New Year, New Meta Update (I)
Over the break we were able to look a bit deeper at some individual companies, new and previous and catch up on how they are doing at a level of detail we don't always have the time for.
One of the most interesting was Meta (the old Facebook).
Now, it is true that we have covered Meta a few times before. It has been, for all the wrong reasons, by far one of the most interesting companies over the last year or so.
In the autumn of 2021 we wrote about the many problems piling up for the company and how these problems might combine in an unusually brutal performance in the years ahead.
Then this autumn we celebrated the end of the FAANG acronym and the dethroning of the big tech companies and then zeroed in on Meta and argued that their rebrand and focus on the Metaverse was both expensive, risky and potentially allowed other competitors, new and old, to eat their lunch.
If you haven't had the chance, it might be worth (re)reading the above. Away from the "Meta is in trouble" aspect the broader point to remember might be that:
Hoping that the "Big Tech" stocks that dominated so much of the last decade reach new highs let alone
So far, so good. We underlined why, even though you may use its products every day, Facebook might also be a stock you might want to exclude from your portfolio and why this may not change any time soon.
We still feel that way - none of the problems have gone anywhere - but it is still possible that the company (and the broader tech sector with it) may see a serious bounce in the next few quarters.
We hope to cover that in the next few editions and discuss what will determine it one way or another.
But much more importantly, we would like to make a broader point about how Meta's current predicament actually has a silver lining and one severely undiscussed by many commentators and anti-social media crusaders.
In short it is:
Meta's share of the online advertising market is plummeting.
In fact, it is beneath 20%. Meta and Google combined are now beneath 50% and falling steadily. Amazon and TikTok are the two biggest competitors that are directly eating Meta's lunch.
See here:
Remarkable.
The reason this is so striking is that for years now we have heard about the power of Big Tech and how these companies had gone under-regulated and are overly powerful as a direct result of this error.
The argument is that the largest technological companies have carved themselves massive and unassailable positions at the heart of the new economy and would reap unusually high profits as a result.
In this narrative, these profits, of course, would be used to dominate other sectors of the economy or areas of the internet and so on and so forth. Most especially, these funds could be plowed into dominating other aspects of our digital lives, further expanding and entrenching the power of these tech behemoths.
Some of this is true of course. We should state that aspects of the hand-wringing about the size and under-regulated nature of these companies does resonate with us.
We do think that simply being able to easily purchase any competing rivals with a flick of the check book without any oversight was an error. And the idea that Facebook or Twitter are not publishers is hilarious.
Some of the acquisitions should have received some (?) and likely quite a bit more real regulatory scrutiny. As we have said a few times in this space: if you are going to have a regulatory state you might as well perform the basic operations thereof.
But we can't help but notice that, in the end, this purported thousand-year dominance lasted about as long as Hitler's thousand year Reich: about ~7 years.
Google and Meta crossed above 50% of the online ad market in 2014, give or take. And Insider Intelligence estimates that the combined market share of the two companies will fall to 44.9% in 2023 and 43.9% in 2024.
All in all, it seems, I dunno, a bit underwhelming.
The rather amusing irony is that it is occurring at the precise moment that the people who have agonized and litigated and written on exactly this topic are finally in the position to do something about it. Tim Wu, an American academic who wrote a panicky book called the "Curse of Bigness" about the above is an official in the White House. And Lina Khan, a lawyer (and professor) who shot to fame after penning an article entitled "Amazon's Antitrust Paradox" arguing that Amazon needed to be regulated for antitrust reasons is the head of the FTC.
They have finally reached the position of being able to achieve at least some of their goals at the exact moment that their fears prove pretty empty, their arguments, vapid.
It is beyond delicious.
Cool. What is the takeaway though?
There are a few:
For one thing, Schumpeter's justly famous argument that "capitalism is defined by creative destruction" is still a thing and just because you are big or have technology isn't a cheat code.
Yes, the power and innate structural properties and network effects of the internet and technology are different from other industries and should perhaps be regulated differently but a lot of the pearl clutching is, well, misplaced.
Free markets are powerful and when up against capitalism tooth and claw is very, very hard to achieve dominance let alone permanently so. Regulation can help but it can also protect against this very competition via regulatory capture. Something academics like Wu and Khan should keep in mind.
Another takeaway is: market leadership changes all the time.
We have made this point time and time again in this newsletter, at this company and in our sleep. It animates a lot of what we do. It is also why you should be very careful to take a broad (and not narrow or concentrated) view of investing.
The churn over even a few years is wild. We have plugged this video before:
And it is worth updating. One of the many reasons we argue that you should stay safely invested in a large index of publicly traded companies is that it is very, very hard to predict the above churn at the top of the market.
To put it in present day context even in the day of "monopoly" big tech companies, the churn continues.
There has been significant changeover just in the last few years. Of the top 10 companies in the S&P at the end of 2020, only 1 had left at the end of 2021 and but 3 have dropped out by 2022. 2 were Big Tech companies.
That is a lot of turnover!
A final takeaway:
This demise of the Meta-Google duopoly is an unalloyed good thing.
The fact that Amazon and TikTok and others have quickly been able to break Meta and Google's "duopoly" is both impressive and underlines the greatest strengths of the American economy: the power of free market competition and then the value of constant rebirth and renewal.
Yes, there are problems perhaps with Amazon's size and reach and there are certainly problems with TikTok's Chinese ownership but both companies are shaking things up and providing new outlets and new avenues for creative destruction.
This is good.
It may be important to "do something" about TikTok from a point of view of regulation. But it should be equally important to ask ourselves why it is that a Chinese and not American company was the one who is doing the disrupting now.
Keeping American capitalism competitive and free rather than keeping companies being "too big" might be the most important regulation of all.
*******
Have questions? Care to find out more? Feel free to reach out at contact@pebble.finance or join our Slack community to meet more like-minded individuals and see what we are talking about today. All are welcome.
