Facebook is now an old cyclical business

Facebook is now an old cyclical business

Facebook and its parent company Meta Platforms haven’t lost their mojo. They have simply grown to the point where the advertising cycle dominates the company’s revenue. That’s the reason for their recent decline in revenue and the likely fate of other tech businesses. Companies that were bright in their youth and growing fast now look like old rusting companies that move up and down through the business cycle.

Advertising has always been a cyclical industry, at least as long as data has been collected. Looking back to 1919, adjusted for inflation, total advertising grew 5.7% annually outside recessions, but fell 5.6% during recession years.

Although marketing people often say that in a recession when a company needs to expand its advertising, the math just doesn’t work out that way. But the cold, hard facts of advertising show that real dollar spending declines during economic downturns.

The larger a company’s market share, the more influence overall industry trends have, and the less the company’s trajectory matters to sales. This appears to be the case with Amazon’s online store sales, which declined in the second quarter of 2022. The same will be true of Tesla when (and if) it catches the market share of General Motors or Toyota; they will play the auto industry. cycle rather than continuing to gain market share.

Think of large and highly cyclical industries like steel or automobiles or paper. Now imagine a smaller company with better management or technology. It starts at just a fraction of one percent of total industry sales, but it’s growing at 50% a year. This company appears to be non-cyclical. The increase in sales will reflect how well it deals with its growing pains and how it breaks through to win more customers. First, the industry cycle dictates where a given year’s growth is 55% or just 45%. Even a smaller number is quite surprising in a mature industry.

Eventually the law of diminishing returns will kick in and growth will drop from 50% per year to 30% or 20%. But that early growth made it a big part of the overall industry. Now the industry cycle can peg growth to 25% in good years or 15% in poor years. It’s still not very cyclical, at least compared to legacy companies. As market share growth inevitably declines, however, industry cycles dominate changes in company sales. And that’s where Meta comes in.

Being cyclical isn’t terrible, although it’s less fun in downturns than being stable. And growing fast is fine, assuming profits come along with sales growth. The challenge of business leadership is understanding the new problems that need to be solved.

Achieving growth in the early stages of a tech company is the key. Whether the economy grows two percent or three percent is irrelevant because a great new product can drive more sales regardless of the economy.

However, in a cyclical phase, company management needs to think about what business cycles mean. How much will incomes fall in a recession? Should spending be cut? Probably yes. And how should it be cut? Layoffs, less marketing, slowing capital spending or eliminating goat yoga classes for employees?

Cycles not only go down, but also go up, and often unexpectedly. Business leaders have to think when conditions are bad for them, how they will meet the increased demand when it comes. This may require adding employees, equipment, locations, and financing all of this expansion before the invoices are paid.

Growth is good, and the extent to which a business becomes cyclical occurs when growth continues long enough. New skills are needed. That’s true for Meta and other great companies with great ideas.

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