The group founded by Mark Zuckerberg lost 40% of its market capitalization in one year. Beyond the many challenges that this society must meet, it seems important to us to underline the limits of autocratic governance sanctioned, here as elsewhere, by the financial markets.
Facebook is the most popular social network in the world today. Founded on February 4, 2004 by Mark Zuckerberg, Facebook has become essential over the years, now exceeding two billion monthly active users. The data used to analyze Facebook’s performance are impressive, regardless of the variable studied: number of members, daily active users, mobile activity, external growth, financial results, etc.
When analyzing the group’s performance in 2021, one might think that Mark Zuckerberg’s company is still geared towards dynamic growth: its 2021 turnover is 117.9 billion dollars (85.7 billion dollars). in 2020, an increase of 37%.The result, at 39 billion dollars, is up 34%.Everything therefore suggests that the group’s prospects are excellent.
However, the publication, in early February 2022, of its activity report for the 2021 financial year, led to a severe correction in its price on the Nasdaq. The Meta share thus fell by 25%. Worse still, on a Meta-Facebook lost 40% of its market capitalization. Over the same period, the Nasdaq rose by more than 6%. For the first time in its history, Facebook lost 1 million daily active users in the last quarter of 2021, dropping from 1.93 billion daily users to 1.929 billion. That is a decrease of 0.05% of daily users. This may seem anecdotal but it’s a first in 17 years of existence.
The President of Meta-Facebook, Mark Zuckerberg, explains this unprecedented situation by the competition imposed by new entrants, and in particular TIK TOK, leading the youngest users to connect less regularly to Facebook. In addition, some analysts have pointed to Facebook’s significant investments in the Metaverse ($10 billion in 2021). Finally, the governance of Facebook also deserves to be questioned.
Facebook is placed in a contestable market
Meta-Facebook’s problem is primarily of competitive origin. The Chinese group Byte Dance, which owns TikTok Global, Douyin (Chinese version of TikTok which accounts for nearly 60% of its advertising revenue), the news aggregator Toutiao (20%) and the video platform Xigua (less than 3%) is experiencing rapid growth. TikTok and Douyin are now approaching 2.5 billion accounts against 2.985 billion for Meta-Facebook. Users therefore divide their connection time between an ever-increasing number of social networks, which explains the drop in the number of daily Facebook users.
This decline influences Facebook’s ability to generate additional revenue for at least 3 reasons. First of all, it is more difficult to identify the profile of users using multiple social networks. The fineness of the advertising targeting made by Facebook is attributed to it. Next, Facebook users’ exposure to advertising is a strictly increasing function of their connection time. If the connection time decreases, the amount of advertising revenue also decreases. Finally, Facebook will be less and less able to impose its prices on advertisers who have a growing number of credible alternatives to communicate with their targets. In this context, the 22% increase in quarterly revenue per user ($33.68) announced by Facebook for the last quarter of 2021 is a bit of an illusion.
Digital advertising is benefiting from the digital transformation of companies of all sizes and the explosion in volumes handled by e-commerce. In particular due to the Covid pandemic, digital advertising recorded 537 billion dollars, an annual increase of 4% (excluding China and political advertising in the United States). Google, Meta-Facebook and Amazon currently dominate this market and together now account for more than 50% of the advertising market in the world (excluding China). However, Byte Dance is already in a position to challenge this supremacy and is certainly paving the way for other ventures.
The Metaverse upsets the distribution of the value created
The announced advent of a more immersive environment leading to an increase in user connection times convinced Mark Zuckerberg to invest massively in metaverses. The capacity of Meta-Facebook to appropriate the lion’s share in this new environment is however questioned.
First of all, the development of the metaverse requires a use of the band-width not common with the current requirements of a social network. Internet access providers are making very large investments to increase this bandwidth. They could be encouraged to demand the payment of an increasingly important right of access to content providers who are among the first beneficiaries of these investments.
Second, the deployment of the metaverse requires its compatibility with the operating systems of major hardware manufacturers. Mark Zuckerberg’s group does not control any of these manufacturers. It may therefore be imposed technological standards that it will be difficult for it to meet. Meta-Facebook is also very vulnerable to the ethical requirements of operating system owners. Thus, the new requirements in terms of protecting the privacy of users of Apple’s iOS operating system have had a strong impact on the quality of advertising targeting carried out by Facebook and therefore the monetization of this targeting with advertisers.
