Facebook’s Age of Austerity Couldn’t Come at a Worse Time

(Bloomberg Opinion) -- You can’t control when a recession hits. But although tech platforms like Alphabet Inc. and Snap Inc. are slimming down to cope with the global economic rout, Meta Platforms Inc.’s own restructuring couldn’t come at a worse time for the firm.

Meta CEO Mark Zuckerberg  told staff on Thursday to expect job cuts and a smaller company overall in 2023. He is currently grappling with the blow to advertising revenue wrought by Apple Inc.’s privacy restrictions, which could cost the company an estimated £14 billion ($15.4 billion) in ad sales this year. The company is also grappling to build a TikTok competitor, while pivoting to virtual reality in what could be the biggest strategic misfire in Facebook’s history.

It’s sensible to trim costs in the face of a recession, but Zuckerberg has put himself in a difficult position to rejig resources that are vying for very different objectives. It’s no surprise investors are growing tetchy about his iron grip on the company. Meta’s shares are down 60% so far this year. On Friday morning they were trading at $136; around this time last year, they were as high as $378.         

Even if shares were to crash below $100, there’s probably little that investors can do to remove Zuckerberg from his position as chairman and CEO since he holds 51% of Meta’s voting power, thanks to its dual-class stock structure. Facebook’s board has been historically pliant, but even if they did start to grumble, he has the power to remove a director “with or without cause,” according to the company’s bylaws.     

Zuckerberg’s cuts will be the first since Facebook’s founding in 2004, and will involve a hiring freeze and the restructuring of some teams to help cut expenses, according to comments he made during a weekly Q&A with staff as reported by Bloomberg News.   

“I had hoped the economy would have more clearly stabilized by now,” Zuckerberg said. “But from what we're seeing it doesn't yet seem like it has, so we want to plan somewhat conservatively.” 

Recessions can be a mixed blessing in tech. Over the last few years, too many startups have been able to raise money for big ideas that lacked a viable business model, and lean times can force entrepreneurs to be more disciplined in their capital expenditure, building companies in a less exorbitant way.

“Thousands of companies need to go out of business between now and 2023,” Tom Stafford, a co-founder of late-stage tech investing firm DST Global at the Bloomberg Technology Summit this week.” He added that the market for investing in startups, which has slowed down markedly in the past six months, was “much healthier now than it was a year ago.”

But Facebook is hardly a startup, and for years it has offered some of the most competitive benefits in big tech. Stafford also said that as recently as last year, Facebook was approaching staff at his portfolio companies with offers at five times their salary, “which is hard to say no to.”

The company’s multiple big objectives could confuse Zuckerberg’s efforts at effective restructuring. It already appears to be struggling to ape TikTok with its short-form video feature on Instagram called Reels, according to a Wall Street Journal report earlier this month, which cited internal research from Meta. User engagement with Reels declined over the summer, while “most Reel users have no engagement whatsoever.”    

Zuckerberg’s expensive shift to the metaverse is also inspiring less and less confidence. He posted a virtual selfie last month that was widely ridiculed for its crude graphics, and the company’s primary focus on headsets as the main gateway to the metaverse  looks unwise. The most successful metaverse platforms already exist in 2D, with Roblox Corp. and Epic Games Inc.’s Fortnight, and have managed to attract millions of regular users with incentives around building and sharing experiences.

Meta has instead focused on the immersive sensation of its virtual reality products, which isn’t all that appealing. Its Horizon Worlds doesn’t have the same kinds of built-in incentives as Roblox and Fortnight, either.       

Zuckerberg needs to work on fixing all of these issues, in addition to finding ways to offset the billions in lost revenue from Apple’s privacy limits on iPhones.

Facebook was once a trillion-dollar company with seemingly unstoppable growth in digital advertising, but that ad growth is slowing, and the company’s other attempts at generating revenue are floundering. Restructuring will help see Meta through, but an economic recession may ultimately accelerate the company’s decline.