Introduction:
Core Business:
Metaverse:
Culture & Structure:
Capital Allocation:
Conclusion:
Introduction:
A loonshot is defined as a technological breakthrough that disrupts the fabric of society, however prior to worldwide acclaim has been beaten down, trivialised and demonised.
The story of loonshot innovations is scattered throughout history, ranging from the invention of statins, the development of the radar, all the way to the creation of the James Bond franchise. History often rhymes, and within the case of Meta, this could represent a true loonshot innovation that disrupts and improves upon the very nature of societal fabrics.
Thus, I do not believe that it is wise to trivialise and demonise Meta & their business model yet. In reality, this company and their new initiatives have yet to been proven.
At the core, Meta is focused on the foundational hardware and software required to build an immersive and embodied internet, that enables better digital social experiences than anything that exists today.
Core Business:
The core business I would characterise as being “steady”. Whilst it seems evident that there is limited exponentiality ahead for the core business, this does not remove from the impeccable innate strengths of social media platforms via network effect creation.
When looking at the Family Monthly Active People (Billions), Meta proves to show increasingly steady figures. with over 3.71B individuals’ logging in and using one of Facebook’s family products. Family Monthly Active Users (MAP) is defined via the following: “a registered and logged-in user of one or more of Facebook’s Family products who visited at least one of these products through a mobile device application or web browser in the last 30 days.”
The products provided by Meta are increasingly engrained within our everyday lives, from business, to commerce, and social interactions. Meta lays at the foundation of these societal domains.
As homo-sapiens, communication is so deeply rooted within our being, and actually has contributed towards the cognitive revolution, in which humans flourished in comparison to other species. Gossip specifically, has been fundamental for sapiens within the formation of larger, and more stable bands. The use of fiction too – bonding over common myths – was necessary for early sapiens in regards to formation of large tribes and cities. This collective imagination actually is so deeply engrained within all humans. All of this is to state that as humans, communication and gossip is perhaps the most vital principle of all – when it comes to large scale cooperation. Meta is positioned as a digital medium for allowing the flourishing of communication in the digital realm, and thus lays as a vital cornerstone for human collaboration and flourishing.
Thus – with knowledge of this – it doesn’t seem wise to trivialise a company in which is so deeply engrained within everyday life, and the psychological aspect of sapiens.
Whilst the conventional media narrative constantly reiterates the notion that Meta is failing, and engagement on their platforms is rapidly dropping, this seems to be more of a fallacy once properly understanding the company.
On Facebook specifically, the number of people using the service each day is the highest it’s ever been — nearly 2 billion — and engagement trends are strong
CEO
Furthermore, as reiterated by CEO Zuckerberg, Meta is focusing upon three main domains in which will power the business over the next few years:
- AI
- Business messaging platforms
- Metaverse
The narrative subconsciously ingrained within the mind of investors is the idea that Meta is investing solely within the Metaverse, in a rash attempt to turn the business around.
When looking at the distinction between investments into the Metaverse, and Family Of Apps, an interesting notion can be derived:
- Family of Apps expenses were $18.1 billion, representing 82% of overall expenses.
- Reality Labs expenses were $4B or 22% of Family of Apps expenses.
As a passive consumer of the media, one may originally assume that Meta is solely investing within the Metaverse, in a “last attempt bid” to turn the company around. However, this is far from the truth.
As noticed recently, deeply ingrained within the cognition of homo sapiens, is the presence of low resolution arguments, in which seem fundamental for the survival of the species. To explain, we as humans seem to be predisposed towards reducing the complexity of events within society, in an attempt to gather and store as much information as possible. However, if one can dissuade from the adoption of low resolution arguments, and thus find nuance, this is where true alpha is created.
The point that I am making is that, across this Meta story, there are countless examples of subconsciously implanted narratives, in which stem from low resolution headlines by MSM, and thus remove us from the truth. In the case of the Metaverse, whilst the Metaverse is a portion of the investments, fundamentally the focus is still upon the FOA’s, and new unique methods in which Meta can deliver value, and monetise their audience.
From sole adoption of low resolution arguements, this conclusion would not have been apparent.
Apple IOS:
Interestingly, Meta has been overcoming major headwinds, specifically the Apple Privacy Changes, in which now incentives users to “opt-in” regarding the sharing of data. Mark Zuckerberg has reiterated countless times that Apples’ privacy changes do pose risks for the company’s financials and revenue growth.
Recently, just in Q3 22, Mark Zuckerberg said the following: “you see dynamics like what Apple has done with ATT and continues to do in some ways with the policy that they announced yesterday, which are obviously big risks, and we see as issues.”
“We’re also continuing to face targeting and measurement headwinds such as Apple’s iOS changes, which we believe are contributing to the growth challenges across the digital advertising industry.”
