Love them or hate them, it’s hard to deny Facebook’s success since launching back in 2004. Initially commercialized as a social media platform for post-secondary students, the Silicon Valley darling has transformed into a technology juggernaut with products and services spanning artificial intelligence, virtual reality, payments, advertising, connectivity in developing countries, and of course, social connection.
Their diverse portfolio has given them unparalleled global reach as they currently boast a whopping 2.81 billion daily active users across all applications. For context, that represents 36% of the world’s population; it’s no surprise that every marketer considers Facebook as a key channel to market in their customer acquisition strategy. You can’t help but marvel at how their investments in technology, partnerships, and category creation have led to a business that generates 86 billion dollars in annual revenue with a market capitalization just shy of one trillion dollars.
Despite past success, Facebook made the bold decision to shake up its corporate identity and rebrand to Meta. With a new focus on enabling connection through the Metaverse, there’s more to the rebrand than just a PR ploy to shake off the brand’s negative sentiment; although, it’s not irrelevant. Fundamentally, it represents a pivotal stake in the history of the company as it embarks on business model innovation.
The Scandalous Elephant In the Room
Let’s get one thing out of the way right off the bat; even though it’s the seventh most valuable brand in the world, Facebook has a serious image issue. From the Cambridge Analytica scandal to burying data on how its products are harmful to users, to watching the January 6th insurrection take shape on its platform and failing to stop groups that promote violence and sex trafficking, there’s an endless list of jarringly negative publicity surrounding the company that only seems to be accelerating. Though successful by all measures of capitalism, Facebook has been riddled with controversy, congressional hearings, and social opprobrium that has led to a reduction in consumer trust over the years.
They may not publicly admit it, but the brand’s ill will had to have played some role in the decision to rename the company to Meta. However, that alone likely didn’t trigger the change in their corporate identity. To better understand why, let’s take a quick sidebar into the basics of branding.
A Crash Course In Branding
A company brand is one of the most important investments a business makes since it’s an investment into its identity. Unlike technology and services, brands are intangible and aim to own a psychological position in a customer’s mind to relate on a human level. You can think of them as the personification of the business’s values, beliefs, and personality, attempting to “befriend” customers. Underpinning a brand, in addition to its products and services, is the foundation of any relationship: trust. When earned, trust yields a massive competitive advantage for a business. It is a consistent force of demand generation through brand equity—the premium customers are willing to pay for a brand compared to a generic alternative.
Rebranding occurs when a business decides to change a significant element of its identity—usually its logo, slogan, or name—and can be proactive or reactive.
Reactive rebranding is when a business changes its brand because events in the market significantly impact the current position. This is often the case with mergers and acquisitions, negative publicity, and legal issues. For an example of reactive rebranding, let’s consider Research in Motion. Having lost a significant portion of the smartphone market and a share price in free fall, the Waterloo-based company rebranded itself to BlackBerry to rejuvenate the brand and counter the loss of confidence from the market. Eight years on, and we’re still waiting for the turnaround.
In stark contrast, proactive rebranding is when a firm changes its identity to seize a new opportunity or thwart competitors. Internationalization, new product offerings, targeting a new buyer, and retaining relevancy are examples of situations where a company may proactively rebrand. Consider the G.O.A.T. of marketing, Apple, who rebranded from Apple Computers back in 2002 as they began delivering consumer technology other than computers to the market.
Business Model Innovation
Much of the narrative surrounding Meta has focused on the reactive side of the rebrand. Yes, they had a lot of bad news going for them, and it’s unlikely the new corporate entity will immediately dissociate from that baggage. However, there’s a proactive angle here also. Let’s not forget Meta is a publicly-traded company with a fiduciary responsibility to shareholders to allocate capital wisely for long-term growth. The addition of ten thousand workers to build the Metaverse represents a 25% lift in their overall workforce and, therefore, signals a legitimate strategic investment into the future direction of the business.
From a business model perspective, the newfound focus will help them transition away from dependency on other hardware platforms. Currently, Meta delivers on its vision by providing free—although you could argue surrendering mountains of your data is hardly free—applications to users worldwide. These apps are accessed via third-party hardware providers like Apple and Google as a piece of software that abides by their respective operating systems. From there, Meta leverages user data, understands preferences, and mines insights that would be valuable to advertisers who pay top dollar to target its billions of users.
