More on the 6 Digital Concepts for Facebook Meta (3 of 3) (Tech Strategy – Daily Article)

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In Part 2, I listed six digital concepts that matter for Meta’s business model going-forward. They are:

  1. People networks for connection and communication.
  2. Audience-builder platforms in text, photos and especially video.
  3. External data streams and limited ecosystems.
  4. Margin vs. engagement products.
  5. Hierarchies of control.
  6. Substitutes. These can be for consumers, content creators, merchants / brands, and (to a small degree) developers.

I went through the first four in Part 2. In this final part, I’ll finish the last two.

Concept 5: Hierarchies of Control

As you build out the digital architecture of businesses and industries, different digital tools and capabilities have to inter-operate. Lots of companies have to coordinate and inter-operate. Apps have to work with ERP systems. Communications have to connect people both internally and externally. And everything feeds into the data lakes and warehouses of the business.

All this required coordination and inter-operability creates a hierarchy of control. Certain software and businesses are more powerful. They can exert their authority over other software and businesses. For example, Oracle and Microsoft really call the shots in enterprise. They can tell companies like Zoom and Slack how to work with them (which is required). I’ve written a bit about hierarchies of control in enterprise at:

Business is about competition (my area). But at a certain point, it is about power.

These power relationships tend to happen more in tech because each part of the technology depends on the other parts. Things have to work together in a way that most physical businesses do not. And some layers and components in digital architecture can dictate what others can do. There is usually a hierarchy to digital systems.

In smartphones, this is easy to see.

The semiconductor leaders (Nvidia, Qualcomm) decide the specifications of the semiconductors and then everyone else makes their systems run according to these specs.

Android (i.e., Google) and Apple run the operating systems that sit on these chips. And determine the operations of the smartphones. They are high up in the hierarchy. Apple is particularly powerful because it not only controls iOS, but it also puts its own devices in people’s pockets.

Apple can forbid most any app, function, or service on the iPhone. And they strictly dictate how data and payments are processed. The 30% tax they levy on anything sold in the app store is an example of them using their power pretty nakedly. It literally took the EU government to stop them by mandating (recently) that other app stores must be allowed on iPhones.

Lower down in the smartphone hierarchy, we can find certain apps that are pretty powerful. Mapping is pretty important. YouTube is super popular. And Facebook is fairly powerful as about half the world’s population uses its social networks. Facebook can kick out and control most any user, media, or information company at will. Which they do for both economic and political reasons.

In fact, Facebook has even told the Canadian government to get lost. In response to Canadian legislation on news sharing, Meta removed Canadian news sites from their apps. That’s an interesting counterexample. The EU government showed it is above Apple (and probably Facebook) in the digital hierarchy. But Meta showed the Canadian government that it is below them. Canadian legislators are still sort of processing this.

Facebook can even push back on Apple and Google to an extent. It is not clear that Apple could sell its devices if they didn’t have Facebook, WhatsApp, and Instagram. Apple, Google, and Meta have a sort of détente (sort of).

Note: This is how I view the ongoing Epic Games lawsuits against Apple and Android. Epic’s increasing power in gaming has helped them rise in the hierarchy. And they are directly challenging Apple and its App Store rules on payment.

Ok. I think I’ve made my point.

There is a clear hierarchy in smartphones. We know the powerful companies at the top. And then there is a sea of companies lower down that mostly must do what the dominant companies say. And governments are now clearly in the hierarchy as well. Digital technology and especially information control has become very political. The digital hierarchy is starting to look more like geopolitics than business.

Keep in mind, that Meta controls the information flows for +3B people. That is a new source of power that virtually every politician, government and security state agency wants to control. And, under the guise of protecting against “misinformation”, we can see most all governments trying to take control of this power.

Meta has largely bent the knee in the US and EU. And it is doing their bidding. During Covid, we saw Meta actively promoting government narratives and censoring dissenting opinions. Most of which turned out to be false.

That’s kind of political. My main point is to think about how hierarchies of control play out in these inter-operable systems.

Concept 6: Substitutes

This is actually my #1 issue for Meta going forward. It’s what I pay the most attention to.

Substitutes as a concept is right out of Michael Porter’s 5 (now 6) Forces. The idea is that the competitive dynamics of a businesses are determined by several forces that can come to a stable equilibrium in some cases. This creates attractive positions within the value chains of industries.

