3-2-1nsight: Dealing with Maturity
30 years later and how we're still living with the aftermath of “A computer on every desk and in every home”
This week we’re going to look at the role of maturing companies as the pandemic rush has slowed down. The markets are so reactionary often times forgetting what happened, which causes the pop and drop of the day. Today we’ll cover the matured incumbents and next, we’ll cover the upcoming growth companies. While we focus on the foundational issues of the mature incumbents, next time we’ll discuss the real challenges that upcoming contenders will have to unlock in order to recognize that opportunity.
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Meta's Stock Slump: Facebook's Stalled Growth Is a Very Big Deal - Bloomberg
Facebook lost almost half a million global DAU in the fourth quarter of 2021 compared to the previous quarter, which is the first time this has occurred globally. User growth dropping for Facebook is a big deal because growth at all costs has always been Facebook’s north star. Like Bill Gates’ infamous “A computer on every desk and in every home” north star he had set. For Facebook, which has an ad-based business model, dipping user growth means switching from growing total users to increasing user engagement, a dramatic shift requiring a very different outlook. Add in the headwinds of Apple iOS changes, affecting Facebook’s ad effectiveness, steering the operational culture of this company from user growth to user engagement will require a massive shift and overhaul of some long-held processes.
Despite growing their ad revenue to 15% of total revenue for the quarter, the company is showing that its user acquisition is slowing down. The streaming company saw a 25M monthly active users growth, which barely hit their user growth guidance. More concerning was that their premium customer user growth only saw a 15% increase year over year, which is their main revenue driver. More worrisome is that Spotify also came out saying they’ll no longer be issuing guidance on user growth, which is often a telltale that it’s not getting better. Despite solid signs showing that Spotify is meaningfully increasing its ad dollar revenue, the slowdown in user growth will mean rising acquisition costs, further eroding any margin created by their other revenue streams.
The subscription shuffle is tiring Netflix and Peloton | Financial Times
Now that streaming is ubiquitous, streaming companies understand the capital-intensive nature that comes with constantly capturing that attention. Keeping consumers’ attention when everything is available at their fingerprints is expensive. Netflix and Peloton both have created artificial moats through their content. Still, as time goes on, the cost of producing that content to command consumers’ attention has gotten more expensive, squeezing more and more of that precious margin. And when your Peloton, who just laid off 2,800 employees as they transition to focus on their instructors, and saddled with a souring product roadmap, and the need to pay some of their trainers over $500,000K a year, showing the cost of fitness content is only going to increase. Peloton currently has 55 trainers listed on their site. At a certain point, more of those trainers will demand that salary or leave the platform as new niche connected fitness services continue to pop up. And eventually, if Peloton becomes the Netflix of fitness, they’ll have a subscription loss problem, but at least their baby-killing treadmill won’t be one.
2 Insights
Incumbent tech companies have quickly oversaturated the marketplace and consumers.
For the first time, Facebook reported about its slowing user growth, highlighting the realities of what happens when you already have 2B+ users on your platform. That number is significant for a few reasons because it represents the total size and scale of Facebook. It also highlights what happens when a company achieves its growth target, showing the enormous rush and change in behavior that a platform can achieve.
It’s easy to parallel this to Microsoft back in the 1980s when Bill Gates started his company’s goal, "A computer on every desk and in every home." Microsoft kick-started the personal computing era, which then enabled the mobile period. The mobile period, and the iPhone’s success, was only possible because Microsoft did indeed over-saturate the personal computing market and changed society’s relationship with computers. Microsoft’s efforts allowed society to become comfortable adapting and relying on computers for almost everything. The only way the iPhone and smartphone evolution could have occurred was because of the saturation of PCs led by Microsoft. Sadly, Microsoft focused on the moat of their Windows and PC business, failed to see the rise of the smartphone, and missed out on this entire phase of growth.
We see shades of this with Facebook, Netflix, and Spotify, as they were the original first movers in the space. Using the distribution paths of the internet, they’ve found themselves as the market leaders ushering in the needed behavior change to grow and validate their business models. Now that their models have gained that validation, competition has heated, or with Facebook, their success has led to their demise as there is no more ample room to grow to hit their original north star. Facebook has always been a passive engagement machine, which is why ads served to customers in the feed was so revolutionary and groundbreaking. As customers’ habits evolved (first being more image-driven as seen through Instagram, then through stories as done by Snapchat, and now through content as we see with TikTok), In the past, Facebook either purchased or mimicked their competitors to steal those benefits. Snap and Instagram were always slight folds and variations on the social network model. At the same time, TikTok is the first mobile platform that overrides the importance of the social network by creating an algorithm that’s optimized to serve users the content they want to see.
Despite having the largest audience, Facebook, a company so predicated on engagement, faces an existential threat to its maturing ad business model optimized for passive engagement. Once the original innovator in streaming, Netflix is now facing headwinds as HBO Max, Disney+, Amazon Prime Video, and Apple TV continue to invest in their streaming efforts to take away Netflix’s first-mover advantage and go after Netflix’s consumers with better-differentiated content. Spotify, which was the first to market, is now facing extreme pressures from players like Apple Music and Prime Music as deeper-pocketed competitors continue to eat away at the market creation accomplished by Spotify.
