The Facebook stock drop and the price of privacy

Earlier this month, Meta, formerly Facebook, saw 26 percent of its value erased. More than $230 billion was lost in a day, the biggest one-day loss for any company, ever. While investments in the Metaverse were a part of the drop, the company also singled out two headwinds, Apple’s iOS 14.5 software update and TikTok. 

The shift in value was driven by an earnings report. “The impact of iOS overall as a headwind on our business in 2022 is on the order of $10 billion,” Meta CFO Dave Wehner said last week during the company’s fourth-quarter earnings call. That’s big coin, about 8.5 percent of its 2021 revenue and a quarter of last year’s profits.

Later in the call, Wehner suggested that the update seems to uniquely affect the company. All of the evidence suggests he is right. Ad spending has shifted across services, away from Facebook and towards other platforms.

But the earnings report and follow-up calls by Meta hint at a deeper conflict brewing with TikTok. As Zuckerberg noted, “TikTok is so big as a competitor already and also continues to grow at quite a fast rate off of a very large base.” 

This one episode holds three lessons. First off, small changes in the default can have outsized impacts. Second, the privacy changes in 14.5 suggest that privacy laws might have an impact on competition legislation. And finally, TikTok is a rising player in the attention economy. 

The iOS 14.5 update

There is good reason to believe that the massive dip in the stock price can be traced back to Apple’s iOS 14.5 update, which was pushed out in April 2021. In this update, Apple rolled out App Tracking Transparency (ATT) regime, which presents users with a popup every time they download a new app. This popup asks them if the app has their “permission to track you across apps and websites owned by other companies.”

While Apple has not released official numbers, third-party reports suggested that 80 percent to 95 percent of users were choosing not to be tracked across sites. Without a means to connect all of the pieces together, Facebook is now blind.

Before last year, the ad ecosystem was situated differently. Stretching back to at least iOS 10, which was released in September 2016, iPhone users could opt out of ad tracking. But the factory settings, the defaults, opted-in users to the identifier for advertisers (IDFA) system. This key allows advertisers to compile aggregate data about a user’s behavior. Because few people turned it off, Facebook was able to stitch together how the device was being experienced using the IDFA as a key to piece together all of the phone’s activity. 

Meta’s secret sauce for ads is built on the IDFA. Both Facebook and Instagram traditionally have commanded a high price for ads because they were able to connect a lot of dots in the conversion funnel. Default settings meant that they could see outside installs happening, which became a lucrative ad market. Defaults also gave Meta the ability to connect final sales. As ad tech specialist Eric Suefert points out, this granularity drove Meta’s ability to personalize ads, which contributed to about 50 percent of that ad channel prices. 

The impact of iOS 14.5 

The addition of ATT in iOS 14.5 shifted the market nearly overnight. Advertisers and marketers immediately took note. By July 2021, it was clear that they could no longer rely on sales conversion rates, install numbers, and a range of other data. The loss of the IDFA meant Facebook couldn’t connect the threads and show users new business products or retarget ads. 

Less precision meant higher acquisition costs. Because they could no longer target specific users, ad buyers would have to show an ad to many more users (spend more money) in order to gain a new customer or convert to a sale. But these buyers are constrained, they’ve got a limited budget. So instead of spending more money on Facebook and Instagram ads, which already commanded a high price, they shifted their spending to other platforms. 

Trade publication MediaPost charted the ups and downs of last year, “Almost immediately after Apple dropped iOS 14.5 last year, ad spend shifted to Android. At one point in the summer, the reports notes that iOS ad spending fell 32%. Since then, it has largely recovered, but there is still some way to go to get back to the pre-ATT era.”

Less demand meant ad prices got driven down across Instagram and Facebook. From an apex in mid-2021 at $14.84, the cost per app install is down to $1.28. The cost per impression is down as well, 42 percent on Instagram and 41 percent on Facebook. While ad prices have stabilized, they did so at a new price level.

The rise of TikTok

The price adjustment came at a fortuitous time. In the last year especially, the leadership at Meta has increasingly come to focus on the threat of TikTok. As Ben Thompson of Stratechery detailed, the first mention of TikTok by then-Facebook was on an earnings call in early 2021. In Q3 2021, Zuckerberg admitted that TikTok was “one of the most effective competitors that we have ever faced.” This most recent earnings call showcased the concern that Meta now has with TikTok.

