Tech Brew Ride Home - Thu. 7/26 - The Greatest Loss of Market Value In a Single Day... Ever

Episode Date: July 26, 2018

The Facebook earnings disaster. What else? But also Qualcomm walks away from an acquisition, Amazon’s facial recognition tech seems pretty flawed, and Samsung might have invented unbreakable displays for smartphones! Links:Samsung announces new 'unbreakable' display that survives punishing UL certification (Android Central) Learn more about your ad choices. Visit megaphone.fm/adchoices

On April 4th, 2023, around 2 in the morning, a man was found stabbed multiple times on a sidewalk in downtown San Francisco. Hey, who did this to you? What happened next turned the story into a political firestorm. Reports have identified the victim as Bob Lee, the founder of Cash App. From Bloomberg Podcasts, this is Foundering, the Killing of Bob Lee, beginning April 16. Welcome to the tech meme ride home for Thursday, July 26, 2018. I'm Brian McCullough. Today, the Facebook earnings disaster.

What else? But also, Qualcomm walks away from an acquisition. Amazon's facial recognition tech seems pretty flawed. And Samsung might have invented unbreakable displays for smartphones. Here's what you miss today in the world of tech. Well, either I picked the worst week to decide to change my policy. on reporting earnings and shifting it to the next day, or I chose the absolute best week. I actually still think this is the best way to do it, waiting for the next day, because quite

frankly, when the headline number that we're about to talk about came out yesterday, it didn't look too bad. The stock was only down around 8% at the time that yesterday's pod would have posted, and it wasn't until the conference call started, which came way after yesterday's show came out that the stock plummeted like 20%. So this is all to say, I wouldn't have been able to give you this big news yesterday anyway. And I can give it to you now, and we can really chew on it. And of course, the big news is Facebook, and it's epically disastrous earnings report after the bell yesterday. As I said, initially, the headline numbers looked fine. Q2 revenues came in at $13.23 billion, which was up 42% year over year. Excellent. Net income was $5.1 billion, up 31% year over

year, strong growth. And even daily active users were up 11% year over year. One point four seven billion people use the Facebook platform every single day. But there's only one number that investors truly care about with any social network, Mao, MAU, MAU, monthly active users. And investors only care that that Mao number keeps growing. And this is where Facebook ran into trouble. In Q2, Facebook only saw monthly active users climb 1.54%. That represents the company's slowest ever growth in monthly active user numbers. The previous Q1 Mao numbers saw growth of 3.14%. So, as I said, initially, the stock was down about 8%.

Not great, certainly, but not epically disastrous. and it was only down that much initially because if you look back at that top line revenue number of 3.23 billion, that represented a miss on Wall Street's estimates of 13.36 billion. So that was bad, but the kind of bad that can happen to a company every now and then. But then those Mao growth numbers started to sink in. And then it was Katie Bar the door, because when you dig into the monthly active user numbers, It's grim. Facebook is no longer growing its user base in North America at all.

For four straight quarters now, users in the U.S. and Canada have been stuck at $185 million. And guess what? Last quarter, user numbers in Europe actually fell. By the time the investor conference call kicked off and Facebook's chief financial officer, David Wenner, was saying, quote, our total revenue growth rates will continue to decelerate in the second half of 2018, and we expect our revenue growth rates to decline by high single-digit percentages from prior quarters sequentially in both Q3 and Q4, end quote. Facebook's stock was down more than 20 percent, and Facebook as a company had lost $125 billion in market value. Let me say that again, $125 billion.

Basically, that's the entire market cap of IBM, or McDonald's, or 3M, or General Electric, or Altru. formerly Philip Morris. So that's why this was epically bad. What happened here? I mean, I could give you a million takes from a million different people, but the truth is we're not exactly sure what happened. There's a number of things we think has happened, and the problem is none of them are any good. So among the options, have all the scandals, the testimony before Congress, the Russian hacking, etc., has that all finally caught up with Facebook?

Will Facebook's efforts to police content, to regain user trust, and basically be less shady? Will that end up costing the company more than we all thought? That could certainly explain the warnings about increased costs that the company had to make. Or look at that drop in users in Europe. Is GDPR having an impact? Facebook suggested that GDPR could be a factor on the earnings call. But look, as Mike Isaac noted on Twitter, Facebook has been warning for about a year that it plans to actively take intentional measures to reduce growth. Things like changes to the news feed, to reduce viral posts. And Mark Zuckerberg, all those times he vowed publicly

to make Facebook as a platform better and more trustworthy, he said again and again that that was his priority above and beyond making money. So it's not like Wall Street didn't know this was coming. No, what really has people spooked is the sudden realization that You know, there could be a natural limit to how long and to what extent Facebook can grow. There are 4 billion people who have access to the Internet right now. As Casey Newton pointed out, through one service or another, Facebook has captured 2.23 billion of them. So half of the pie has already been eaten and the most profitable part of the pie as well. We've known for a while that the developed world is basically saturated for Facebook.