CEO
Fundamentally, the change from Apple, on-top of the increasingly stringent regulatory environment is resulting in a lack of data to deliver personalised advertisements. When looking at the average revenue per user, and family average revenue per person, the figures follow a strikingly similar trend. On the Average Revenue Per User (ARPU) front, the statistics over the past few quarters are shown below:
- Q3 21: $10.00
- Q4 21: $11.57
- Q1 22: $9.54
- Q2 22: $9.82
- Q3 22: $9.41
As can be seen, from Q4 21, to Q1 22, there is a staggeringly stark increase within revenue deceleration that can be seen. Similarly, is true for the Family Average Revenue Per Person metric:
- Q3 21: $8.18
- Q4 21: $9.39
- Q1 22: $7.72
- Q2 22: $7.91
- Q3 22: $7.53
Thus, as can be seen within ARPU metrics, there is a deceleration in the revenue from each user after the introduction of the Apple IOS Privacy changes. Any further changes by Apple could be detrimental to the success of Meta to capitalise on average revenue metrics.
However, whilst these comments may seem concerning at first, Meta are attempting to solve this issue via two main solutions:
- Growing first party engagement and interests
- AI & ML
Thus, just to explain very fluently. In order for Meta to future proof their platform, and therefore reduce the externalities associated with impact upon the platform, Meta is to create a funnel in which can be used to understand and grow the first-party understanding of people’s interests via easier engagement with businesses within the applications.
Furthermore, as reiterated by management:
But I will say that we’re really — I think we’re pretty early on this.
Management
What gives me increased levels of optimism, is the fact that for Meta, this issue occurred in the past. Whilst not in the exact same form, Meta had a very similar issue with privacy, and the ability to use data effectively in a safe manner whilst also providing personalised advertising targets for advertisers. Interestingly, Meta led the industry in this area. Therefore, this can give us more optimism in regards to Meta and the overcoming of this current hurdle.
And, in relation to future proofing of the Meta platform, on top of the roll out of new products in which can bridge the signal loss associated with data, Meta is also investing considerably into AI, and ML products that can solve the signal loss created by IOS changes. When one combines this with the fact that as an industry, there seems to be cross collaboration in order to solve these issues, this presents the Apple IOS tailwind within a more optimistic light.
As investors, when looking probabilistically:
- Meta is creating a funnel of engagement in house
- AI & ML solutions
- Cross industry collaboration
- Past track record of success with overcoming systemic issues
- Incredibly low chance Apple will roll out harsher policies
From a probabilistic standpoint, it leads one to conclude that Meta is likely to overcome these issues. Whilst complete restoration of signal loss may never be achieved, there is strong reason to assume that a substantial amount of signal loss can be restored. To add, in knowledge of the fact that the harshest policies are put behind us, overall this paints the Apple IOS narrative within a slightly more optimistic light.
Macroeconomic Environment:
Within a recession, or hard economic period, there is clear evidence to show that advertising spending is cyclical for companies. During times of harsh macroeconomic conditions, often companies view advertising on social platforms as a more “discretionary” spend, and thus cut back on this significantly.
“Weak advertising demand, which we believe continues to be impacted by the uncertain and volatile macroeconomic landscape”.
CEO
As reiterated by Google’s management:
“The growth in our advertising revenues was also impacted by lapping last year’s elevated growth levels and the challenging macro climate.”
CEO
Whilst this is a shorter-term issue, over the long term, it is clear that Meta is proving to provide fairly stable advertising revenues, highlighted via their digital advertising revenue share.
However whilst stating this, if anything this shows the increased level of resiliency of the applications, in which have managed to thrive in increasingly competitive periods. With harsh macroeconomic conditions impacting advertisers, as well as the IOS privacy changes causing significant signal loss for advertisers, overall this shows the strength of the platforms.
Reels:
One main emphasis going forward is the focus on reels, and short form content creation.
“Our AI discovery engine is playing an increasingly important role across our products — especially as advances enable us to recommend more interesting content from across our networks in feeds that used to be primarily driven just by the people and accounts you follow.”
CEO
“Reels, continues to grow quickly across our apps both in production and consumption. Now more than 140 billion Reels plays across Facebook and Instagram each day – a 50% increase from six months ago. Reels is incremental to time spent on our apps. We believe that we’re gaining time spent share on competitors like TikTok.”
CEO
When moving to monetization, in the past the growth of short-form video content has proven to create challenges since reels do not monetise at the rate of feed or stories yet. Thus, this means that as reels is growing, there is a displacement of revenue from higher-monetising surfaces. CEO Zuckerberg noted that the closing of this gap “is also a high priority”.
