What investors can learn from Facebook’s first 20 years

You didn’t have to be a regular user of Facebook to have enjoyed “The Social Network”, the 2010 film that portrayed the founding of the world’s largest social networking website – it was nominated for eight¹ Academy Awards, winning three, and took more than $224 million at the box office².

While the film excelled in exploiting dramatic tension, it was perhaps lacking when it came to investment guidance. As Facebook (now Meta) celebrates its 20th anniversary – and a trillion-dollar market capitalisation³ – we run through some of the lessons we have learnt following its journey from student halls to the world’s seventh largest company⁴.

First-mover advantage isn’t everything…

Facebook wasn’t the first social media website to capture the public’s attention – that honour goes to Myspace. Credited with launching the careers of musicians such as Lily Allen and The Arctic Monkeys⁵, at one point Myspace was adding 70,000⁶ users a day, with Rupert Murdoch’s News Corp buying it for $580 million⁷ in 2005.

This acquisition initially looked to be an inspired decision. In little over a year, revenue increased from $1 million to $50 million a month⁸, partly due to a $900 million⁹, three-year deal that allowed Google to display its adverts to the network’s users.

Myspace peaked in 2008, attracting 115 million unique global visitors a month¹⁰. However, that was the year it was overtaken by Facebook¹¹, which was not only easier to use, but was able to supercharge its growth via an email-address importer that sent instant sign-up invitations to users’ friends¹².

The emergence of Facebook as the dominant player in social media marked the start of Myspace’s decline. In June 2011, News Corp sold it for approximately $35 million¹³. By 2019, its monthly visitor numbers had dropped to just 7 million¹⁴.

…but being early helps

The advantages of online platforms are self-reinforcing: for example, a customer in search of a product will use the platform with the highest number of vendors, for reasons of choice, convenience and economy (competition drives down prices); while a vendor will prioritise the platform with the highest number of potential customers.

This ‘network effect’ means that firstly, more vendors leads to more customers and vice versa, and secondly, once a platform has established a dominant position in one area of the market, it is more likely to become stronger than be dislodged by a competitor.

While Facebook hosted adverts from a relatively early stage, founder Mark Zuckerberg was reluctant to fully monetise the website, preferring instead to focus on growth. It didn’t become cashflow positive until 2009, by which point it had 300 million users¹⁵.

This initial freedom from financial targets has been cited as one of the reasons Facebook was able to outmanoeuvre Myspace. There are claims that Myspace was reluctant to embrace technology that streamlined the user experience as it would have reduced the number of page views the site generated and therefore its advertising revenue¹⁶.

Reaching the number-one spot is the ultimate “all or nothing” strategy for a platform business, requiring enormous sums of investment with a low probability of success. For example, Google (now Alphabet) spent close to $600 million¹⁷ launching its own social media site, Google+, in 2011. Alphabet has networking advantages across its collection of businesses that Meta can only dream of – at one point its video sharing site Youtube required users to have a Google+ account to post comments¹⁸.

But while Google+ could at one point boast 300 million active monthly users¹⁹, it barely made a dent in Meta’s business. This was because, as Alphabet later revealed, 90% of user sessions lasted less than five seconds²⁰. Google+ shut in 2019²¹.

The investment case for Meta today

Despite Meta’s status as one of the world’s largest companies, in many ways its management team still has a startup mindset, with a focus on capturing the long-term opportunity set over maximising near-term profits. Its willingness to invest substantially in areas outside of its core business is one of the reasons we remain confident it can continue to grow and see off the threats posed by competitors.

For example, when Apple changed the privacy settings on its operating system in 2021, it restricted Meta’s access to user data which reduced the company’s targeting ability and led to a significant fall in ad pricing across its platforms²².

While this was happening, Meta faced a growing threat from shortform video site TikTok, whose user numbers grew from 466 million in 2020 to 834 million by 2023²³.

Yet one area in which Meta’s leadership is underestimated is artificial intelligence, where it has one of the most advanced and scalable supercomputers ever built.

This allowed it to regain most of the signal and targeting ability lost since 2021 and will likely put it in a better position than before the privacy changes, protecting it against further interference from Apple.

The rebound contrasts with many of its peers – Twitter’s revenue share is declining rapidly²⁴, while Snap saw two consecutive quarters of falling sales²⁵ before announcing it would have to invest more in AI to stop the bleeding.

Meanwhile, TikTok’s growth is already starting to slow. Meta’s own shortform video platform, Reels, has quickly reached a $10 billion annualised revenue run-rate compared with an estimated $11.5 billion for TikTok²⁶.

So far, Meta has appeared uninterested in moving into the public cloud market. But our analysis suggests that the scaling capability and cost efficiency of its AI architecture means the opportunity set in this area could be enormous should the company reevaluate this strategy.

There is less excitement around Meta than there used to be. Admittedly, the story of a tech giant becoming even more dominant and profitable isn’t as interesting as the one about the plucky underdog who took on Wall Street. It certainly won’t win any Oscars. But for investors, the prize could be far more valuable.