Finally, the development of the metaverse deemed more immersive and therefore more intrusive should logically be accompanied by new laws and regulations, in the United States and in international jurisdictions, likely to delay or hinder the development of the metaverse, to increase the operating costs, or simply harmful to the business of Meta-Facebook. As the latest annual report submitted by Facebook to the Securities and Exchange Commission points out:
“Due to these or other factors, our strategy and investments in Metaverse may not be successful in the foreseeable future, or may not be successful at all, which could adversely impact our business. , our reputation or our financial results. »
In this regard, it should be recalled that the future European Digital Markets Act (DMA) regulation plans to regulate large companies offering “essential platform services” (social networks, search engines, virtual assistants, etc.), and to regulate targeted advertising . In particular, the platforms will have to refrain from combining personal data for the purpose of distributing targeted or micro-targeted advertisements” without the “informed, explicit and renewed” consent of users, in accordance with the General Protection Regulation. data (GDPR).
Meta-Facebook is therefore faced with rapidly changing competitive, technological and legal environments. The dynamics at work among the latter question Meta-Facebook’s ability to increase its revenues in the medium term. The complexity of these environments also questions the governance of major digital platforms and in particular that of Meta-Facebook.
Facebook’s governance deserves to be questioned
Mark Zuckerberg benefits from the legitimacy of the founder of Facebook. He also has the majority of the voting rights associated with the ownership of the share capital. Finally, Mark Zuckerberg combines the functions of chairman of the board of directors and CEO.
The founder of Facebook controls the issuance of all matters submitted for shareholder approval. Thus, the election of directors, opportunities for mergers, consolidations or the sale of all or almost all of Meta-Facebook’s assets are subject to its sole approval or veto. Such a concentration of control rights may delay, defer or prevent the election of independent directors, but also a merger, consolidation or sale of all or substantially all of the assets supported by the other shareholders. Conversely, this concentration of control may lead to such transactions being carried out against the advice of other shareholders. Therefore, the power wielded by Mark Zuckerberg on Meta-Facebook leads to discouraging potential investors from acquiring Class A common stock.and therefore harms the course of this share class.
Additionally, Mark Zuckerberg has the ability to control the management and major strategic investments of the company due to his position as CEO and his ability to control the election or, in some cases, the replacement of directors. Thus, while the competitive, technological and regulatory environment of Meta-Facebook appears increasingly complex, the sustainability of Meta-Facebook relies solely on the quality of the strategic choices made by its founder. Under these conditions, holding Meta-Facebook shares is an act of faith and amounts to attributing to Mark Zuckerberg capacities due to what he has demonstrated in the past. We respect this point of view and stress that it is not financial theory at all.
In addition, Meta-Facebook’s articles of association stipulate that in the event of death, the shares of the share capital held by Mark Zuckerberg are discreet to the persons or entities he has designated. The concentration of control of the company could therefore be transmitted to people who do not have the same legitimacy as its founder.
Finally, as a board member and officer, Mark Zuckerberg has a fiduciary duty to shareholders. He must act in good faith in a manner that he reasonably believes to be in the best interest of the shareholders. As a shareholder, even if he is a controlling shareholder, Mr. Zuckerberg has the right to exercise the voting rights attaching to his shares, and to the shares over which he exercises control through of a voting agreement and in its own interest. The latter is not necessarily confused with the interests of shareholders in general.
The market capitalization of Meta-Facebook, which is supposed to summarize the company’s cumulative future income, today represents less than 10 times its operating cash flow.. It seems that investors are beginning to doubt the sustainability of this company and therefore lend it a limited income horizon. Of course, like all Nasdaq-listed companies, Meta-Facebook operates in a rapidly changing competitive, technological and regulatory environment. Faced with this, the governance of this flagship of social networks seems to us to be very autocratic and fraught with danger. Meta-Facebook’s stock market setback may signal that the era of high-tech gluttons is now over. It is time for these global companies to equip themselves with governance commensurate with the challenges they face. It is also time for their founders to accept that all or part of their creations escape them and to share power.
 Group M study, December 6, 2021.
 Class A shares are preferred shares with associated additional voting rights or a right to more weighted dividends.
 Against 22 times for Amazon
Article written by:
Pascal MontagnonDirector of the Digital Research Chair,
Data Science and Artificial Intelligence OMNES EDUCATION
Eric BrownAssociate Professor – INSEEC Bachelor
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