Meta seems to be well positioned for growth in this area. TikTok, currently the largest competitor to Meta for short-form-content-creation, is consistently under rigorous scrutiny, mainly as the product acts as a data-collection toy for the CCP. It seems reasonable to assume that, even aside from a banning of TikTok, the scrutiny alone, in conjunction with the ever growing totalitarianism present by the CCP, may result within user growth decline for TikTok.
Instead, this is likely to considerably favour the likes of Meta, who are very well positioned to capitalise upon this trend.
According to figures provided by Eric Seufert – an analyst for Mobile Dev Memo – for the month of November, US installs of TikTok were down nearly 33%. This is in comparison to WhatsApp installs growing by 31%, and Instagram worldwide installs increasing by 12%. Whilst this data is still early, I believe this is a sign of more scrutiny ahead for TikTok.
Commerce:
Another youthful opportunity is apparent for Meta. This is present within end-to-end shopping experiences, resulting in the ability for companies to use Meta’s messaging platforms in order to directly contact customers and thus sell within the chat. In consideration of the fact that this platform is solely starting to ramp up within India, and is yet to experience mass adoption, there is reason to assume that this progress could add considerably to Meta’s bottom line.
Fundamentally, Meta is curating a flywheel for commerce, in which the marginal cost associated for a sale is close to zero, whilst simultaneously reducing the friction associated with a purchase. Meta is creating a seamless experience for shopping, via removing subtle – yet noticeable – areas of muda in which previously would dissuade a purchase of a product.
The initiatives by Meta, increasingly reminds me of WeChat – a Chinese social media platform in which is commonly referred to as the “X” application. In simple English, this social media application allows users to be able to do everything from payments, to the ability to book flights, and hotels. WeChat is the “all in one” social media application.
It seems that Meta perhaps is reiterating some of the important lessons learned by WeChat, in an attempt to future proof their already “resilient” product.
The question is, what happens once AI becomes the dominant form of content consumption, in combination with the seamless ability for commerce on the platform. Likely, a flywheel of content and commerce comes into swing, perhaps creating unimaginable benefits for companies.
AI:
As mentioned at the start, the investment distinction between FOAs, and the Metaverse, looks like this:
- Family of Apps expenses were $18.1 billion, representing 82% of overall expenses.
- Reality Labs expenses were $4B or 22% of Family of Apps expenses.
Highlighted subtly throughout the commentary by CEO Zuckerberg, is the increasingly important emphasis on AI. In fact I would argue that this emphasis on AI is the most important initiative the company is focusing upon.
The Metaverse is the smokescreen, however AI is the backbone.
Three of the primary areas we’re going to focus on are our AI discovery engine that’s powering Reels and other recommendation experiences, our ads and business messaging platforms, and our future vision for the metaverse.
CEO
Meta has developed the AI Research SuperCluster (RSC), a powerful supercomputer capable of quintillions of operations per second. The RSC is among the fastest AI supercomputers currently running and will be the fastest in the world when it is fully built out in mid-2022. Meta’s researchers are already using the RSC to train large models in natural language processing and computer vision.
The goal is to eventually train models with trillions of parameters. The RSC will enable Meta’s AI researchers to develop new and improved AI models that can learn from vast amounts of data and work across multiple languages. The ultimate aim is to use RSC to develop advanced AI for applications in the metaverse.
It requires more expensive servers and networking equipment, and we are building new data centres specifically equipped to support next generation AI-hardware. We expect these investments to provide us a technology advantage and unlock meaningful improvements across many of our key initiatives, including Feed, Reels and ads.
CEO
Thus, extrapolating from CEO Zuckerberg, and his commentary on AI, it is clear that Meta is leveraging the use of AI, not solely upon the new initiative of the Metaverse, but also towards reinforcement of current products within the FOAs. This will give Meta a considerable advantage among competitors and peer, such as YouTube.
As was noted beforehand, the importance of AI within this new digitalised era could not be more overemphasised.
A single AI advancement in scaling our recommendations models had led to a 15% watch time gain for Facebook Reels, and that gain has continued to grow.
Management
The AI recommendations by Meta are incredibly addictive. Whilst I have personal concern regarding the benefit this AI engine has upon mental wellbeing and overall productivity, from a business perspective, this presents a fascinating opportunity.
Considering the fact that AI generated content led to a watch time increase of 15% for Facebook reels, what happens when this AI generation and recommendation is the primary form of a consumption? Fundamentally, it can be concluded that a flywheel forms between content consumption, thus leading into a frictionless experience of commerce, in which the final completion of a purchase of a set product has incredibly low levels of muda.
