Facebook is struggling to retain users, fending off regulation, trying to pivot to VR, and paying a massive wage premium to attract the workers it needs to make any of this happen. The company is on the ropes
I’ve been praying for Facebook’s collapse ever since it attained liftoff. In a 2007 article, I predicted that “your creepy ex-co-workers will kill Facebook” by demanding to know why you won’t “friend” them, prompting an exodus to the next platform. That was the social network cycle back then: a new network opens, and you and the people you genuinely like enjoy a rollicking group chat until all the people you have to pretend to like show up.
That’s the double-edged sword of products that rely on “network effects” – the economists’ term for a product that gets better when more people use it. Sure, you might join Facebook because your friends are all there (and more people might sign up because you’re there), but that also means that every time your friends leave Facebook, it’s a reason for you to leave, too.
My prediction failed. For a decade and a half, Facebook resisted the fate of all the social networks that preceded it. In hindsight, it’s easy to see why: it cheated. The company used investor cash to buy and neutralize competitors (“Kids are leaving Facebook for Insta? Fine, we’ll buy Insta. We know you value choice!”). It allegedly spied on users through the deceptive use of apps such as Onavo and exploited the intelligence to defeat rivals. More than anything, it ratcheted up “switching costs.”
“Switching costs” is another economic term: it means “the price you pay when you switch from one service to another.” Switching from Facebook to a rival means saying goodbye to the communities, friends and customers you hang out with on the platform. Normally, tech has really low switching costs: want to change from T-Mobile to Verizon? Just port your number. Your friends don’t even have to know you did; they can still call you and you them.
Tech’s rock-bottom switching costs are what kept the industry so dynamic in its early days. Microsoft could deploy an army of corporate salespeople to turn Microsoft Office into an industry-standard, then Apple could come along and reverse-engineer the Office formats and make the interoperable iWork office suite. That means that Windows users could switch to the Mac and open their Word docs in Pages, their Excel spreadsheets in Numbers and their PowerPoints in Keynote.
It’s different for Facebook. The company’s ascendancy coincided with an overall concentration in the tech sector, and, with it, laws that protected winners of the latest round of the interoperability wars from new challengers. Apple was able to reverse-engineer its way out of the Microsoft Office trap, but woe betides a company that tries the same trick on Apple – try to make a program that lets you run iPhone apps on an Android device, or read the media files you buy in Apple’s book, movie or music stores, and you will quickly discover that the law is now on the sides of the giants, not the upstarts.
That same legal shift is how Facebook has kept its switching costs high. Fifteen years ago, it was safe to make a Facebook-MySpace bridge that would let you leave MySpace but stay in touch with your friends thereby scraping your MySpace inbox and moving the waiting messages to your Facebook inbox. Try to build one of those bridges today – blasting an escape tunnel through Facebook’s walled garden – and Facebook will sue you until the rubble bounces.
But high switching costs have their limits. If you make your service terrible enough, a certain number of users will find the cost of switching preferable to the pain of staying. And as users leave, network effects start to work in reverse: though every user that joins makes your service more valuable, every user that leaves makes the service less valuable. If you’re only on Facebook to stay in touch with a small group of friends, each one of those friends who departs makes it easier for you to make the jump, too. And once you go, it’s even easier for the rest of the group to bail.
This is very bad news for Facebook. After years of slowing US growth, Facebook just experienced its first-ever US shrinkage, which precipitated a $230bn stock crash, the largest in global corporate history.
Though most of Facebook’s users are global, its US users generate far more profit than users in the rest of the world. Losing a US user is expensive. Even more important: the US is Facebook’s home base, and its US user base is its main bargaining chip in resisting US regulation, and in securing US support in its regulatory battles abroad.
Speaking of regulatory battles abroad: Facebook is on the brink of having its business model declared illegal under the European Union’s General Data Protection Regulation (GDPR). Fending off that scenario will depend on vast capital expenditures and friendly European regulators, and Facebook’s running short on both. Oh, and Europeans are Facebook’s second most valuable users.
Admittedly, when a company’s shares decline, it’s not like the company itself has lost any money – those losses hit shareholders, not the business itself. However, Facebook’s costs and share-price are intimately bound together, thanks to tech firms’ reliance on stock grants as a way of scoring a discount on their wage-bills. Engineers, lawyers, and other high-paid, in-demand professionals are glad to take much of their compensation in stock, betting that the company’s share price will balloon and that they can cash out their shares and keep their winnings, thanks to the tax-preferred status of capital gains – in most of the world, the wages you earn for doing useful work are taxed at a much higher rate than the winnings you get from lucky bets on stocks.
Even before its stock fell off a cliff, Facebook was mired in a multi-year hiring crisis. Nobody wanted to work for Facebook because it’s a terrible company that makes terrible products that everyone hates and only use because the company has rigged the system to punish users for switching.
Facebook was already paying a wage premium, offering sweeteners to in-demand workers in exchange for checking their consciences at the door. Those sweeteners mostly took the form of shares, which means that all those morally flexible “Metamates” got a hefty pay-cut when the company’s stock price fell off a cliff. Expect a lot of them to leave – and expect the company to have to pay even more to replace them. Companies with falling share prices can’t use share grants to attract workers.
Facebook is now famously trying to pivot (ugh) to virtual reality to save itself. It’s an expensive gambit. It’s going to alienate a lot of its users. It’s going to alienate a lot of its in-demand workers. It’s going to freak out a lot of regulators.
Meanwhile, the switching costs for people who want to jump ship keep getting lower. It’s not merely that fewer and fewer of the people you want to talk with are still on Facebook. Even if there’s someone whose virtual company you can’t bear to part with, lawmakers in the US and Europe are working on legislation that would force Facebook to allow third parties to “federate” new services with it. That would mean that you could quit Facebook and join an upstart rival – say, one by a privacy-respecting nonprofit or even a user-owned co-op – and still exchange messages with the communities, customers and family you left behind on Facebook’s sinking ship.
For 15 years, I’ve been waiting for Facebook to suffer the fate of every network-effects-driven success story – to experience the precipitous decline that is triggered by people leaving the service and taking the value they brought to it with them. Facebook now has to somehow retain users who are fed up to the eyeballs with its never-ending failures and scandals, while funding a pivot to VR, while fending off overlapping salvoes of global regulatory challenges to its business model, while paying a massive wage premium to attract and retain the workers that it needs to make any of this happen. All that, amid an exodus of its most valuable users and a frontal regulatory assault on its ability to extract revenues from those users’ online activities.
Stein’s Law holds that “if something cannot go on forever, it will stop.”
Facebook can’t go on forever.
- Cory Doctorow is a science fiction author, activist and journalist. He is the author of many books, including the forthcoming book Chokepoint Capitalism, with Rebecca Giblin, about monopoly and fairness in the creative arts labor market. In 2020, he was inducted into the Canadian Science Fiction and Fantasy Hall of Fame
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