The issue with its current model is that every user must first go through Google or Apple to access Facebook, Whatsapp, or Instagram. Usually, this isn’t an issue as the app stores provide application builders with a distribution platform to reach the masses. However, the inherent risk with this model is that it subjugates apps to the rules and regulations of the platforms they run on. For example, purchases made through Apple’s App Store or Google’s Play Store entitle their parent companies to 30% of the transaction.
Money isn’t the issue for Meta; they have ample cash on their balance sheet. What is cause for concern is when software updates around user privacy impact their advertising model. For example, iOS 14.5 allowed iPhone users to opt out of web tracking by easily surfacing user privacy options. Without tracking, Meta cannot understand its user preferences, thus, its ability to monetize data on said users is severely dented.
To circumvent the problem, they plan on architecting their own hardware and software platform where they’re no longer dependent on the likes of Apple and Google. Fortunately, half the strategy has been stewing for a few years, courtesy of a two billion dollar acquisition made back in 2014.
Enter the Metaverse
When Facebook acquired Oculus, investors inherently understood it was part of a longer-term strategy, which is still a few years from real fruition. While they don’t explicitly report on revenue from Oculus, it makes up a large chunk of the “other revenue” segment on their income statement. In the first quarter of 2021, it showed growth of 146% year over year to 732 million dollars; 3% of the company’s overall revenue. While advertising remains the cash cow of the business, they can continue to pour resources into their new Metaverse division: Reality Labs.
Tasked with commercializing a hardware and software combination that delivers on the expansive, immersive, and sci-fi vision of the internet, Meta is poised to capture a significant portion of the estimated 800 billion dollar market opportunity. Importantly, as both hardware and software creators, they would have a direct relationship with end-users and cut their reliance on the brands that deliver smartphones to the market. Of course, with 2.81 billion daily active users, they have the perfect channel to promote the adoption of VR/AR technology alongside Metaverse content.
The Cart Before the Horse
One major gripe about the Meta rebrand is that it’s been introduced without any substantive product-related changes. Though focus and resources are being directed towards their Metaverse division, it’s currently an empty promise that puts enormous importance on their ability to execute. Understandably, external messaging was the first move as it’s easier to manage than technological innovation. Experimenting with messaging is a common strategy many businesses use to evaluate market demand and guide the product roadmap. However, there’s enough validation around the concept of the Metaverse—just look at the success of companies like Roblox and Unity Software which dabble in the space.
Even Google had a diverse product portfolio of driverless cars, medical devices, and smart home appliances before rebranding to Alphabet back in 2015. Suffice to say, there’s a lot riding on the product and development teams over at Meta in delivering on the brand promise, which currently amounts to a zero-sum.
Looking ahead
From an investment perspective, I’m bullish on Meta and think it’s a fantastic opportunity for long-term growth. They have a proven track record of delivering value to customers, are experts at driving top and bottom line growth, and excel at creating new market categories. That last note is essential. Meta is making a big bet that VR/AR technology will be as pervasive as smartphones in the future, enabling us to interact with the internet in new and immersive ways.
Of course, they must deliver on the product vision they have in place. But, to regain the market’s trust, data privacy, hate speech, transparency around platform governance, misinformation, surveillance supported advertising, and cyberbullying, are just some of the major issues they must be proactive in addressing.
As a consumer, what concerns me is that Meta already exhibits negligence in matters that they really shouldn’t. In a world of their creation—which is what they are aspiring towards—they would be the arbiter of all things on the platform. Similar to how governments dictate the laws and regulations within their borders, so too will Meta dictate the laws in the new internet they envision. If you take stock of their previous track record, that’s a world that I would not be rushing to participate in.
Ironically, it all comes back to the inherent trait all brands aspire to earn: trust. Though they’re fundamentally altering their business model and are creating some very tempting technology, the prospect of Mark Zuckerberg being a god in the Metaverse is quite unsettling.
The optimist in me hopes that ethics guide their moonshot project. However, the realist in me worries the same image problems that plague the company today, will resurface in the future, albeit in new ways.
Here’s to hoping Tim Cook or Satya Nadella make their plays in due course.
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