He must not only be cultivating the next platform to which he would jump if it came to that, but also diligently be seeking the next next platform in the distance. At Facebook’s f8 Developers Conference in April 2016, he described this mentality as a three-step progression that (1) takes new technologies, (2) turns them into successful products with people and then (3) builds an ever growing ecosystem of partners like developers and advertisers around them. Facebook is an assembly line of different technologies at different points along this progression, with Facebook itself being the most mature ecosystem, Instagram, Messenger and WhatsApp being successful products maturing into ecosystems, and artificial intelligence, connectivity and VR/AR just beginning to evolve beyond the technologies stage.
To attack Facebook’s technology assembly line, you would have to go after Facebook’s key asset, which—as it is for all businesses—is the source of its revenue and therefore vulnerability.
For Google, their unique asset is understanding people’s expressed intent, which translates into revenue via search advertising. For Apple, it is the superior integration of hardware and software, translating into highly profitable gadgets with vibrant software and content ecosystems as their revenue.
For Facebook, this asset is its leadership in connecting people and monopolizing their time spent online via the things that happen across those connections. They translate that extensive access to people into revenue via display advertising.
To make all these threats and maneuvering more real, let’s imagine three very specific, very dangerous scenarios that could unseat Facebook (beyond the failure to execute the plans they already have, the most urgent thing to protect against for every leader):
Attacking head-on (next five years): There’s nothing easy about going after Facebook’s ability to connect people and deliver content across those connections, but the combination of a fast and popular newcomer and the financial, technical and awareness-generating wherewithal of an established leader could drive a wedge between Facebook and people just as the nature of sharing appears to be going through a transition to being less personal.
The most potent allegiance on this front would be Google acquiring Snapchat.
In a move not unlike Facebook’s acquisition of Instagram, this would allow Snapchat to concentrate on growing their platform for sharing short clips of media in mobile settings beyond its strength among Millennials while taking advantage of Google’s financial air cover, existing content generation ecosystem from YouTube—where more than 2,000 channels have over a million subscribers2—and giant base of search and display advertisers, the largest in all of digital.
If Google further combined this offensive threat with the unprecedented defensive move of changing the terms and conditions of its Android mobile platform to allow advertising in apps—including Facebook, Instagram, Messenger and WhatsApp—only if those apps (1) use the Google advertising system and (2) allow Google to take 30–70% of the resulting ad revenue, it would mark a simultaneous erosion in Facebook’s strategic position with people and advertisers as it would syphon users away from Facebook’s apps and cut revenue for as many as 80% of Facebook’s users by more than 30%.
There are a number of unlikely elements in this scenario—not the least of which is the antitrust scrutiny Google would be under for forcing the Google-based advertising system on its app ecosystem—but, it is feasible.
Flanking (five-plus years): Instead of going after Facebook’s strength in connecting people, the flanking approach would go after how people spend their time online. Currently, there are only three successful competitors to the amount of time Facebook’s family of apps corner: YouTube, television from the likes of ABC, CBS, NBC, Fox and ESPN delivered via cable and satellite providers and subscription video on demand (SVOD) from the likes of Netflix, HBO and Amazon Prime Video.
This approach would leverage people’s interest in video content of all types—and their growing inability to understand and digest all of it as it seems we now have too much television on television—to pull people to a new offering with which to spend their time that throws a highly intelligent, easy-to-use umbrella over all sources of video. To be viewed as a game-changer by people, the service would have to pool paid content from the key traditional and SVOD television players, as well as key public content from platforms including YouTube, Vine, Snapchat, Instagram and even Facebook and lay over that entire collection a next-generation discovery mechanism that goes beyond today’s mechanisms, which can no longer adequately address all the content. Instead of search, guide or store approaches, it would offer an intelligent agent that actively surfaces the most interesting video for you given all available public commentary and trends and your continued reactions and guidance.
A butler for your content: a “jukebot.”
It will have to do it all—from the NFL to HBO’s Game of Thrones to Netflix’s House of Cards to that trending Vine to the new Snapchat Discover content from CNN and the 360-degree video from the Red Bull drone races in Dubai—for $99 per month, delivered on-demand to all the devices you care about, saving you from higher cable bills and combining what today is spread across many different apps and several different pieces of hardware into one integrated and interesting experience that never runs out.
Although difficult to deliver—only Google, Apple and Amazon have the means and scale to pull this off—it would force Facebook into a battle royal to decide who the real king is: People or Content. Whether machines or people are the best way to get to the content you enjoy the most.
If that service can be launched at a time of large-scale transition to a new primary interface, such as consumer-grade, lightweight, wireless glasses capable of going from being completely clear to delivering both augmented and virtual reality—an 80-inch television anywhere you want it—and do so substantially ahead of Facebook’s own Oculus VR hardware while also blocking Facebook’s existing services from becoming as popular on the new interfaces as they have on mobile, a significant threat to Facebook’s momentum would be created. Every minute you spend with a “jukebot” is a minute you are not spending with Facebook’s News Feed, the major source of its revenue.
Both Apple and Google have seen how Facebook co-opted their phone platforms for its own momentum and success. An evolved content and interface future could provide the disruption and transition necessary to shake off Facebook’s hegemony in a similar way that the smartphone ecosystem shook off Intel’s dominance during the PC era.
Revenue incursion (five to 10 years): Perhaps facing even longer odds than the first two scenarios, but no less dangerous, is the one that goes after neither Facebook’s strength in connecting people nor the amount of time people spend with Facebook but instead simply goes after a part of its advertising revenue by providing a more effective advertising option for a fraction of Facebook’s advertisers big enough to disrupt Zuckerberg’s momentum and clip his ability to invest in the future to protect against disruption.
Aside from Google, online retail giant Amazon is one of the few companies in the world with a pool of knowledge about people as valuable as Facebook’s. In important ways to advertisers, Amazon’s knowledge might be even more valuable.
With purchase history—and credit card numbers that shrink the distance between interest and transaction to a single click—for over 300 million people worldwide,3 it’s no wonder that the online retailer is already a more valuable company on Wall Street than retail juggernaut Walmart. By 2016, Amazon’s Prime membership program had penetrated into 50% of all U.S. households and 70% of its wealthiest.4 Early experiments with its Dash buttons enabled automatic reordering of household items with just the push of a button and its Echo voice-controlled assistant eliminated even the need to lift a finger in ordering. Beyond running its own online retail operation, Amazon had also extended its ability to run the infrastructure of digital businesses to companies small and large by growing its Amazon Web Services division into a $10 billion annual operation in less than 10 years.
With highly respected and longest-tenured5 Internet CEO Jeff Bezos at the helm, who is to say Amazon could not become even more focused on turning its knowledge of people at its own site and those of companies whose infrastructure it manages into significantly expanding6 advertising opportunities for companies that would otherwise have taken their money to Facebook, especially in the retail and consumer packaged goods categories that are consistently two of the top three largest spending categories in all of advertising?7
The sheer number of if’s around these three scenarios show just how difficult it would be for even large competitors like Google, Apple and Amazon to unseat Facebook’s lead with people and the way they spend their time.
It’s not impossible, but it would be a long shot under the best of circumstances, and Zuckerberg has shown clearly that he will not stand idly by or be caught asleep at the switch.