Fascinatingly, the AI & ML investments have already led to a considerable positive impact upon return on advertising spend. For example, one of Meta’s products, Advantage+ Shopping, allows clients to test, learn and optimise their campaigns faster. This already led to a 32% increase in return on advertising spend.
In light of the advancements to mitigate the risks associated with Apples IOS changes, notably via the use of AI to close the gap between data and advertisers, on top of the eventual changes that will occur on a macroeconomic level thus gradually incentivising companies to spend more on advertisements, the future of the Meta core business seems fairly “steady”.
Metaverse:
What Actually Is The Metaverse?
Meta at the core, despite the trivialisation of the idea, are aiming to build the next generation of computing platforms. In the modern date, there is a static, two-dimensional approach towards computing and the internet. Static monitors are used as a portal into the digitalised internet; however, this comes with various archaic limitations.
Meta, however, wants to change this.
Instead, Meta wants to focus on interoperability of the digital and physical world via the use of AR & VR. The potential for true immersion regarding digitalised presence will result in the unlocking of “hundreds of billions of dollars, if not trillions, over time”, according to CEO Mark Zuckerberg.
Thus, at the core, the Metaverse represents an interesting inflection point in human history, which is the first iteration of true interoperability between the physical and digital world.
“It enables deeper social experiences where you feel a realistic sense of presence with other people, no matter where they are – whether you’re playing games or working for hours at a time, or you’re just jumping in for just a minute at a time to say hi to a friend or collaborate on a project quickly.”
CEO
Meta is focused on the foundational hardware and software required to build an immersive, embodied internet that enables better digital social experiences than anything that exists today.
Issues With The Current Computing Infrastructure:
As humans in daily life, we operate via the interoperability of senses, in which work in conjunction simultaneously. This includes the use of smell, sight, and touch, in order to successfully navigate the world. However, from a digitalised perspective, this four-dimensional innate human superpower, is instantly retracted to a static, two-dimensional confinement.
To explain further, this two-dimensional field thus fails to provide an adequate sense of immersion and feel. In consideration of the fact that Meta is at the core a social media company, this is a huge emphasis. The unlocking of true computational immersion could result in countless use cases. For example; removing the boundaries upon which people work, thus allowing people to work wherever, whilst still maintaining a realistic sense of connection. Also, the ability to fully replace laptops, monitors and PCs, via the introduction of immersive, accurate, and realistic, AR. This could all be achieved through a small wearable infrastructure, with resemblance similar to that of subtle glasses.
The interconnectedness of humans, and AR together, would enhance productivity drastically. Perhaps in a manufacturing sense, to identity nuanced details regarding which materials are to be used. Or, even within the healthcare sector. Via the introduction of an immersive, embodied internet, this could provide healthcare emergency operators with enhanced levels of detail, and accuracy regarding a certain operation in real time. All achieved solely through a small wearable physical infrastructure.
The creation of the next generation computing platform, namely an immersive, and embodied internet, would blur the boundaries between physical reality, and the digital world, thus unlocking unimaginable use cases in which would dramatically enhanced productivity and utility.
However, importantly to understand, often the most important breakthroughs within business rarely follow blaring trumpets, or red carpets. Instead, these companies are often incredibly fragile. They pass through dark tunnels, after a range of scepticism and uncertainty. Often these companies are dismissed or neglected for some time.
Usually products that are radically innovative, often fail countless times, before success. As reiterated by Peter Thiel, usually with radical technological breakthrough, first mover advantage is mute. In other words, it is not wise to rapidly rush towards radical innovations – before anyone else. Usually, these radical innovations comes with a plethora of warts, and unprecedented issues, in which ultimately can result within the ultimate demise of the product.
Therefore, it is wise to take the notion of the Metaverse, and approach this will considerable scrutiny.
I do expect Meta to pass through, and perhaps succeed with management of what I refer to as, “The Three False Fails.” As stated, and what is true among people and ideas, is the fact that often brand new ideas jump from lily-pad, to lily-pad, before the final hurdle in which is only when the idea gains wide world applause.
Usually these radical innovations go through “three” false fails, in which at each hurdle, it seems that the product has been buried – forever. However, as was true with the statin, for example, if one can overcome these hurdles, then upon completion these radical technological innovations that were once demonised, usually end up totally transforming the ways in which we as humans operate.
Culture & Structure:
If you have read my prior posts, specifically those on China, it is clear to recognise that I emphasise the necessity of organisational culture and structure. The reason as to why is based on the atomic understanding that solely, at the core, a company consists of game theory and incentive structures. Thus, the ways in which information flows, ultimately results within the most superior outcome for companies, teams and nations.
All successful companies, are solely the function of good human organisation. In fact, Elon Musk for that matter, Jeff Bezos, and Mark Zuckerberg – all of these great leaders – are masters within human engineering, and human organisation.
