Facebook (NASDAQ: FB) CEO Mark Zuckerberg did not mince his words about the company’s recent earnings conference call.
“I want to highlight that we see more and more Apple (NASDAQ: AAPL) as one of our biggest competitors, “said the Facebook boss.
It is rare for company executives to speak in such direct terms about rivals, especially in earnings calls, as management generally seeks to minimize potential competition and generally does not mention competitors by name.
This is not the first time that Apple and Facebook have shaded each other. Referring to the use of Facebook’s tracking tools, Apple CEO Tim Cook called these companies “totally out of control” in 2018 and responded to Zuckerberg’s recent appeal, saying, “Technology doesn’t need a big amount of personal data “to succeed, another reference to Facebook.
The two companies have long argued over privacy issues, but the stakes are about to get much higher, with billions of dollars being played out in this battle.
Image source: Facebook.
Uncertainty ahead for Facebook
Facebook destroyed analysts’ estimates in its fourth quarter report, but the stock price still fell in the report, as management warned of “significant uncertainty ahead”, mainly because of headwinds related to the release of iOS 14 Apple’s new mobile operating software.
IOS 14 includes a series 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 advertising identifier, which allows the type of ad targeting that is a central part of Facebook’s advertising product.
For Facebook, this change is introducing an unusual level of uncertainty into its business. And it has alerted its millions of advertisers repeatedly to the disruptions that iOS 14 is likely to cause. On the conference call, Zuckerberg blamed Apple:
Apple has every incentive to use its dominant position on the platform to interfere with the way our apps and other apps work, which they do regularly to prefer their own. This impacts the growth of millions of businesses worldwide, including the upcoming changes to iOS 14, many small businesses will no longer be able to reach their customers with targeted ads. Apple may say that it is doing this to help people, but the movements clearly track its competitive interests.
On removing ad targeting tools, COO Sheryl Sandberg added: “Small businesses are really concerned because they are concerned about not being able to buy effective advertising. If all personalized ads were eliminated, small businesses would see a cut 60 percent in website sales. ”
Small businesses make up the bulk of Facebook’s 10 million advertisers, generating the vast majority of the company’s revenue, and these companies 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 that and [COVID-19]. New phenomenon, uncertain future, people go crazy and reduce their spending as a reflex of the knee. “He also told me that he expects more inexperienced advertisers to be kicked out of Facebook as the economy changes and that the policy may even bankrupt weaker companies in some cases.
Facebook’s worst-case scenario of a 60% drop in return on advertising spend would be disruptive or even catastrophic for many of the companies that depend on the platform. The company is listening to these concerns now and responding accordingly.
Blaming Apple
For Facebook, which is often called a monopolist, Apple serves as a useful sheet. The social media giant often presents itself as the small business hero, providing free and paid tools on which millions of small businesses depend, and Sandberg shares small business success stories on Facebook on all profit calls.
Positioning yourself alongside small businesses is a smart strategy for a company that has often been at the center of controversies and antitrust investigations more recently, as small businesses are crucial to the economy and it is a good policy to claim to be on their side.
Based on Apple’s account of this saga, Facebook is invading user privacy without their permission, but according to Facebook, this strategy is in the interest of millions of small businesses. The company also claims that users prefer ads that are relevant to them.
In blaming Apple, the company also portrays itself as a victim of a technology giant that is harming Facebook to take advantage of its own apps, like iMessage. Apple is also the subject of an antitrust investigation, mainly in relation to its relationship with applications, so it is a smart argument for Facebook.
What this means for Facebook investors
It is difficult to doubt Facebook’s business after the quarter just reported. Revenue jumped 33% year over year to $ 28.1 billion, and operating revenue jumped 44% to $ 12.8 billion, providing a large operating margin of 46%.
However, the company faces several risks ahead, including the potential for increased regulation and the threat of another reaction, like the boycott of the advertiser last year, but management seems more concerned with the impacts of iOS 14.
The good news is that Facebook’s guidance does not seem to anticipate a major impact from the launch and even calls for accelerated growth over the first half of the year, as it goes through the worst of the pandemic. However, he anticipated slower growth in the second half of the year and expected the iOS 14 outage to begin at the end of the first quarter.
Investors should also remember that Facebook was agile before, when it needed to adapt, whether in the transition to mobile in the early days of the company as a public company, or in the changes it made in response to Russian hacking in the 2016 elections. and the Cambridge Analytica scandal. Facebook will certainly not be stopped this time, as it will adjust its algorithms and continue to develop new features, such as e-commerce.
In general, the matter deserves attention from investors, but it is not a reason for sale, mainly due to the solid value of the share. Keep an eye on the launch of iOS 14 in the coming months, as tensions with Apple will only heat up from here.