July 31, 2018

Peak Social Networking

Tough news this week for investors in Facebook and Twitter. Following comments from Facebook’s CFO that the company’s privacy efforts would dampen future earnings, the company lost more than $100 billion in market capitalization literally overnight. Twitter subsequently reported earnings and admitted that its user base has started to shrink. The stock also tanked, shedding 16% in a day.

Are these just market gyrations, or is the market telling us something more important?

A few thoughts…

1. Social Networking is a One-Time Generational Phenomenon
My parents have never understood rock & roll. They were born in the 1930s and both over 30 when the Beatles and the Stones appeared in the 1960s. They understand what rock music was, but it had no emotional power over them. I was born in 1971. Facebook launched in 2004, Twitter in 2006. I was in my mid-30s when these services came out. I have an account on both, but neither has any real power over me. I get a stronger emotional charge over hearing Foreigner’s Juke Box Hero on the radio than I do from getting a like on Facebook. My hunch is that most folks over about 40 feel much the same way.

At the same time, my three kids (ages 14, 11 and 11 — yes, twins) have zero interest in either Facebook or Twitter. The combined effect of countless warnings about the dangers of baring your soul online, as well as the simple fact that these tools are mainly associated in their minds with (a) our President, and (b) suburban Moms have pretty well inoculated them for life against these services. Do a quick survey of kids under 15 that you know and you’ll find the same thing. Facebook (at a minimum) is dead to them, and all other mainstream social networks are highly suspect, as well.

This leaves both Facebook and Twitter in a strange position. Both continue to have strong core audiences, comprised mainly of today’s 25-40 segment, which is highly appealing to advertisers and helps explain much of Facebook’s wildly successful run over the past five years or so. Going forward, however, I don’t really see how they can grow their user bases in the US or Western Europe. On the contrary, I think it’s very possible (even likely) that both service audiences have peaked and are entering a long, slow decline.

Let me be clear: Neither service is going away anytime soon. Classic rock on FM still has a real audience. AC/DC, Aerosmith, and Led Zeppelin still have remarkable cultural currency (just go to any NFL stadium and listen to the music), this despite the fact that their generational peak occurred long ago.

The bottom line: At the height of their popularity, all pop culture phenomena feel like they will last forever. As we know, however, it doesn’t play out that way. It is becoming painfully apparent that social networking sites like Facebook and Twitter have peaked. Snapchat kind of never was. Other platforms (Facebook’s Instagram) are doing better, but cannot and will not replace or surpass their predecessors in either size or scale.

2. Privacy is Back
Privacy never really died. It was just overwhelmed for a couple of decades by young people who concluded that the benefits of sharing themselves online strongly outweighed the benefits of keeping ‘private stuff’ private. While still strong among a segment of the population, I believe the anti-piracy, oversharing moment has also peaked. Just in the past few months, I have seen several mar-tech (marketing tech) startups that relied exclusively on harvesting personal data from Facebook and Twitter have their API access shut down. Most immediately went under or sold off their development teams as acquihires. Few VCs would at the moment touch this space with a ten-foot pole.

Looking back, the aforementioned Snapchat was the canary-in-the-coal-mine from a pop culture perspective, teaching a whole generation of young people to cover their tracks when posting online. The public decline of folks like Roseanne Barr, who suffered a career-ending death-by-Tweet, has also had an impact.

Importantly, this change of perspective extends far beyond any one app or service. My kids use the “In Cognito” mode on their browsers almost as frequently as they go online. Half their middle-school peers already use VPNs on their laptops to enable anonymous browsing. No adult had to teach them this behavior, certainly not the schools who seek to limit the sites they can visit, nor their parents who would prefer the ability to easily track their children’s behavior online. This desire for anonymity runs directly contrary to the fundamental “look at me” foundation of all social networks.

From a public policy perspective, the implementation of the GDPR (General Data Protection Regulation) by the European Union this past May is a similarly important public milestone, as was the Cambridge Analytica data scandal and Mark Zuckerberg’s subsequent testimony before Congress this spring. The Wild West era of consumer data exploitation is over, and it’s not coming back. The next generation of online consumers are wary, skittish, and as nervous as cats about their personal information. There will be some inevitable backsliding, but in the immortal words of classic rock gods The Who back in 1971, “We Won’t Get Fooled Again.”

Conclusion
Social networks have peaked. Businesses that rely on exploiting people’s personal data face serious challenges going forward, which, all in all, is mostly a good thing.

Stick with TDG and stay ahead of the curve.

Joel Espelien is a Senior Advisor for TDG and serves as an advisor and Board Member to the video ecosystem and technology companies. He lives near Seattle, WA.

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