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 revenues. This is the cause of their recent drop in revenue and the likely fate of other tech businesses. Companies that looked bright when young and fast growing now resemble rusty old companies moving up and down with the business cycle.
Advertising has always been a cyclical industry, at least as long as the data has been collected. Looking back to 1919, total inflation-adjusted advertising grew 5.7% annually outside recessions, but fell 5.6% in the recession years.
Although marketers often say that it’s during recessions that a company should increase its advertising, the math doesn’t work that way. But the cold and hard facts of advertising show that dollars actually spent decline during economic downturns.
The higher a company’s market share, the more it will be affected by general industry trends and the less the company’s trajectory matters to sales. This appears to be the case with Amazon’s online store sales, which fell in the second quarter of 2022. This will also be true for Tesla when (and if) it reaches the market share of General Motors or Toyota: they lead the cycle auto industry. rather than continuing to increase market share.
Think of a large and very cyclical industry, such as steel or cars or paper. Now imagine a small business with better management or technology. It starts with only a small fraction of one percent of the industry’s total sales, but grows 50 percent annually. This company will appear non-cyclical. Its sales growth will reflect how well it copes with its growth issues and how it progresses to win more customers. At the outset, the industry cycle determines where a particular year’s growth is 55% or just 45%. Even the smallest number is rather surprising in a mature industry.
Eventually the law of diminishing returns will come into effect and growth will drop from 50% per year to 30% or 20%. But that early growth made it an important part of the total industry. Now the industry cycle can anchor growth at 25% in good years or 15% in poor years. It’s still not very cyclical, at least compared to legacy companies. However, as market share growth inevitably diminishes, industry cycles come to dominate changes in company sales. And this is where Meta is located.
Being cyclical isn’t terrible, although in pushups it’s certainly less fun than being stable. And growing fast is good, assuming profits are accompanied by sales growth. The challenge for business leadership is to understand the new problems to be faced.
In the early days of the tech company, achieving growth was the key. Whether the economy grows two percent or three percent is irrelevant, because a great new product can get more sales regardless of the economy.
In the cyclical phase, however, corporate leadership must reflect on the significance of business cycles. How much will revenue drop in a recession? Will the expense have to be reduced? Probably yes. And how should it be cut? Staff layoffs, less marketing, slowing capital spending, or eliminating goat yoga classes for employees?
Cycles not only go down, but also go up, and often unexpectedly. Business leaders need to consider, when conditions are worse, how to meet increased demand when it comes. This may require adding employees, equipment, locations, and financing all of this expansion before bills are paid.
Growing is good and growing to the point that business goes cyclical is what happens when growth continues long enough. New skills are needed. This is true for Meta and all other big companies with great ideas.