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Facebook is at a crossroads. Did Mark Zuckerberg bet right?

Facebook's growth is stalling. It's spending billions of dollars and dedicating most of its resources to fix...

Posted: Oct 31, 2018 4:04 PM
Updated: Oct 31, 2018 4:04 PM

Facebook's growth is stalling. It's spending billions of dollars and dedicating most of its resources to fix the problem, but Mark Zuckerberg says Facebook won't right the ship for quite some time.

The company is gambling its future on Stories, which is growing in popularity but isn't early as lucrative as Facebook's News Feed. Facebook is also betting on its engineers' ability to rid the platform of disinformation campaigns, abuse and hate speech.

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Meanwhile, Facebook (FB) is exhibiting all of the signs of a company in transition, and the new normal for Facebook isn't pretty. Sales were up 33% last quarter -- the worst performance in six years. Profit grew only 9%, worst in more than three years.

Investors are giving Facebook some leeway. After sending the stock down by a third following its miserable July earnings report, Facebook shares rose 6% Wednesday.

Is Stories really the new News Feed? Zuckerberg thinks the 24-hour photo- and video-sharing feature is the future, although he conceded on a conference call with Wall Street analysts Tuesday that the transition "hasn't been as smooth as I'd hoped." He said that Stories is growing quickly, and he believes the format will be better positioned to take over for the News Feed soon.

Disappearing content is very popular, demonstrated by Facebook's success integrating Stories into Instagram. More than 400 million people use the popular feature each day, up from 250 million last year. It's so successful that it has taken customers away from Snapchat, which pioneered the concept of Stories and disappearing messages.

But for Stories to become the "new" News Feed, Facebook will have to hope adoption picks up. The company said 300 million people use the feature every day on Facebook -- a big number but a relatively small percentage of the 1.5 billion people who use Facebook every day.

Advertisers have been tepid about diving into video advertising on Facebook, Zuckerberg admitted Wednesday, although they tend to go where the people are -- and most people are still using the News Feed.

Yet there's hope that Stories can succeed on Facebook. The growth of the format on Instagram and WhatsApp is indisputable. Zuckerberg likened the transition to the shift from desktop to mobile: When Facebook when public in 2012, it made no money from mobile advertising. Mobile now accounts for 92% of Facebook's ad sales.

Innovator's dilemma

Facebook's situation is far from dire. The success of Facebook's other apps like Instagram and WhatsApp have been important to the company's growth: Instagram recently hit 1 billion users and Facebook also said it estimates more than 2.6 billion people now use Facebook, WhatsApp, Instagram or Messenger each month.

But Facebook is bumping up against what all successful innovators go through at one point or another: The main cash cow has reached a point of saturation. Facebook is by far the most successful technology product in history -- and at some point Facebook is just going to run out of people to join.

That has been particularly difficult in recent years, after state-sponsored disinformation campaigns, a giant hack, a major privacy scandal and continued abuse of the platform have dominated headlines. Zuckerberg said the company continues to battle for control of its platform.

He said that 2019 will be another year of significant investment, and Chief Financial Officer Dave Wehner said Facebook's advertising growth would come from its newest products.

Sometimes these growth strategies work. Microsoft (MSFT) bet big on the cloud a decade ago, when Windows and Office had reached saturation but were still its most lucrative products. Microsoft is now the second most-valuable company on the stock market, and its Azure business is booming. It gives away Windows updates for free.

But around the same time, Hewlett-Packard (HPE) gambled on enterprise services, which was a big growth market 10 years ago. It spent tens of billions of dollars acquiring companies. But the enterprise services market collapsed, and HP sold off its unit for a fraction of the cost. The company split up and is a shell of its once-great self.

Facebook's direction has been set. We won't know if it was the right path for some time. But it had to choose something.

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