Last week, Meta (US:META) launched its newest social media app, named Threads, “for sharing text updates and joining public conversations”. In other words, Mark Zuckerberg has launched a competitor to Twitter just as Elon Musk’s business is struggling to make ends meet.
The concern for Musk since his takeover of Twitter has been that social media is an extremely hard business to make profitable. So far, only one company has been able to achieve it on a significant scale, and that is the one that has now decided to compete directly with him. If the early days are anything to go by, Threads is going to be a threat. It already has more than 100mn users, making it the fastest-growing consumer app ever.
Since 2010, Meta’s operating margin has consistently been over 35 per cent. The only two years in which it fell below this level were 2012 and 2022: in 2012, it invested heavily in its mobile phone app so it wasn’t left behind by the rise of the iPhone. Similarly, last year it was spending on artificial intelligence (AI) to optimise its proprietary user data once Apple stopped it from tracking users across websites.
However, even in those two years, operating margins were still 10 and 28 per cent, respectively. The impressive thing about Facebook is that it didn’t need to sacrifice growth for profitability. Between 2010 and 2022, its monthly active users rose from 500mn to 3bn.
By comparison, Twitter last managed to make a profit in 2019. To keep the company solvent, Musk decided he had to fire half of its employees. The problem is that, with fewer employees, the app loses functionality. Outages are relatively common and last week it restricted the number of posts that users could view each day.
The big problem with many modern social media companies is not only that they do not make a profit, but user growth has stalled, making it harder for them to increase advertising revenues. Between 2010 and 2015, Twitter’s user base increased almost seven times over to 304mn, but since then the growth has been erratic. The figure fell to 298mn in 2018, before rising again during the pandemic to 362mn. The same happened at Pinterest, which has only once made an operating profit, and saw its user numbers peak at 478mn in 2021 before subsequently flatlining.
So why can Meta, where user growth at Facebook and Instagram is also now stalling (albeit at much higher levels), make so much profit while all the social media companies that followed have failed? One theory from the investment blog MBI Deep Dives is that the monopoly position of the few big tech companies – Meta, Microsoft (US:MSFT), Alphabet (US:GOOGL) and Apple (US:APPL) – has pushed up the cost of labour across the whole tech sector.
People assume that Meta's moat is the network effects its user base provides, but it is the cost of running the network that arguably protects it most. Scaling a network needs to be done quickly and to do this without outages a company must have spare server capacity, which requires a lot of capex. Add on top of that the need to compete with a few dominant companies for talent and suddenly the barriers to entry are significant – even at a time when the industry is cutting jobs. Even TikTok, the company Meta fears most, made a loss of $7.2bn in 2021, according to the Wall Street Journal.
Mastodon was a new network first touted to replace Twitter. However, its users peaked at 2.5mn earlier this year before slumping to 1.5mn. There were complaints that the interface wasn’t intuitive enough to keep people around. Without enough money, it is difficult to make a good product.
The problem for Musk is that the one company that has ever done it profitably is now coming after him. History and operating margins suggest he will be on the losing side of this battle.
