Facebook and its parent company Meta Platforms haven’t lost their mojo. They’ve just grown to the point where the advertising cycle is dominating corporate revenue. That’s the reason for the recent sales decline and the likely fate of other tech companies. The companies that looked brilliant when they were young and grew fast now look like old Rust Belt companies that bob up and down with the business cycle.
Advertising has always been a cyclical industry, at least as long as data has been collected. Going back to 1919, inflation-adjusted total advertising grew 5.7% annually outside of recessions, but declined 5.6% in recession years.
Although marketers often say that a company should increase its advertising during recessions, the math just doesn’t add up. But the cold hard facts of advertising show that actual dollars spent decline in economic downturns.
The larger a company’s market share, the more it is influenced by general industry trends and the less the company’s own development plays a role in sales. That appears to be the case with Amazon’s online store sales, which fell in the second quarter of 2022. So will Tesla if (and if) it catches up with General Motors or Toyota’s market share — they’ll be riding the auto industry cycle rather than continuing to increase market share.
Think of a large and very cyclical industry like steel or automobiles or paper. Now imagine a small business with better management or better technology. It starts with a small fraction of one percent of total industry revenue, but grows at 50% annually. This company does not appear to be cyclical. Its revenue growth will reflect how well it manages its own growing pains and how it breaks through to bring in more customers. First, the industry cycle determines where growth is 55% or just 45% in any given year. Even the smaller number is pretty amazing in a mature industry.
Eventually, the law of diminishing returns will kick in and growth will drop from 50% a year to 30% or 20%. But that early growth has made it a big part of the entire industry. Now the industry cycle can lock growth in at 25% in good years or 15% in bad years. It’s still not very cyclical, at least compared to the legacy companies. However, as market share growth inevitably slows, industry cycles dominate changes in company sales. And that’s where Meta finds itself.
Being cyclical isn’t a bad thing, but it’s certainly less fun in downturns than being stable. And it’s good to be growing fast, assuming profits will match sales growth. The challenge for corporate management is to understand the new problems to be overcome.
In the early days of the tech company, achieving growth is key. It doesn’t matter whether the economy grows by two or three percent, because a great new product can generate more sales regardless of the economy.
In the cyclical phase, however, corporate management must think through what economic cycles mean. By how much will earnings fall in a recession? Does spending need to be cut? Probably yes. And how should it be cut? Layoffs, less marketing, slowing capital expenditures or eliminating goat yoga classes for employees?
Cycles don’t just go down, they go up too, often unexpectedly. Business leaders, when conditions are at their worst, need to consider how to meet the rising demand when it comes. This could require adding staff, equipment, locations and funding that entire expansion before paying any bills.
Growth is good, and growing to the point where the business becomes cyclical is what happens when growth lasts long enough. New skills are required. That goes for Meta and all the other great companies with great ideas.