Mark Zuckerberg announced that Facebook changes its name and becomes Meta. (Photo Illustration by. , [+]
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 part of the reason for their recent revenue decline and the likely fate of other tech businesses. Young and fast-growing companies now look like old rust-belt companies that are moving up and down with the business cycle.
Advertising has always been a cyclical industry, at least for as long as the data has been collected. By 1919, total advertising adjusted for inflation grew by 5.7% per year outside the recession, but fell 5.6% in the recession years.
Although marketers often say that it’s in a recession when a company should ramp up its advertising, the math doesn’t work that way. But the cold, hard facts of advertising suggest that real dollar spending has declined in an economic downturn.
The larger a company’s market share, the more it is influenced by overall industry trends and the less likely is the company’s own trajectory to sales. That seems to be the case with Amazon’s online store sales, which fell in the second quarter of 2022. The same will be true of Tesla when (and if) it acquires the market share of General Motors or Toyota—they will be riding the auto industry cycle rather than increasing market share.
Think of a large and very cyclical industry like steel or automobile or paper. Now imagine a small company with better management or technology. It starts at only a tiny fraction of one percent of the industry’s total sales, but grows at a rate of 50% annually. This company would appear to be non-cyclical. Its sales growth reflects how well it deals with its own growing pains and how it succeeds in winning more customers. First, the industry cycle dictates whether the growth for a particular year is 55% or just 45%. Even small numbers in a mature industry are pretty surprising.
Eventually the law of diminishing returns will apply, and the growth will fall from 50% per annum to 30% or 20%. But that early growth has made it a huge part of the overall industry. Now the industry cycle can grow by 25% in good years or 15% in bad years. It’s still not very cyclical, at least compared to legacy companies. As market share growth inevitably decreases, however, industry cycles tend to dominate changes in company sales. And that’s where Meta finds itself.
Being cyclical isn’t terrible, although it’s certainly less fun than being stagnant in a downturn. And it’s good to grow fast, assuming that with sales growth came profits. The challenge for business leadership is to understand the new problems that need to be tackled.
In the early days of a tech company, achieving growth is key. Whether the economy grows by two percent or three percent is irrelevant, because a great new product can generate more sales regardless of the economy.
In the cyclical phase, however, company leadership must think about what business cycles mean. How much will revenue fall in a recession? Need to cut expenses? Maybe yes. And how should it be cut? Layoffs, lower marketing, slash capital spending, or eliminate goat yoga classes for employees?
Chakras not only go down, they also go up, and often unexpectedly. Business leaders should consider – when conditions are the worst – how they will meet increased demand when it comes. Adding employees, equipment, locations and financing all of this expansion may be required before the invoice is paid.
Growing is good, and growing to the point that business becomes cyclical is what happens when growth continues over a long period of time. New skills are needed. This is true of Meta and all the other great companies with great ideas.