Its profit margin is down – Variety

These days, everything seems to be wrong for Facebook. The social networking giant is still shocked by the Cambridge Analytica privacy scandal. Its content moderation guidelines are the subject of a careful review of the decisions to maintain the content of Infowars, as well as the denial of the Holocaust, on its platform. And on Wednesday, investors responded with a shock after Facebook posted lower-than-expected earnings, growth and financial forecasts.

However, the resulting liquidation of shares resulted in the evaporation of $ 110 billion of market capitalization. , can not be explained with Facebook missing Wall Street revenue estimates. Instead, investors are realizing that Facebook executives have been frank for some time: the way consumers interact with social media is changing and, as Facebook adapts, its margins beneficiaries will be reduced

. growth problem

One of the key points to remember from Wednesday's earnings report is that Facebook's growth is slowing. The company had posted solid double – digit growth quarterly, but in the second quarter, its year – over – year growth slowed to 11%. Moreover, from one quarter to the next, growth in the United States and Canada has remained stable and the number of users in Europe has even declined.

In Relationship

That should not be a surprise: Facebook is now used by 2.23 billion users worldwide each month. It's already close to a third of the world's population and it is estimated that 62% of Internet users in the world. Facebook has invested in expanding the use of the Internet around the world to increase its potential audience, but ultimately, the company is expected to reach a ceiling.

This kind of saturation can already be seen in the United States, where the social network has hovered around 185 million daily active users for a year now. Facebook is addressing this issue with a greater focus on some of its other applications that still have greater growth potential, including Instagram, and the company is likely to put more emphasis on these numbers for the company. 39; future. CEO Mark Zuckerberg has already launched a test balloon for this approach at Wednesday's call, revealing that 2.5 billion people were using one of Facebook's apps each month

Stories and advertising have fewer ads. But what really surpbaded them Wednesday, is the predictions of David Wehner, Facebook's chief financial officer, according to which the growth of the company's turnover would slow down in the coming quarters and its operating rate 44% lower than the mid-thirties. coming quarters. Wehner attributes some of this to a greater investment in content security and moderation, which has been reported by executives for some time as potentially damaging to profitability.

But Wehner also distinguished Stories, very popular on WhatsApp and Instagram. Facebook started adding stories to many of its apps two years ago, after the format became popular on Snapchat. This has been successful in stopping the growth of Snapchat, to the point that twice as many people are now using Stories on Instagram than Snapchat.

However, ads have a lighter ads charge and do not make as much money as Facebook. . Facebook COO Sheryl Sandberg was not able to promise investors Wednesday that they would never do it, telling investors: "We do not know honestly."

Investors seemed angry at these revelations but the leaders had warned the problem for some time. . In fact, Zuckerberg had spoken in frank terms about the need to evolve Facebook's business almost exactly a year ago, when the company announced its second quarter 2017 results. At the time, Zuckerberg was warned investors that the adoption of the video by the company could result in significant changes. "The economic aspects are very different from the ones we know today," he said.

"The structure of the margin will be different," said Zuckerberg. "This case will probably – probably not, I think, will certainly – be a lower margin revenue stream than the current thing we are doing." At the time, Wehner also warned that the adoption of Facebook would likely mean that people spend less time in the highly profitable news stream of the company. "There is, in this sense, a cannibal effect of gender happening there," says Wehner.

Say Goodbye to Cash Dispenser

Zuckerberg and Wehner made these remarks just before Facebook launched Facebook Watch, a dedicated YouTube-like video destination with original content from partners such as BuzzFeed, Tastemade and Cheddar. But the same goes for similar media-centric initiatives, including Stories and IGTV's newly launched Instagram

. In the end, Facebook must evolve to remain relevant to its users and not lose to competitors like Snapchat. These changes may affect the profitability of the company in the short term, but it is also likely that some of these new media formats will never be as profitable as Facebook's news thread

To be clear: Facebook is always ready for the foreseeable future. But as the company adopts an evolving online media landscape, investors may have to face the fact that the days of the e-ticket machine will not last forever.