The quarterly report showcases the two major sides of Meta’s business. The ad side is clearly facing headwinds, but user engagement is also plateauing. For the fourth quarter, Facebook had 1.929 billion daily active users compared to 1.93 billion in the previous quarter.

The core business of Meta has shifted its focus onto Reels, the short clips that look suspiciously like TikTok reels. Speaking on this topic directly, Zuckerberg noted in the only way he could that, “The dynamic that I think is actually a little bit different with Reels… is that TikTok is so big as a competitor already and also continues to grow at quite a fast rate off of a very large base.” 

Meta is the biggest player in the attention economy, but it is not the only one. Ultimately, as Thompson continued, “any service that occupies your time and attention — and TikTok occupies a lot of it — is a fundamental threat” to Meta. As the chart below helps to illustrate, TikTok is the third biggest player in this space, behind Facebook and Netflix. 

Policy implication

Meta’s earnings report and the follow-up calls are important for policymakers to parse because they give an unusually clear picture of the current moment.  

For one, changing default settings can have big impacts. Moving from an opt-out system to an opt-in system radically reshaped the market away from Facebook and towards others in the advertising space, notable among them Amazon. 

Meta is still a large company by any reasonable standard. Its total value is well over $600 billion. It is just substantially down from the $1 trillion valuation of last fall. iOS 14.5 reshuffled the deck, but all of the big players, including Meta, are still at the table. 

Some have suggested that changing privacy laws to restrict personalized ads will only have minor impacts on the bottom lines of companies. But the specifics of the law are important, especially if they have asymmetric impacts on one company and leave others unscathed. The United Kingdom’s “Online platforms and digital advertising: Market study final report” compiled by The Competition and Markets Authority offers evidence to this effect. In a wide-ranging report, the agency dove into data provided by Google on an internal test that the company ran in 2019. In a head-to-head battle between publishers using personalized and non-personalized advertising, Google found that “UK publishers earned around 70% less revenue when they were unable to sell personalised advertising but competed with others who could.”

The 14.5 update reiterates that Lawrence Lessig’s framing of code as regulator is underappreciated. As he wrote over twenty years ago,

“This code, or architecture, sets the terms…It determines how easy it is to protect privacy, or how easy it is to censor speech. It determines whether access to information is general or whether information is zoned. It affects who sees what, or what is monitored. In a host of ways that one cannot begin to see unless one begins to understand the nature of this code, the code of cyberspace regulates.”  

The relationship also works the other way. Regulation can become encoded. The 2018 California Consumer Protection Act (CCPA) is an important example of regulation becoming encoded as it was the first comprehensive privacy law in the United States. According to new research from a group of economists at the Swiss Finance Institute, by limiting the buying and selling of customer data, the CCPA seems to have entrenched the power of firms with their own customer data. Because the researchers were privy to a novel dataset of businesses during the implementation of the law, they were able to track its relative importance over time to trace the impacts of the law. Overall, they found that “the CCPA gives a strong protection and advantage to firms with in-house data on consumers.”

Changing the code, in the case of the 14.5 update, and changing the law, in the case of CCPA, had similar effects. Seemingly small changes in the law and in the defaults had outsized impacts on how companies were able to connect the dots.  readjusting how companies large and small compete.   

Policymakers should be careful to take heed of these impacts, especially as they inevitably affect other goals and make them more difficult. By happenstance, the current valuation puts Meta tantalizingly close to the market cap threshold of $600 billion that some competition bills are considering. If Meta were to drop below this level, Sen Klobuchar’s “Platform Competition and Opportunity Act of 2021” wouldn’t apply, for example. 

Finally, it is clear that the attention economy can rapidly readjust—as it is doing now. TikTok is taking its place alongside other major players in tech. Already TikTok has more reach than Instagram and is quickly catching up to Facebook. 

Policy needs to be built on reality. Sometimes that reality is fluid.

CGO scholars and fellows frequently comment on a variety of topics for the popular press. The views expressed therein are those of the authors and do not necessarily reflect the views of the Center for Growth and Opportunity or the views of Utah State University.

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