As stated within my previous post, labelled: F*uck Culture. Structure Wins. The Secret Lessons Of Steve Jobs. | Darntons Media, I note the necessity of good leadership and structure, via reflection upon the story & life of leaders:
“The company leader must be more like a gardener, rather than a dictator. This is incredibly important. When it comes to Steve Jobs, or any other innovative leader, these individuals were not outstandingly superior technologists.
These individuals were solely professionals at human organisation, and structure. And within the case of Jobs these lessons did not come easily.
In fact, for Jobs, he was kicked out of Apple, had a range of failed start-ups, including NeXT, and then solely joined Pixar in which he learnt the most vital lessons of structure and human organisation. Only after years of failure and disappointment did Jobs join Apple again, and save the company via the new iteration of structural improvements.”
The point that I am making is that, it is necessary to understand the intangible, qualitative functions of a company, in order to adequately lead to success.
Structure:
Structure can help investors understand the incentives within a company from an employees perspective. Whilst there is no one size fits all approach regarding structure, for each company it can vary, and thus must be analysed individually.
For example, salary step up is a factor to consider. This principle refers to the relationship between promotions and pay. For example, if one gets a 200% increase within pay per promotion, this will drastically influence ones decision to focus far more on internal gossip and politicking in order to garner a promotion, in comparison to hard work on a set project.
The reason as to why is clear. Why spend countless hours working hard on a project when the benefit associated with pay is not tied to the outcome of this specific project? Instead, it seems far wiser to become friendly with your boss, play status games, and thus increase chances of a promotion this way instead. Furthermore, when salary step up rates are incredibly high, this creates a culture of fierce competition, in which peers are viewed as “enemies”. Employees usually are so set on climbing the career ladder, than often, sight of the project is disregarded.
However, on the other hand, if one promotion translates into solely a 2% increase within pay, you are incentivised to work on your project, in which extra effort, or smart work may earn you a bigger bonus or reward.
Often as is true within the case of Governments or large investment banks, there is commonly large salary step ups. This usually can result within the sole focus on rising the ranks, via focusing on rubbing shoulders with those in charge, political games, and mindless agreements with superiors in order to “fit-in” and thus get along nicely with higher ups.
However, this emphasis on zero-sum-status-games usually is detrimental for organisations.
Instead, when the incentives are tied to a specific project, and the outcome of this project, then subconsciously employees are incentivised to focus upon the success and optimal outcome of that specific project. This is not only beneficial in regards to pay, however also is beneficial in regards to the success of the company in question.
A skew of incentives so commonly throughout history, has resulted within the failure of leading companies. This is present in the story of Pan Am, Nokia, & IBM. All once dominant companies – however failed – based on poor incentives and structure.
In regards to salary step up, what is apparent at Meta is the clear combination of a base salary, in conjunction with equity & stock, as well as a performance bonus. Whilst there is limited information regarding the specifics of salary step up figures, it can be seen that via the use of tangible equity procedures, this is ideal for alignment of incentives.
Furthermore, management span is also vital to analyse for Meta. With a wider management span, namely 100s of employees reporting to one manager, the likelihood of a promotion is fairly low. Therefore this disincentivises political games, but instead incentivises hard work. This is because, a promotion occurs so rarely, that it is not worth politicking.
However, the opposite is true regarding a narrower management span. When there is solely 3 people who are reporting to one manager, the chances of a promotion increases majorly. Therefore, there is a much larger incentive to engage within constant competitiveness in order to garner a promotion, as the chances of getting one are increased since there are less people to choose from.
According to reports, “Meta has a matrix organisational structure, meaning it is structured both hierarchically and divisionally. A matrix organisation has two lines of authority. Each team member reports to two bosses — their project team manager and their functional (department) manager (Buchanan and Huczynski, 2019, p.569).”
In accordance to a whilst blower and thus now an ex-employee at Meta, there are some interesting revelations in regards to the organisational structure at Meta.
Frances Haugen (Swisher, 2021), former employee and whistleblower, discussed the “fetishization of flatness” at Meta. The open floor plan hangar-style office is a quarter of a mile long. The flat hierarchical structure that Haugen describes as being the organisational structure at Meta, and across Silicon Valley as a whole, makes sense from a tech company standpoint.
Ignoring the allegations, the focus for myself is upon the “flat” structure, and the commentary in regards to what is known as the “matrix” design of structure.
Also, and fascinatingly is the fact that reportedly, “each team member reports to two bosses”. Whilst it is unclear the reasons as to why this occurs, what perhaps can be extrapolated from this is the emphasis on reducing return on politics. This structure actually reminds myself of the structure present at McKinsey.