Michael Porter’s five (now six) forces are:

  1. Bargaining power of suppliers
  2. Bargaining power of buyers
  3. Threat of Substitutes
  4. Barriers to entry / threat of potential entrants
  5. Degree of existing competitive rivalry
  6. Role of complements

Classic strategy (for certain types of businesses) is to use 5 forces to identify the attractive positions within a value chain. Capture these and then try to get as big as possible. That is a really common strategy.

However, this approach only for certain types of “classical businesses”. Porter’s Forces actually doesn’t work that well in:

  • Dynamic and non-classical strategy terrains.
  • Digital business models, especially platforms and ecosystems.
  • SMILE digital marathon dimensions, particularly related to innovation.
  • This is what he added as his sixth force.

I actually like BCG’s framework better. They argue that the right strategy depends on the terrain. And terrains are determined by how predictable and malleable the business is. They describe 4 terrains – each of which requires a different strategy.

Porter’s approach is classical strategy. Which is good for businesses that are predictable and non-malleable. Like Coca-Col and KFC. But most digital businesses are visionary or shaping terrains. Powerful businesses can shape the industry and customer behavior (i.e., malleable).

Early Facebook was actually a predictable business. And Facebook was able to shape the industry and consumer behavior. That made it Visionary strategy. Mature Facebook is probably half Visionary and have Classical strategy.

Applying 5 Forces to Meta today, I think about:

  • Existing Rivals. This is like comparing Coke vs. Pepsi.
  • New Entrants. Who could jump into the same business. This is like asking if Virgin Cola is a threat to Coke?
  • Substitutes. This is the big issue. What would be an acceptable substitute for the same customer need (i.e., I’ll have water instead of cola). When applying this to Meta, you also want to think about substitutes for other user groups. What are potential replacements for merchants doing advertising? For content creators?

Here’s how I break it down.

Question 1: What are substitutes for consumers using WhatsApp, FB messenger, IG messenger and messenger for connecting and communicating?

What about:

  • Using in person connections and communication? This doesn’t scale. And in-person communication is really what Facebook was founded to replace.
  • New messenger apps? The emergence of WhatsApp, Line and other messengers definitely created a substitute for the Facebook newsfeed. Facebook’s response was to acquire WhatsApp. Today, smaller messengers do exist. For example, Japan and Thailand use Line.
  • Communication within other apps?
    • Couldn’t’ you connect and communicate within ecommerce sites like Amazon? Possible. Meta does have a small marketplace. It also has some coordination with Shopify.
    • What about communicating within Payment apps like WeChat? If you can go from communication to payment, can’t you go the other direction?
    • What about communicating in video sites like YouTube and TikTok? Chats? Bullet time?
    • How about within gaming which is increasing looking like a social product This is a major problem.
  • Connection and communication with metaverses? This is definitely a big potential substitute. We already see this in Roblox and others. In theory, it’s a big potential substitute. But metaverse hasn’t gotten much adoption. And Meta has obviously gone after this space with big dollars.

So far, I don’t see any substitutes for connection and communication. But technology changes fast. And gaming and metaverse are big potential substitutes.

Question 2: What are substitutes for consumers using Facebook Newsfeed and IG for consuming, sharing and discussing content?

What about:

  • Consuming and sharing photos with JPEG-focused apps? Early Instagram was definitely a substitute to Facebook for the creation, consumption and sharing of content. But they acquired them.
  • Consuming and sharing videos with short video-focused apps? YouTube draws a huge amount of time and attention. And TikTok emerged as major substitute for Facebook and Instagram. Consumers rapidly shifted their time, content consumption and sharing to this platform. And it was the first major substitute to Meta that they couldn’t buy. They launched Reels in response, which is now doing well within Instagram.
  • Consuming and sharing other types of content?
    1. Twitter is a potential emerging problem. It’s moved from being specialized in short-form text to all media types (long-form text, video, etc.). Meta launched Threads in response, which went nowhere.
    2. Podcasts?
    3. AR / VR?

What jumps out here is that most of Meta’s big acquisitions and strategic moves were about taking out potential substitutes.

  • WhatsApp was a clear substitute for their communication network. So, they bought it.
  • Instagram was a powerful substitute for their audience builder platform. They bought it.
  • TikTok was a powerful substitute that they have struggled to respond to.
  • Metaverse hits both their communications and content consumption businesses (in theory). They are flooding money into this (for better or worse).