Given the new methods of distribution, gaining relevant eyeballs has never been easier, which also means what a company does with its first-mover advantage is now even more critical. It’s never been easier to launch a competitive service once the behavior change caused by the first mover gains traction. With the current distribution channels, growth at all costs allows business to over-saturate their potential customers at faster rates… which is the most self-inflicting wound if your business can’t efficiently convert that customer.
Slowing or declining user growth is destroying mature tech companies.
After the 2008 recession, so many companies’ mission was to grow at all costs as growth often mischaracterized itself as the proof point of product-market fit. In the past, due to high entry barriers, specific growth rates or membership numbers made certain companies appear as though they were indeed a cultural phenomenon. In reality, those numbers were just the byproduct of unsustainable marketing tactics (do I need to remind everyone of Gilt Groupe). This blind drive for user growth and any associated KPIs (MAUs, DAUs, etc.) made many believe that growth was the most critical metric. And, as America was transitioning from PCs to mobile phones, that was potentially true, as we needed to have enough compelling reasons to see the present 80:20 split of mobile to desktop users. That is the spine of the current digital consumer landscape.
But as we enter the new normal for America, where most consumers experience technology mobile-first, rather than the traditional norms of desktops, we can see that many of those old “grow at all costs” companies deal with this reckoning. DTC darlings such as Casper, a poorly run mattress company that tried to disguise itself as a technology company, were one of the first prominent examples that customer growth, especially the wrong customer growth, is more detrimental than beneficial. This same trend is plaguing Casper, Peloton, and Netflix, which were traditional businesses that tried to paint themselves as technology companies, is now coming for all the incumbents. And we’re seeing the decline in user growth threaten the reason to be for these companies causing them to have existential crises.
Facebook has to battle the reality of iOS changes, a maturing consumer digital behavior, and new competitors that understand these behaviors. The only way to address this is by changing its culture to build features that enrich its consumer’s experience. Not just passive engagement. While we may think it’s tough to scale beyond 2B users, it’s even harder to create a go-to destination that can consistently occupy attention from 2B users.
1nsight
Switching costs have never been lower, making it harder for incumbents to continue to grow.
When companies are new and bring forth novel innovations, most consumers don’t realize what they want. So it proliferates as they quickly get onto the path of proving product-market fit. Except the metrics and expectations associated with product-market fit have changed because the effectiveness and efficiency of current channels have made it easier than ever to hit the results we want and need to see.
To understand the consequences of the new reality, we don’t need to look farther than the traditional media company. Many of the dinosaurs have died and have no chance of coming back. At the same time, the few that remain, given the success of Netflix, believe that the only way they can succeed is to run the Netflix playbook and hope Wall Street grades them as a technology company rather than a media company. To make this happen, so many media companies have to keep on over-investing in premium content to retain and attract new users, creating a new ecosystem for past players and shifting traditional media’s roles and responsibilities.
In this ecosystem, the most competent players maximize their revenue earning potential, as these platforms, studios, and media giants compete against one another for the best content or best content consumption experience. As these players and components in this greater ecosystem recognize this shift, they’ll increase their price to fit this new reality and maximize their earning potential. Once a few find success, those lessons quickly become habits or best practices, and we see everyone follow that market trend.
As these ecosystems mature, the companies and brands mature, the players in the space grow complacent, leaving a gaping hole for new competitors to come in and steal market share or attention share away from the incumbents. Incumbents find themselves forced to find new ways to differentiate, which is why Spotify has made its bed with Joe Rogan and is betting on podcasting. The most recent quarter shows that the bet is paying off. The only problem for Spotify is that its facing slower user growth. Which begs the question: does Spotify have the product chops to create sticky and meaningful features that’ll delight their customers and prevent them from churning?
Facebook created a business model focused on connections, relationships, news and was the OG social network. Facebook redefined friendship and relationship as the feed, and it was revolutionary user data to increase engagement cause companies like Apple to come in and change that behavior. And as users get used to and bored with Facebook’s offerings, they move to other platforms. Now that their behaviors have changed, there is space for platforms like Snapchat to come in and introduce new media consumption formats. While Snapchat still over-relied on networks and relationships, that let a company like TikTok come in that doesn’t even rely on social networks but engaging content.
It is now infinitely more complicated for Facebook to copy and add to their system, this is why Instagram has yet to see the same success when it stole Stories from Snapchat when introducing Reels into Instagram.
The incumbents chased growth at all costs, laying the groundwork and foundation for changing consumers to a digital-first and mobile preferred future, allowing new upstarts to take advantage of these behavior changes. These rapid behavior changes created companies that took the assumptions and growth tactics of the prior incumbents to develop and further evolve the digital and experiential needs of this consumer. And as these new features come into play, at a rapid scale from various distribution strategies, every incumbent’s worldview becomes quickly outdated. As those views become obsolete, it is easier for consumers to switch and divert their attention span. Facebook, Spotify, and Netflix proved that consumers want a digital-first future. Disney, TikTok, and Apple just gave the consumer more choices.