At McKinsey, the company has a very unique and attractive organisational structure, one in which incentivises hard work, in comparison to internal politics and zero-sum-thinking. For example, when it comes to important promotional decisions, a senior partner, chosen for his or her limited overlap with a candidate’s office and practice, is brought in to conduct an independent evaluation. This distance reduces the influence of local politics. This process may take upwards of 3 months, and the investigation is often exhaustive. McKinsey retains careers, however, also reduces the subjectivity of a promotion.
Thus, put very simple, McKinsey tries to eliminate politics via reducing the subjectivity of a promotion.
The same perhaps seems to be apparent within Meta. Via the reporting of employees to not only one, however two senior bosses, this seems to be a good way in which one can either reduce the politics associated with a promotion, or equally, perhaps “cross check” decisions, thus resulting within a higher probability of the best outcome.
Whilst this commentary regarding structure, to some, perhaps may be viewed as abstract, I still believe this conversation has huge utility. These seemingly disconnected data points over time, I believe, can result within a more conclusive discussion further into the future.
Just touching upon the notion of a “matrix structure”, this is defined as:
“A combination of two or more types of organisational structures. It is a way of arranging your business so that you set up reporting relationships as a grid, or a matrix, rather than in the traditional hierarchy.”
In other words, a matrix structure does not follow the conventional means of a hierarchical model. In this structure, employees usually have dual reporting relationships – generally to their functional manager as well as the project manager. Typically, one reporting line will take priority over the other (eg staff may have to report to their functional manager before reporting to the project manager).
As stated, there are some clear benefits that I see via this structure. Firstly, unlike some conventional hierarchical structures, the combination of “dual reporting” – the process of reporting to two senior managers – perhaps can disincentives internal politics and gossip, but instead incentivises hard and smart work. Via the use of two senior managers one needs to report to, this adds an alterative level of responsibility upon the subordinate employee. Based on this added oversight, and perceived duty of the subordinate employee, it seems reasonable to assume that this structure incentivises hard work, in comparison to sole status games.
Via the use of a conventional hierarchy, in which one manager is responsible for a set number of employees, it could be argued that this encourages zero-sum-status-games, and “blind agreement” with seniors in order to garner a promotion.
Via the introduction of two seniors, whom are responsible for a span of employees, this structure seems to mitigate the chances of politics interfering within promotional decisions, as both managers have an oversight and say upon performance of a set subordinate employee.
There seem to be some other apparent advantages of this structure:
- It allows the sharing of skilled resources between functional units and projects, which facilitates resource planning.
- It fosters better cross-functional communications, which improves team collaboration and builds a more dynamic organization.
- It helps organizations achieve their goals at a faster pace, thanks to a higher use of material and human resources.
- This structure is great for employees who are looking to widen their experience and skill sets. It puts them in an environment that facilitates learning and gives them an opportunity to grow professionally.
Overall, it is important to understand and gain a base line vision of how information flows, and thus how incentives are aligned. Through this, one can better understand and grapple with the dynamic of organisational fitness. In other words, the distinction between return on investment for politics, or return on investment for hard work.
Good companies want high return on investment for hard work, in comparison to politics and zero-sum-status-games.
As mentioned, this notion of structure must be not trivialised. Countless times throughout history, companies have failed and gone bankrupt, despite being leaders within their field, based on skewed incentives and bad structure.
As stated within my prior writing: https://darntons.com/2022/11/06/the-investment-paradox-insight-into-christians-unique-investment-style/
“Nokia was a leader in their field for many years, producing innovation after innovation. However, after years of domination, Nokia rapidly fell apart, and lost market share. The reason as to why this seemingly abrupt ending occurred within the case of Nokia was based on their disastrously flawed incentive alignment system, and poorly curated structure. To cut a long story short, at Nokia, a phase transition occurred resulting in the incentivisation to focus on career and internal politics, in comparison to loonshot innovations. Over a matter of a few years, via this phase transition, instead of Nokia tending to new radical innovations, the company shut them down instantaneously via picking apart their early-stage warts and weaknesses.
Nokia did not let the artists nurture early-stage ideas.
This culminated back in the early 2000s when the innovative team at Nokia approached high level management with a radical idea of touchscreen phones, and an App Store. However, based on intangible structural features, management instantly disregarded this idea, picking apart early-stage flaws, and thus halted the project. Just a few years later, Steve Jobs would dramatically showcase Apples brand new innovation – namely the iPhone – in which included a touchscreen body, and a brand-new Apple App Store. The years proceeding this launch would result in dwindling profits for Nokia, whilst the righteous management team witnesses Apple surpass incumbents in a fairly spectacular fashion.