Rapidly emerging substitutes are Meta’s biggest threat.

***

Ok. Those are my six digital concepts for Meta.

And for fun, I checked my conclusions for my Meta from 2018. Here’s what I wrote at the end as my conclusion.

That scribbling says:

  • Meta is a “cheetah”. That’s my analogy for business that are super-specialized for 1-2 activities. Like cheetahs are specialized for acceleration. These are my favorite types of businesses. Meta is specialized in social interactions.
  • Management behavior is an issue. This is the result of having no real competition for a long time. More on this below.
  • Meta is a truly dominant company. Globally. It’s probably impossible to challenge this model directly. But it is vulnerable to substitute products for social interactions. That’s what to watch for.

Note: I didn’t actually read that summary until I had finished writing this article. Seems pretty consistent.

Last Point: Great Businesses Become Lazy

Great businesses almost all get slow and bloated over time. And non-innovative. The very success they enjoy makes them become lazy.

It’s actually really hard to fight against this. When you have no serious competitors and are swimming in cash, why should we everyone come in on Saturday afternoon? Why exactly do we need to stay until 9pm on Tuesday?

It’s like growing up with rich parents (another type of karma). These kids almost never work as hard as those who grow up struggling and hungry. And it’s logical. Why not enjoy life?

For this, I always think about Brazilian 3G Capital. They are famous for having the most lean and hungry managers. They specifically hire crazy young managers (in Brazil) who often grew up poor. And who will work harder than anyone.

Their investment strategy is to buy companies and then deploy their legions of crazies into them. They supercharge the management. And do shock therapy on the culture. Elon Musk did pretty much the same thing with Twitter.

3G’s favorite acquisition targets are super successful companies (like Meta) that have become somewhat bloated and lazy over time (usually over decades). They seem to especially like buying successful companies that are now run by the children of the founders. That’s how they bought Budweiser in St. Louis.

We can see a lot of the weaknesses of great success in Meta. But only to a moderate level.

  • Management does spend a lot of money. Operationally, the company isn’t even close to being “lean and mean”. They have way too many staff. They are pretty generous with their investment dollars. In 2021, the company even spent $21M on Zuckerberg’s security detail.
  • Their rate of innovation is really slow. Meta hasn’t invented anything new in +10 years. Their core products have evolved and improved. But there haven’t been any major new products. Nothing like what we see at Tencent and Amazon. Overall, their rate of innovation is slow. And they keep missing opportunity after opportunity.
    • They missed messenger and had to buy WhatsApp. Note: Tencent built it internally.
    • They missed photo sharing and had to buy Instagram.
    • They missed short video sharing and had to develop it internally after TikTok had most of the market.
    • They are not a big proprietary player in Generative AI.
    • They have not advanced WhatsApp in a decade, which is ridiculous. All they had to do was copy the stunning evolution of WeChat. They could have added payment, mini-programs, mini-games, search, etc.

But if your core business is strong enough, all this doesn’t seem to matter. Coca-Cola doesn’t innovate either. And they have grown dramatically in usage, revenue and valuation over the past decade. They are doing fantastic.

***

Ok. That’s it for Meta. I hope this was helpful.

Cheers, Jeff

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Related articles:

From the Concept Library, concepts for this article are:

  • Porter’s 5 Forces
  • Porter’s 5 Forces: Substitutes
  • BCG 4 Terrains
  • Hierarchies of Control

From the Company Library, companies for this article are:

  • Facebook / Meta
  • WhatsApp
  • Instagram

Photo by Brett Jordan on Unsplash

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I write, speak and consult about how to win (and not lose) in digital strategy and transformation.

I am the founder of TechMoat Consulting, a boutique consulting firm that helps retailers, brands, and technology companies exploit digital change to grow faster, innovate better and build digital moats. Get in touch here.

My book series Moats and Marathons is one-of-a-kind framework for building and measuring competitive advantages in digital businesses.

This content (articles, podcasts, website info) is not investment, legal or tax advice. The information and opinions from me and any guests may be incorrect. The numbers and information may be wrong. The views expressed may no longer be relevant or accurate. This is not investment advice. Investing is risky. Do your own research.

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