Sunday, February 9

Over the past two weeks, Facebook and Google reported uninspiring revenue numbers. Facebook’s year-over-year growth was down to 25% in this year’s Q4 compared to 28% last year. Google missed revenue projections, and its ad revenue growth is declining too. Both companies’ stock dropped after earnings.

This wasn’t just a slow quarter, though. It was the beginning of the Great Flattening.

For years, Google and Facebook have enjoyed explosive revenue growth as advertisers moved their dollars from print and television to digital. Facebook posted twelve straight quarters of more than 40% revenue growth, ending the streak in late 2018. Google added more than $20 billion in revenue per year between 2016 and 2019, starting from $90 billion in 2016. But now their growth is starting to flatten out — and it had to happen.

Total advertising spending, in all media, tends to grow at a fixed percentage each year, typically around 4 to 5%. Facebook and Google outpaced that number because advertisers were so over-indexed on print advertising. This chart from the venture capitalist Mary Meeker in 2011 illustrates the imbalance — and the opportunity:

Facebook and Google made it easy for advertisers to spend their money thanks to their massive reach and data. So advertisers dumped their budgets into “The Duopoly,” as these two companies became known in advertising circles. But their growth had an upper bound.

Brian Wieser, the global president of business intelligence at the massive media buying agency GroupM, has been warning of the Great Flattening for years. When I saw the most recent numbers come in, I called him. “We passed that point of maximum growth. We’re well past that point,” he told me. “The market isn’t limitless.”

Wieser said it might take a decade for Facebook and Google’s growth rates to slow down to the 4 to 5% the rest of the advertising industry sees. But that moment is coming.

As Facebook and Google’s advertising growth decelerates, their secondary businesses will become more important to their bottom lines. For Google, it’s cloud services, where the company trails Amazon and Microsoft. For Facebook, it’s virtual reality, where the Oculus Quest is bringing in meaningful revenue.

These companies, as with all the tech giants, are masters of reinvention. They’re constantly building the next business before the current one is maxed out. And this test will be their next big one. The Great Flattening approaches — and now things start to get fun.

It’s Always Day One

Reinvention is core to the tech giants’ DNA, and so here is my weekly plea for preorders: In my book Always Day One, which comes out on April 7, 2020, I detail how the tech giants built cultures focused on reinvention. There’s an interview with Mark Zuckerberg in there, where we talk about what comes next for Facebook, and I found his comments on the subject pretty interesting. You can get it the day we launch by preordering here: www.alexkantrowitz.com

The Final Word

Thanks again for reading. Hope you had a nice weekend. What are you looking forward to this week?

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