Due to poor structural management, Nokia disincentivised new innovations, but instead incentivised internal politics, gossip and status games.“
Culture:
Culture also is another principle that has mass import for the success of a company. As previously stated, companies and teams are solely the function of good human organisation. Therefore, the ways in which companies are structure and organised, results within the most optimal outcome.
Culture plays a major role within good structure, and organisation.
Whilst I understand that as retail investors, it can become very difficult to understand and compute the “true” organisational culture, there are certain disconnected data points in which I believe are fundamental to analyse, and perhaps can lead us towards a more conclusive argument.
Interestingly, one data point that we can gauge from the commentary of Mark Zuckerberg was released after the new wave of lay-offs occurred for Meta. A notable highlight that was present throughout the writing and commentary by the CEO was an emphasis on:
- Efficiency
- Seriousness
- Focus
- Discipline
From an outsiders point of view, it is clear from the commentary by the CEO, that Meta is eliciting a culture that is very appealing for individuals that have a focus upon technological innovation, true disruption, risk and fundamentally entrepreneurialism.
Furthermore, reports state that the days of Zuckerberg coddling employees is over. “Realistically, there are probably a bunch of people at the company who shouldn’t be here,” Zuckerberg said on the June 30th call.
“And part of my hope by raising expectations and having more aggressive goals, and just kind of turning up the heat a little bit, is that I think some of you might just say that this place isn’t for you. And that self-selection is okay with me.”
CEO
Interestingly, Mark Zuckerberg has focused massively upon the forwarding leaning model of remote work at scale. Upon first intuition, this perhaps can contradict the prior notion of “brutality” and emphasis on “efficiency” in which is present within Meta today. The outcome of remote work is yet to be seen, specifically as this translates into organisational culture.
The tone of Mark Zuckerberg is almost analogous to that of Elon Musk, and his recent actions at Twitter, in which highlights the importance of efficiency, discipline, and risk taking within the organisation for employees.
The prior culture at Meta was emphasised upon “moving fast, and breaking things”. The shift by the CEO is emphasising the necessity upon “fast moving, long term vision, building awesome things, living in the future, be direct and being respectful to colleagues.”
To unpick some of these comments, briefly listen to what Mark Zuckerberg said to employees:
“Move Fast helps us to build and learn faster than anyone else. This means acting with urgency and not waiting until next week to do something you could do today. At our scale, this also means continuously working to increase the velocity of our highest priority initiatives by methodically removing barriers that get in the way. It’s about moving fast together — in one direction as a company, not just as individuals.”
“Focus on Long-Term Impact emphasizes long-term thinking and encourages us to extend the timeline for the impact we have, rather than optimizing for near-term wins. We should take on the challenges that will be the most impactful, even if the full results won’t be seen for years.”
Overall, this commentary is music to my ears. I believe that these principles are curating a culture of optimism for the future, innovation, entrepreneurialism, and simultaneously individual autonomy.
This is vital because, this culture will play a role in ensuring that information flows most successfully, thus resulting within the best ideas filtering to the top, in a sole pursuit for a higher good.
Just to give some contrast, a negative organisational culture would be one in which subconsciously emphasises the necessity of internal gossip and politics. This is especially present in Governmental organisations, whom commonly are characterised as a “old-friend-clubs”, in which is analogous to a school playground, in comparison to a location for vital decisions. This is especially true in the UK.
Meta seem to have an adequate organisational structure and culture, thus creating a company in which incentives hard and smart work, in comparison to sole status games, and political persuits. This atomic reason is necessary for the flow of information, and therefore the success of the company.
Capital Allocation:
What strikes me as incredibly attractive about Mark Zuckerberg is his clear shareholder oriented vision, and the ruthless capital allocation strategies. Instagram, for example, has become one of the most spectacular capital allocation decisions for the company, despite large amounts of criticism.
Facebook brought the photo sharing start-up for $1B in 2012, paying what seems to originally be an absurd amount of capital. Now however, Instagram has over $1B monthly users, including 500M daily users of the Stories future, in which was solely introduced in 2016.
Just 10 years later, Instagram has grown into a business that generates shy of $30B annually, drastically dwarfing the prior acquisition price of $1B.
Furthermore, another data point that adds towards the rigour of the Facebook thesis is centred around the acquisition of WhatsApp, for $19B. Once again, many touted Zuckerberg as insane, especially in consideration of the fact that WhatsApp had made little money, and was largely popular outside the US.
In 2014, over 450 million people used WhatsApp monthly, and the service added more than 1 million users per day. With 70% of WhatsApp users being active daily, the app was expected to quickly reach one billion users.
The app launched in 2009 and, as of 2020, had more than 2 billion users. As of 2020, Facebook had 2.8 billion monthly active users.
For Zuckerberg’s company, user growth comes first and monetization later.
