January 30, 2020 / 12:04 AM / 19 days ago

Breakingviews - Facebook’s user black box is cause for concern

A 3D-printed Facebook logo are seen in front of displayed binary digits in this illustration taken, March 18, 2018. REUTERS/Dado Ruvic/Illustration/File Photo

NEW YORK (Reuters Breakingviews) - Facebook shareholders risk focusing on the wrong problem. They punished Chief Executive Mark Zuckerberg’s $636 billion company in after-hours trading on Wednesday, sending the stock down as much as 7% on the back of fourth-quarter earnings that showed rising costs and slowing sales. A bigger issue, though, is the decision by Zuckerberg’s company to lump together the metrics for its various social-media platforms.

That’s not to downplay results. Revenue grew 25%, one of the pokiest growth rates in years. Worse, costs rose even faster, by 34%. But Facebook beat analysts’ estimates for the top and bottom line, as well as for user growth, even if not by much. Moreover, executives had already flagged both issues. Expenses, for example, have been ballooning as it tries to police a flood of toxic and divisive content.

Dealing with those issues isn’t going away any time soon. On Tuesday Facebook unveiled a confusing set of proposals and bylaws for its oversight board. Advertising growth this year is expected to slow further, and finance chief David Wehner didn’t mince words about the onslaught of global regulators and the impact of privacy standards on ad targeting. “The majority of the impact lies in front of us,” he told investors.

That ought to be a reason to provide investors with more clarity about the business. Instead Zuckerberg is busy knitting Instagram and WhatsApp into a tighter framework with his flagship product. The company is reporting daily active users for a new metric that counts the number of people using one or more of the products. That was 2.3 billion at the end of the fourth quarter, an increase of 11% from the fourth quarter of 2018. It’s not clear how this so-called “family” tally gels with the 1.6 billion or so daily active users on the Facebook platform, which was up 9%.

The move prevents investors from getting a decent sense of how each franchise is performing, and its value. Instagram would be an enormous public company on its own – $80 billion, Breakingviews calculated two years ago. That number has surely mushroomed. WhatsApp is a popular messaging service that also deserves its own space on the income statement. Shoving it all into a black box does shareholders a disservice.

Breakingviews

Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.


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