Facebook (NASDAQ: FB) CEO Mark Zuckerberg did not mince words about the company’s recent earnings call.
“I want to emphasize that we are seeing more and more Apple (NASDAQ: AAPL) as one of our biggest competitors, “said the Facebook chief.
It is rare for company executives to speak of rivals in such direct terms, especially on revenue calls, as management usually tries to downplay potential competition and generally does not name competitors.
This isn’t the first time Apple and Facebook have shadowed each other. Referring to Facebook’s use of tracking tools, Apple CEO Tim Cook called such companies “totally out of control” in 2018, and responded to Zuckerberg’s recent call by saying, “Technology doesn’t need massive amounts of personal data” to succeed, another reference to Facebook.
The two companies have long argued over privacy concerns, but the stakes are about to get a lot higher as billions of dollars are fought out in this battle.
Image Source: Facebook.
Uncertainty for Facebook
Facebook quashed analyst estimates in its fourth-quarter report, but its stock price still fell in the report as management warned of “significant uncertainty ahead,” mainly due to headwinds from ads targeting the release of iOS 14, are new mobile operating software.
iOS 14 includes a number of changes designed to increase user privacy and control over their data. Apps like Facebook will now have to ask users for permission to track them or use the device’s ad ID, which enables the kind of ad targeting that is a central part of Facebook’s ad product.
For Facebook, this change introduces an unusual level of uncertainty in its business. And it has repeatedly warned its millions of advertisers about the disruptions iOS 14 is likely to cause. On the earnings call, Zuckerberg blamed Apple:
Apple has every reason to use their dominant platform position to meddle with how our apps and other apps work, which they do regularly to show their own preference. This is affecting the growth of millions of businesses around the world, also with the upcoming iOS 14 changes, many small businesses will no longer be able to reach their customers with targeted ads. Apple may say they are doing this to help people, but the moves are clearly following their competitive interests.
On the removal of ad targeting tools, Chief Operating Officer Sheryl Sandberg added: “Small businesses are very concerned because they fear they won’t be able to buy effective ads. If all personalized ads disappeared, small businesses would see a drop of 60 percent in website sales. ”
Small businesses make up the bulk of Facebook’s 10 million advertisers, who generate the vast majority of the company’s revenue, and those businesses are clearly concerned about the changes.
In an interview last week, Dee Deng, CEO of Right Hook Digital, a digital advertising agency in Australia, compared the threat to what small businesses just faced with the COVID-19 pandemic, saying, “There are so many similarities between this and [COVID-19]. New phenomenon, uncertain future, people panic and stop their expenses like a knee. He also told me that he expects more inexperienced advertisers to be driven off Facebook as the economy changes and said the policy could even cause weaker companies to fail in some cases.
Facebook’s worst-case scenario of a 60% drop in exchange for ad spend would be disruptive or even catastrophic for many of the businesses that rely on the platform. The company is now hearing these concerns and responding accordingly.
Blaming Apple
For Facebook, which itself is often referred to as a monopolist, Apple serves as a useful foil. The social media giant often poses itself as a small business hero, offering free and paid tools that millions of small businesses depend on, and Sandberg shares small business success stories on Facebook with every revenue call.
Positioning on the side of small businesses is a smart strategy for a company that has often been at the center of controversy and antitrust investigations recently, as small businesses are vital to the economy and it is good policy to claim to be on their side.
Based on Apple’s story of this saga, Facebook attacks users’ privacy without their consent, but according to Facebook, this strategy is in the best interest of millions of small businesses. The company also says that users prefer ads that are relevant to them.
Blaming Apple, the company is also portraying itself as a victim of even a larger tech giant harming Facebook in order to favor its own apps like iMessage. Apple is also the subject of an antitrust investigation, particularly regarding its relationship with apps, so it’s a smart argument for Facebook to make.
What it means to Facebook investors
It’s hard to question Facebook’s business after the quarter it just reported. Sales were up 33% year over year to $ 28.1 billion and operating income was up 44% to $ 12.8 billion, yielding a solid operating margin of 46%.
However, the company faces a number of risks that lie ahead, including the potential for more regulation and the threat of a fresh backlash such as the advertisers boycott last year, but management appears to be most concerned about the impact of iOS 14.
The good news is that Facebook’s guidance doesn’t seem to anticipate a major rollout impact and is even calling for accelerated growth during the first half of the year as the worst pandemic is over. However, it anticipated slower growth in the second half of the year and expected the outage for iOS 14 to begin towards the end of the first quarter.
Investors should also remember that Facebook was more nimble when it needed to adapt, whether that was the move to mobile in the company’s early days as a public company, or changes it made in response to Russia’s 2016 election hacking and the Cambridge Analytica scandal. Facebook will certainly not stand still this time either, as it will adapt its algorithms and continue to build out new features such as e-commerce.
Overall, the issue deserves investor attention, but it is not a reason to sell, especially given the solid value of the stock. Keep an eye on the iOS 14 rollout in the coming months as tensions with Apple will only intensify from here.