Last June, the social media giant then known as Facebook became only the sixth company in the world — behind iPhone maker Apple Inc, software powerhouse Microsoft, search supremo Google’s owner Alphabet Inc, e-commerce behemoth Amazon.com and Saudi Arabian oil firm Saudi Aramco — to surpass a market value of US$1 trillion ($1.35 trillion). Its market value peaked at US$ 1.1 trillion on Sept 1.

Despite a hard pivot, tens of billions in R&D on a virtual network focused on social connection called metaverse, US$19 billion in stock buybacks, a name change to Meta Platform and an aggressive PR campaign, it has been downhill ever since. On Feb 3, after it guided slower earnings and a plunge in revenue growth, Meta’s shares fell 26.4%, wiping out US$237 billion — the largest ever single-day drop in market value for a listed company on earth. They have fallen over 40% from the peak and the company is now valued at just US$612 billion.

Meta, which last year earned US$117 billion in revenues, is as close to an icon of digital technology as you can get. With Google, it is one of two dominant advertising-based platforms in the world. Amazon, which raked in US$31 billion in ad revenues last year, is a distant third.

Founded in 2004 in his Harvard dorm room by 19-year-old Mark Zuckerberg, Meta is one of a handful of tech giants that are still founder-led. Microsoft, Google and Amazon’s founders have all since retired, Apple’s Steve Jobs died a decade ago and Tesla’s helmsman Elon Musk joined the electric vehicle pioneer months after it was founded. Zuckerberg, now 37, is still seen as a boy wonder who took an idea from zero to a trillion dollars in just 18 years.

How did a trillion-dollar giant, indeed, one that is among the most-watched on Wall Street, fall so far, so fast? What went wrong? Can it be fixed? What will it take to return it to its former glory?

If you are looking for clues of what’s gone wrong look no further than your smartphone and exactly what you spend time on these days. Facebook long ceased to be cool. Its daily active users, a key social media metric, fell for the first time ever in the last quarter. Four years ago, TikTok, owned by Beijing-based Bytedance began capturing the imagination of young people around the world.

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A ton of firms have for years tried short-form videos but none has ever come anywhere near what TikTok has achieved: high and growing user engagement. Once you are hooked on TikTok you keep coming back for more. “People have a lot of choices for how they want to spend their time and apps like TikTok are growing very quickly,” Zuckerberg said earlier this week as he explained why Facebook’s user engagement was in a free fall.

The key to TikTok is its deft use of AI and machine learning. As soon as you get on its platform, TikTok starts learning everything it can about you and the data it gathers is quickly put to work to inundate you with whatever you want and get you hooked as quickly as possibly. Snapchat, Instagram Reels and YouTube Shorts may often have funnier or better produced short-form videos but TikTok hooks you faster and makes the whole experience so good that you don’t want to be anywhere else.

Research group Forrester estimates TikTok reaches 63% of Americans between the ages of 12 and 17, up from 50% in 2020 while Instagram has declined to 57% from 61% two years ago.

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Meta’s loosening grip on advertisers

Even though TikTok has been drawing users away from Facebook, Instagram and Snapchat for a while now with ever-higher user engagement numbers, for the most part, advertisers stuck with the media they knew: Facebook. Now, they are leaving Facebook and Instagram because they don’t have the same user engagement that TikTok has.

One reason why Meta shares have fallen so far, so fast, and why so many investors are rushing to exit is that Zuckerberg now publicly concedes that his firm’s near-term path forward is no longer “quite perfectly defined”. “TikTok is so big as a competitor already and continues to grow at quite a faster rate off of a very large base,” Meta’s CEO said last week.

“We’re seeing that people want to spend a lot more time what we’ve seen from apps so far and that’s also reflected in the success that apps like TikTok have had,” he conceded.

While social media giant has duelled it out with competitors in the past by blatantly copying them the way it did with Snapchat or just buying them out as it did with Instagram, Zuckerberg now says that he doesn’t really know how to compete with TikTok. The Chinese app is “one of the most effective competitors we have ever faced” and to counter its growing threat “we are retooling our teams to make serving young adults their north star,” Meta’s CEO added. “This shift will take years, not months, to fully execute.”

TikTok apart, Apple has removed Meta’s oxygen. iPhone maker’s AppTracking Transparency, or ATT, which grant users the ability to opt out of any type of targeting or tracking has hurt Facebook and Instagram hard.

How hard? Zuckerberg estimates that the impact from ATT will be over US$10 billion in 2022. Essentially, ATT is shaving off 10% of Meta’s annual revenues. Meta had revenues of over US$117.9 billion last year. “Apple created two challenges for advertisers: one is that the accuracy of our ads targeting decreased, which increased the cost of driving outcomes; the other is that measuring those outcomes became more difficult. These challenges are complex and interrelated,” Meta said in its earnings statement.

