January 4, 2019 / 6:21 PM / 11 days ago

Breakingviews - A graying Facebook will require a different leader

Facebook CEO Mark Zuckerberg testifies before a joint Senate Judiciary and Commerce Committees hearing regarding the company’s use and protection of user data, on Capitol Hill in Washington, U.S., April 10, 2018. REUTERS/Aaron Bernstein

NEW YORK (Reuters Breakingviews) - Mark Zuckerberg and Facebook have been inseparable since he launched the social network 15 years ago. But his lack of perspective helped create the existential problems facing the company today. His priority is finding a new leader who can take over and meet the challenge.

The company has been reeling since the 2016 U.S. presidential elections, when Zuckerberg brushed off alarm bells that Kremlin-backed operatives manipulated the platform to sway voters. Worries about fake news and privacy violations have prompted users to abandon the network and politicians to demand regulation. Surmounting the crisis will require a new business model, just as Facebook’s valuation looks over the hill.

The company harvests data from more than 2 billion members and pitches it to advertisers so they can target their messages. Promoting controversial and divisive content while making it difficult for users to control their personal information is part of the money machine. Facebook either properly cleans up to avoid losing more users or it will have to hunt for different revenue streams.

The company has faced setbacks before. Shortly after it went public in 2012, it lost about half of its then $25 billion market value on fears it wouldn’t be able to move advertising to mobile phones from desktop computers. Zuckerberg and Chief Operating Officer Sheryl Sandberg overcame that challenge, but they didn’t change the basic model. What they did do was double costs.

Assume the same happens in 2019 and operating expenses rise to $50 billion. Meanwhile, revenue growth slows to 24 percent, according to the mean analyst estimate from Refinitiv’s I/B/E/S, hitting $68 billion. Tax the profit at the standard corporate rate to arrive at $15 billion. On Facebook’s current multiple of 17 times earnings, it would be worth about $260 billion - roughly a third less than its value at the end of November.

To survive and thrive, the company must do more than shift ads to yet another platform. As chairman, chief executive and controlling shareholder, Zuckerberg could continue to bumble along. But he would do better to relinquish his executive role to a manager better equipped to address the problems - perhaps someone from the heavily regulated financial world, or a media executive. For inspiration, he could look to mentor Bill Gates. He gave up the CEO title at Microsoft nearly two decades ago. It is now one of the most valuable companies in the world.

- This is a Breakingviews prediction for 2019. To see more of our predictions, click reut.rs/2R6H5pG

Breakingviews

Reuters Breakingviews is the world's leading source of agenda-setting financial insight. As the Reuters brand for financial commentary, we dissect the big business and economic stories as they break around the world every day. A global team of about 30 correspondents in New York, London, Hong Kong and other major cities provides expert analysis in real time.


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