Following the testimony of former employee Frances Haugen, Facebook is under heavy pressure over claims that it fails to protect children and other users from harmful content.
Both Democrats and Republicans want to introduce regulation to ensure child safety, which would not only impact Facebook but also its competitors.
In the meantime, Facebook will face increasing pressures within its own markets, where it is among the least diversified companies and relies heavily on its rivals to connect it with users.
Facebook’s efforts to dominate the “metaverse”, an alternative online reality, will drive it towards greater vertical integration and a direct link with its users.
Facebook is under pressure again, just three years after the Cambridge Analytica scandal in 2018. In recent testimony to the US Congress, Ms Haugen has claimed that the company puts profits before the public good, and that it harms children and stoked divisions. Despite Facebook’s dismissal of the claims, the company will attract increased scrutiny from both policymakers and regulators. However, even if regulation is delayed, we expect that Facebook will face more headwinds from competitors.
The most likely regulation will target children
Facebook has long talked about the need for more regulation, as it looks for policymakers to make key decisions instead of leaving it to the company itself. The latest focus is on greater scrutiny on algorithms, mirroring a similar attempt in the EU through the Digital Services Act. There is bipartisan consensus in the US that something needs to be done about Big Tech companies, but Democrats and Republicans focus on very different things; the former on misinformation and the latter on censorship. Moreover, there is a queue of legislation that needs to go through Congress ahead of the mid-term elections of November 2022. Big Tech regulation will not be the main legislative priority.
If there is regulation, it will likely target children’s use of social media, to try and reduce potential harms. This will mirror a privacy code that took effect in the UK in September 2021. The British example shows such a code will not only target Facebook and associated companies such as Instagram, but all its major rivals, including YouTube, TikTok and Snapchat. All have had to change their rules and improve protections in the UK to comply with the new rules, and regulation may level the playing field in a market where Facebook had lost ground. The company, especially the original Facebook platform, has lost its cool factor with Western teenagers, and while it continues to grow strongly in emerging markets, most of its platforms’ monetisation continues to come from the developed world.
Facebook relies the most on its main rivals
There are two main reasons why Facebook is under the most threat from its competitors.
The first is that it is one of the least diversified Big Tech companies. In 2020, 98% of its US$86bn revenues came from advertising. Advertising also represents 92% of Google revenues, but they are much higher, at US$183bn. Apple and Amazon, by contrast, are less reliant on their core products: Apple’s iPhone and Amazon’s online stores represent about 50% of each company’s revenues. This lack of diversification means that Facebook is vulnerable to changes or barriers in its advertising market. One barrier, for example, is that Apple devices require Facebook users to give explicit consent to being tracked.
This leads to our second key reason why Facebook is vulnerable to competition: it lacks a direct link with its users and relies on its rivals to carry its services. Apple has its own hardware and operating system. Google has the same, as well as the Chrome browser. Even Amazon can leverage the Kindle, the Fire tablet and smart speakers using Alexa to go direct to consumers. Facebook does not have any direct interface, after the failure of its efforts to launch a smartphone with HTC and with the Portal.
This dependence on competitors poses a major threat to the company, at a time where Big Tech companies are increasingly competing with each other in a wide range of markets, including commerce, advertising, finance, the home and gaming.
The metaverse will lead greater vertical integration
Most of the 2% of non-advertising revenues Facebook reported in 2020 came from Oculus, a maker of virtual reality headsets that it acquired in 2014. Beyond looking to increase commerce on its core platforms, Facebook’s key priority is to become the main player in what it calls the metaverse, an online world using extended reality (augmented and virtual reality) that is often seen as the next major computing platform. The company has recently pledged a US$50m investment in global research, and it has also launched Ray-Ban Stories, a pair of augmented reality glasses.
With the metaverse, Facebook is looking to create a direct link with its consumers through a range of vertically-integrated products and services. This will lower its reliance on its rivals, which are also looking to take advantage of the new platform. Regulators, however, are still catching up with current social media trends, let alone future ones. Which is why competition is likely to be a bigger threat to Facebook’s ambitions than any new legislation.