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Facebook is now an old cyclical business

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Facebook and its parent company Meta Platforms are not losing momentum. It’s just grown to the point where the advertising cycle dominates the company’s bottom line. That’s the reason for their recent decline in revenue, and may be the fate of other tech companies. Looks like Rust Belt companies.

Advertising has always been a cyclical industry, at least for as long as data has been collected. Going back to 1919, inflation-adjusted total advertising increased by 5.7% annually in non-recessions, but in recession years he fell by 5.6%.

Marketers often say that the recession is the time for companies to ramp up their advertising, but that’s just not the case. But the stark and stark reality of advertising shows that real spending has declined during recessions.

The larger a company’s market share, the more it is influenced by industry-wide trends and the less the company’s own trajectory influences sales. This also appears to apply to Amazon’s online store sales, which plummeted in the second quarter of 2022. If Tesla gets (and achieves) market share from General Motors or Toyota, it will catch up with the auto industry. Repeat the cycle instead of continuing to increase your market share.

Think of large, highly cyclical industries such as steel, automobiles, and paper. Now imagine a small company with better management or technology. Starting with just 1% of total industry sales, growing by 50% annually. This company appears to be acyclical. The company’s sales growth reflects how well the company handles growing pains and breaks through to win more customers. First, industry cycles determine whether the growth rate in a given year is 55% or 45%. In a mature industry, even fewer numbers are pretty amazing.

Eventually the law of diminishing returns will kick in and the growth rate will drop from 50% to 30% or 20% per year. However, its early growth has made it a large part of the overall industry. Currently, industry cycles may indicate growth rates of 25% in good years and 15% in bad years. It’s still not very cyclical, at least compared to traditional companies. However, as market share growth inevitably declines, industry cycles will dominate changes in company sales. That’s where Meta comes in.

Being cyclical isn’t a bad thing, but it’s certainly not as fun in a downturn as being stable. And assuming the profit came with the sales growth, it’s good that it grew quickly. The challenge for business leaders is to understand the new problems to be addressed.

In the early days of a tech company, achieving growth is key. It doesn’t matter if the economy grows 2% or 3%. A good new product can drive sales regardless of the economy.

But during the business cycle phase, corporate management needs to ponder what the business cycle means. How much will your income fall in a recession? Need to cut spending? Probably so. And how should it be cut? Laying off staff, cutting back on marketing, slowing down capital spending, or eliminating goat yoga classes for employees?

Cycles can go up as well as down, and are often unexpected. Business leaders must consider how they will respond to increased demand in the worst-case scenario. We need to add employees, equipment, locations and fund all of this expansion before the bill is paid.

Growing is good, and growing to the point where a business becomes cyclical is what happens when growth continues long enough. New skills are required. This is true for Meta and all other great companies with great ideas.