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Here’s the problem. Apple’s AppTracking and Transparency does not just impact Facebook, Instagram and WhatsApp but also Google, Snap and Pinterest which reported record revenues and profits for the last quarter.

Yet Zuckerberg implied there may be something nefarious going on. While Apple is indeed forcing other platforms to adhere to the same rules it might be giving Google which pays Apple US$15 billion a year to be the preferred search engine on its iPhone little more leeway than others. If Apple is secretly helping Google because of its search deal why did Snap and Pinterest report stellar results when they pay no money to Apple and have no search deal?

Meta’s problem is that it is far more reliant on advertising than Google. Over 98% of Facebook revenues are from advertising. Only 81% of Google’s revenues are ad-related. Google has 10 units — including cloud, YouTube, Fitbit watches, Pixel phones, Nest devices — that have over US$1 billion in annual sales.

So, when ads are hit, whether it is due to an economic slump or ad-based platforms being prevented from harvesting too much private data from users, Facebook suffers more.

The difference is in how the two actually gather the data which is then used to sell ads. Facebook follows you around from website to website all day as you surf the web sucking in as much data as it can.

With its algorithms and its ad technology, Google doesn’t need to track you on every website. It can get by tracking you around a third or less of the websites and still have enough data that allows it to sell as many ads. Facebook, says Silicon Valley VC Chamath Palihapitiya, “is just an app that sits inside an ecosystem that is subject to the rules of platform owners — Apple and Google”.

Competition from TikTok

Can Meta do anything about TikTok? Until recently, Facebook was growing revenues at 30%–40% a year so investors were happy to pay a high multiple for its stock. Now Meta is guiding investors that revenues in the current quarter will only grow 3%–11%. In an inflationary environment, 3% is the rate at which old stodgy companies grow. Proctor & Gamble Co grew revenues by 5% in the last quarter.

In another era, “Facebook would have just bought TikTok long before it was able to get the traction and engagement that it has today,” notes Neil Cybart, who writes the tech blog, Above Avalon. “In 2016, Facebook tried to buy Musical.ly which later merged with TikTok to become the current platform,” he says. Now with the Department of Justice and the Federal Trade Commission scrutiny, it is unlikely that it would ever be allowed to do a major acquisition let alone one which kills off a competitor.

Yet there may be a silver lining for Meta. The Biden’s Administration recently began a national security review of apps with ties to countries like China such as TikTok. Two years ago, then-President Donald Trump had threatened to ban TikTok on national security grounds. That forced ByteDance to start negotiations to sell the app, first to software giant Microsoft, then to another software firm Oracle, with retail giant Walmart as a minority partner in both the deals. But the sale got bogged down in legal suits and in November 2020, Trump lost the election. Biden has since revived the scrutiny of TikTok.

As Beijing put the squeeze on its own tech giants last year, Bytedance offered the Chinese government a stake in its holding company and a board seat. If Washington restricts TikTok because it now has a direct link to Beijing it will allow Meta to regain lost ground. But if Beijing allows the sale of TikTok to Microsoft-Walmart or the Oracle-Walmart consortium it will only make things even more problematic for Zuckerberg.

For now, Meta is focused on making its next big bet — the metaverse — a success. To do that, it needs to woo thousands of top software engineers. Top talent can’t just be lured by big salaries or bonuses. They need to be given generous stock options. Recruiting and retaining top talent is easier when your stock is going up 30% a year and Wall Street is longterm bullish on you. It’s much harder when the stock is slipping the way Meta shares are right now. For this part, Zuckerberg, for his part, has been pump-priming Meta stock with tens of billions in stock buybacks.

If he is too focused on the metaverse where it could take seven to 10 years before any meaningful profits can be reaped, core Facebook and Instagram businesses will suffer. Zuckerberg conceded that Instagram has so far struggled to make money from its Reels short-form videos. “The history of tech is filled with companies who got comfortable with their flagship businesses and simply floated off to irrelevance,” says tech commentator Alex Kantrowitz.

Meta’s CEO knows that his core business Facebook is not in great shape and even Instagram’s growth is tapering off. The bet now is that Zuckerberg can build a brand new business from the scratch the way he did with Facebook, says Josh Brown, CEO of Ritholtz Wealth Management. “He has the cash flows to invest a lot of money but can he catch lightning in a bottle a second time?” he says. “Very few people have been able to do that twice. Steve Jobs did that when he returned to Apple after a decade-long hiatus.

Fifteen years ago, Google and Facebook were the new disruptors upending the old media. Now they are the ones getting disrupted. Until now, the metaverse was a long-term project for Meta, says Kantrowitz. “Now, it’s the metaverse or bust.”

Corporate behemoths decline gradually, then suddenly. Meta still has a few years to change course, tweak its strategy and reinforce its old core businesses. After last quarter’s debacle, it will be a challenging crawl back up. E Assif Shameen is a technology and business writer based in North America

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