Facebook Ad Business Faces Challenges from Regulators & Apple

Facebook Announces Strong Second Quarter Earnings

Facebook revealed its financial results for the second quarter on Wednesday, exceeding analyst predictions with a revenue of $29 billion.

Revenue for the quarter was projected to be $27.8 billion, representing a 50% increase when compared to the same timeframe in 2020. Earnings per share reached $3.61, also surpassing expectations.

The company’s revenue stood at $18.6 billion during the corresponding quarter of the previous year.

User Growth and Market Position

This financial period marks the first to fully reflect a shift towards economic recovery following a year heavily reliant on online activity due to the pandemic. Facebook successfully met expectations regarding user growth.

As of March, Facebook’s network of applications supported 2.85 billion monthly active users. By the end of the second quarter, this number had grown to 2.9 billion, aligning with anticipated figures.

Stock Performance and Future Challenges

Shares in the company commenced trading at $375 on Wednesday morning, but experienced a decline to $360 following the release of the earnings report.

Despite a robust quarter, Facebook has cautioned about upcoming changes, specifically those impacting its substantial advertising business, which generated $28.5 billion of the total $29 billion revenue.

The company identified Apple’s privacy-focused updates to its mobile operating system as a potential threat to its operations.

According to the investor report, Facebook anticipates “increased ad targeting headwinds in 2021 from regulatory and platform changes, notably the recent iOS updates,” predicting a more significant impact in the third quarter than the second.

Diversification and the Metaverse

During the investor call, Facebook CEO Mark Zuckerberg highlighted the company’s strategy to lessen its dependence on advertising revenue.

He noted expanded initiatives to attract and support content creators, as well as the company’s focus on e-commerce. “We want our platforms to be the best place for creators to make a living,” Zuckerberg stated.

The company intends to begin monetizing creator tools starting in 2023.

Zuckerberg also underscored Facebook’s ambitious vision for social experiences within virtual reality. “Virtual reality will be a social platform, which is why we’re so focused on building it,” he explained.

The potential for monetizing digital goods, such as clothing and avatars, within virtual reality social networks was also discussed.

Facebook refers to its concept of an interconnected network of virtual social environments as the “metaverse” – a reference to Neal Stephenson’s 1992 science fiction novel, “Snow Crash.”

Competition and Future Outlook

Regardless of the reported figures, Facebook remains a dominant financial force. Negative publicity and waning user trust in Western markets have had limited impact on its financial performance.

Its advertising business continues to demonstrate strong dominance. Without substantial antitrust reforms in the U.S. or the emergence of a powerful competitor, few obstacles currently stand in Facebook’s path.

While antitrust reform remains uncertain due to political divisions in Congress, Facebook is now facing a growing challenge from a competitor: TikTok.

For years, identifying a viable rival to Facebook has proven difficult, given its market leadership and its practice of acquiring or replicating competitors.

However, TikTok is rapidly establishing itself as a significant contender. YouTube is also substantial, but the two platforms have evolved alongside each other, offering distinct experiences.

TikTok's Rise

TikTok reached 700 million monthly active users in July 2020 and exceeded three billion global downloads earlier this month, becoming the only app not owned by Facebook to achieve this milestone, according to Sensor Tower data.

If TikTok can successfully attract users away from Instagram and Facebook’s other platforms, and simultaneously become a preferred advertising venue, Facebook may face a genuine threat.