As two of the main tenants for a CEO, there is a necessity to prevail within running of operations in the most efficient manner, in conjunction with the deployment of cash that is generated by these operations. The use of the language, ” while enabling greater return of capital to shareholders”, reiterates the clear iconoclastic vision apparent by Zuckerberg and his emphasis on return to shareholders.
In consideration of the fact that Zuckerberg has an array of experience in which adds rigour and strength towards his track record, this becomes another viable data point in which may provide a more conclusive argument towards the investment into Meta. Also, this shows that Mark is not shy of common criticism. The clear mitigation of cowling into the conventional narrative when Zuckerberg has conviction should actually provide investors with some reassurance that Zuckerberg’s newest bet into the Metaverse will pay off.
The key trait to point out here is one of iconoclasm. The ability to uphold unconventional views, and also prove these views to hold truth, is a skill to applaud. Furthermore, this trait of iconoclasm is also apparent with a range of other investors, and successful businessmen.
For example, Buffett notes that: there is a powerful force of peer pressure among CEOs, and one must find a way of tuning it out. Buffett states that the role of a CEO for the outsiders was not one of charismatic leadership, but instead, a focus on careful deployment of firms resources. These traits of iconoclasm are ever present within the track record, and current state of CEO Zuckerberg.
Other acquisitions include that of Oculus, once again reiterating the scarily outstanding capital allocation skills in which are apparent by CEO Zuckerberg. Facebook announced the acquisition of Oculus in 2014, solely for $2B.
All of these data points can add rigour to the thesis that the Metaverse investment will pay off, and thus will produce outstanding ROI for investors.
Conclusion:
To conclude it seems apparent that the core business of Meta is “steady”. Whilst it is clear that the core business does not have large exponentiality ahead, I do believe that Meta is uniquely positioned as their platform is solely at network that connects billions of nodes together daily. With understanding of this, there is almost no bounds as to the capabilities of the platform, and further product releases that will come in the future.
To add, there are some overheads and outstanding debates in which are present for the company. But, it seems clear that via the strength of the track record apparent from management, and the past history with overcoming systemic issues, this should add more rigour and confidence to the thesis of Meta.
In fact, one may even argue that whilst currently these issues are present, over the long term this is solely beneficial for Meta. This is because these events give the company the perfect opportunity to “bullet proof” their platform, and reduce the future externalities associated with success.
Moreover, the notion of the Metaverse is a highly misunderstood domain, yet presents a true inflection point within human history. If the Metaverse investment is successful, not only will this contribute towards hundreds of billions, or even trillions of dollars created for the company, however it will also result within the first truly immersive and embodied internet. Since inception of humanity, through the cognitive, agricultural, and scientific revolution, humans have focused upon novel methods of rearranging society in order to enhance productivity. In my view, the interoperability between the digital and physical world is the next step for humanity – thus resolving the clear issues present with the two dimensional digital realm.
Whilst there is concern that this investment may not pay off – it is wise to note that this investment into the Metaverse is still a fraction of overall expenses. The focus is still upon the FOAs.
As noted in the writing, I believe it is wise to look at the atomic reasons as to why organisations are successful. It is clear to me that all successful companies are solely the condition of good human organisation. Thus, the ideal ways in which humans are organised, ultimately results within the most optimal outcome.
As clear at Meta, their unique culture emphasises the importance of entrepreneurialism, autonomy, and a focus on discipline and hard work. This has likely been reinforced via Zuckerberg after the hardships associated with macroeconomic conditions, and the turbulence associated with current tailwinds for Meta.
To add when looking at structure, Meta has created a unique and fascinating organisational structure in which disincentives return of politics, however incentivises hard and smart work. This is achieved via management span, pay step up gaps, and the alignment of incentivises via tangible equity. From a holistic level, it seems apparent that this unique structure is fundamental for the success of the company.
And to finalise, whilst I am critical of CEO Zuckerberg for certain decisions made in the past few years regarding censorship, I do believe that CEO Zuckerberg has a proven track record, and thus takes the crown as one of the greatest capital allocators of all time.
As noted, the two most important metrics for a CEO is that of efficiencies from operations, and capital allocation skills. Within the case of Meta, previously known as Facebook, the company is riddled with iconoclastic, and fabulous capital allocation skills. What it strikingly appealing is the fact that CEO Zuckerberg is a true outsider – iconoclastic by nature. In other words, CEO Zuckerberg has the ability to go against conventional narratives and consensus, have conviction, and then turn out to be correct within his original thesis. This is apparent within the acquisitions of WhatsApp, Instagram, and Oculus, solely to name a few.
This iconoclasm must give investors in Meta more conviction and confidence regarding the next capital allocation initiative within the Metaverse.
