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Facebook Controversies Loom Large on Earnings Call

·6 min read

Allegations from a Facebook whistleblower loomed large on the company’s third-quarter earnings call on Monday. Chief executive officer Mark Zuckerberg immediately addressed some of the controversies swirling around the company, which reported $29.01 billion in revenue, coming up short of analyst expectations.

“Before I get to our product update, I want to discuss the recent debate around our company,” Zuckerberg said on the call. “I believe large organizations should be scrutinized, so I’d much rather live in a society where they are than one where they can’t be. Good faith criticism helps us get better but my view is that what we are seeing is a coordinated effort to selectively use leaked documents to paint a false picture of our company.”

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Data engineer Frances Haugen appeared before the British Parliament on Monday to say that Facebook doesn’t mitigate hate on the platform because it profits from it. “Until incentives change, Facebook will not change,” she said, echoing the sentiments she expressed earlier this month to Congress in the U.S.

Zuckerberg pointed out the complex nature of the situation and to the company’s investments on safety and security — on track for more than $5 billion in 2022, he noted — as well as formation of an oversight board and research efforts. He also framed the company as constantly working on transparency.

Haugen leaked hundreds of documents, some of which indicated a potentially dicey scenario for the platform — that its popularity was nosediving among teens and young adults. For instance, the documents showed that U.S. teens were spending less time on Facebook, a decline of as much as 16 percent year over year, while new signups among teenagers were falling.

The CEO cited broader figures, that almost 3.6 billion people actively use its services, but also noted competition from Apple and TikTok. “Our services have gotten dialed to be the best for most people who use them rather than specifically for young adults, and during this period competition has also gotten a lot more intense, especially with Apple’s iMessage growing in popularity and, more recently, the rise of TikTok, which is one of the most effective competitors we ever faced.

“So we are retooling our teams to make serving young adults their North Star, rather than optimizing for the larger number of older people.”

A few factors complicated the third quarter for Facebook, perhaps principally Apple’s iPhone privacy changes.

Sheryl Sandberg, chief operating officer, elaborated “we’ve been open about the fact there were headwinds coming and we experienced that in Q3. The biggest is the impact of Apple iOS 14 changes which has created headwinds for others in the industry as well, major challenges for small businesses, and advantaged Apple’s own advertising business. We started to see that effect in Q2 but adoption on the consumer side ramped up by late June so it hit critical mass in Q3.”

The company also saw a pandemic effect playing out to hit its interests.

“The strong e-commerce growth in recent quarters is driven in part by the acceleration of the digital transformation that is now tapering off. I think most people see this in their own lives — there is a period of time when many people who were able to stay-at-home and order things online much more,” she explained. “But now in many places, things have opened up and people are increasingly making purchases in-person.”

Still, Facebook managed to hit $3.22 in earnings per share, beating the $3.19 EPS expected by analysts. And younger consumers notwithstanding, the number of daily active users met expectations, at 1.93 billion. But monthly actives missed, with 2.91 billion instead of 2.93 billion anticipated by analysts, as did revenue, the latter clocked growth of about 35 percent over a year ago. Facebook also reported profit of nearly $9.2 billion, a 17 percent year-over-year jump.

So to all of the headwinds listed, Wall Street’s reaction was something of a shrug. Shares ticked up 1 percent immediately in after-hours trading, ambling upward from there.

As for what happens next, the company was clear in its priorities.

In the near term, it’s preparing for the holiday season by “rolling out a range of holiday shopping experiences to help people find great deals, support small businesses and shop with local and black-owned businesses,” said Sandberg. Those will include promotions for Shops when people check out on Facebook or Instagram — like 20 percent off of a first purchase and free shipping — and it will launch a live shopping series with brands such as Walmart, Macy’s, Benefit Cosmetics, Paintbox Nails and others.

The Facebook executive also noted the return of its Buy Black Friday campaign to feature Black-owned businesses on Facebook and Instagram.

Further out, Facebook sees its future hinging on video, particularly Instagram’s short video offering, Reels, and the advertising opportunities there, as well as its broader seller tools and work on metaverse applications.

“Our three product priorities remain our focus on creators, commerce and building the next computing platform,” Zuckerberg said. “A big part of our work with creators is our focus on Reels. Reels is already the primary driver of engagement per client. It’s incredibly entertaining and I think that there is a huge amount of potential ahead. We expect this to continue growing, and I am optimistic that Reels will be as important for our product as Stories is.”

As for the metaverse, the company is building “multiple generations” of its virtual reality and augmented reality technologies simultaneously, he explained. This has included new Oculus Quest 2 virtual reality headsets with more storage and its EssilorLuxottica connected glasses, which are “off to a strong start as well.” But it’s not about building one-off gadgets.

“There’s a whole ecosystem. We’re building multiple generations of our VR and AR product at the same time, as well as a new operating system and development model and digital commerce platform, content studios and, of course, a social platform,” he said. More could be revealed later this week, when its AR/VR conference, Facebook Connect, kicks off on Thursday.

The commerce opportunities may be intriguing, as neither Oculus — the company’s VR outfit — nor its Facebook Reality Labs talk about digital commerce plans in the virtual world, apart from apps and gaming.

It has so prioritized the metaverse that it now plans to carve out financial reporting for Facebook Reality Labs separately, starting next quarter, to “provide investors with additional visibility into the investments that we’re making in augmented and virtual reality. In 2021, we expect these investments to reduce our overall operating profit by approximately $10 billion, and I expect this investment to grow even further for each of the next several years,” Zuckerberg said.