There can still be growth in developing countries as more people come online over the years, but that has a very obvious ceiling that you can measure in terms of revenue. Maybe Shira Oviday put it best. If what the company predicts comes to pass, the Internet's best combination of fast revenue growth and plump profit margins is dead. All at once, it seems, reality finally caught up with Facebook, end quote. And there's really no way to spin that. I mean, Facebook tried?

For the very first time ever, the company trotted out a new metric on the conference call yesterday. It said, 2.5 billion people use some member of the, quote, Facebook family every single day. If not Facebook, then WhatsApp or Messenger or Instagram. They've never tried to make that argument before. Hey, look at the big picture, guys. Even if one thing slows, we've still got people hooked on this other thing over here. As Owen Williams said, that shows how desperate the company is. to save face right now.

And as Casey Newton tweeted, quote, this metric was previously housed in a glass case labeled break in case of emergency, end quote. So it all comes down to, is the emergency finally here for Facebook? Or is this a Facebook problem alone? Initially, it seems that investors kind of think so. Other social networks like Twitter and Snap

only opened it down about 2% or 3% today while Facebook opened down 18%. So maybe Facebook just flew too close to the sun, got too big first. In different ways, though, the grand investor story for every single one of these tech giants is predicated on the notion that they are simply standing in front of the tidal wave of history,

as I've said before, a tidal wave that will wash over them and wash them up to unimagined heights. And they haven't had to do anything because this title wave was inevitable. They just had to stand in front of it. Think of Amazon. The tidal wave of history is the shift to e-commerce.

With Google and Facebook, it's the shift of advertising to digital. With Netflix, it's the shift of entertainment to digital and an app ecosystem and away from the broadcast model. But in each of these cases, what if it turned out that the wave only goes so high or that maybe we're closer to the crest of that wave, than we thought. Again, there are only so many people on Earth. Sure, Facebook has done the smart thing of insulating themselves. People might be souring on Facebook, but they seem to be happy to shift over to Instagram or WhatsApp. Facebook specifically said that one solution to declining

revenue would be, wait for it, more ads on Messenger. But in the end, though, to what degree would something like that just be window dressing, just moving the numbers around? Think that last fang stock that I didn't mention, Apple? For about a decade, Apple rode the inevitable historical shift of everyone on the planet getting smartphones. But we all knew that that had a natural limit, too. Why do you think Apple is suddenly touting the growth in its services and subscription revenue? Because there's only so many phones you can sell. The point is, is Facebook a special case? Maybe it is. And maybe it's making a necessary correction to its business model, one that we've been crying out for for a long time in different contexts,

and one that might be healthier for the company in the long term, even if it dings revenue and margins in the short term. Or maybe Facebook will just be a temporarily wounded member of this Fang club. Google just reported decent numbers, and Amazon's upcoming earnings will be instructive. But what if Facebook is the canary in the coal mine here, the first of the fang stocks to hit the natural law of large numbers limit, the first to have to figure out a way to grow when the old simple playbook is obsolete, when just getting every single human on the planet to use your product is no longer the obvious and best strategy. Could all of the big tech behemists one day face a similar reckoning, a similar quarterly earnings disaster?

What would that mean to the overall stock market? To the tech ecosystem to the global economy full stop. Remember that recent segment I did about how much the so-called fang stocks, Facebook, Apple, Amazon, Netflix, Google have exploded in just the last five years? According to Bank of America, Merrill Lynch, those five companies single-handedly have been responsible for the stock market being in positive territory this year. Without them, the market would have been underwater by about 1%. And so what happens when the grand investing fairy tale that has fueled the rise of every one of these companies into the highest echelons of the global economy suddenly loses its happy ever after ending? Well, that story sucked up a whole lot of the chatter over the last 24 hours, but there was other news, even other earnings news. Qualcomm reported Q3 revenue and the numbers weren't as interesting as the fact that the company announced.

that it is walking away from its proposed acquisition of NXP semiconductors because it has not secured Chinese regulatory approval of the merger. Because the deal is off, Qualcomm will have to pay NXP $2 billion as a breakup fee. China's state administration for market regulation, Samer, the antitrust regulator reviewing the deal, never ruled on it. And the deadline for the merger to take place expired. NXP is actually based in the Netherlands, but the acquisition needed Chinese approval because two-thirds of NXP's revenue

came from China last year. So why is this news? Because it seems like this is another example of tech companies getting caught up in the increasingly simmering trade war between China and the U.S. There was no official word on why the Chinese regulators

never acted on the acquisition, but most people, assume that this was part of the tit-for-tat regulatory and trade battle going on between China and the U.S. Quote, we obviously got caught up in something that was above us, Qualcomm Chief Executive Steve Mollenkoff said in an interview after the announcement on Wednesday. I don't know if I've talked about it on this show before, but Amazon has a facial recognition technology called Recognition, Recognition with a K. It sells the tech to police departments and other organizations, and it has proven controversial, to say the least, with some activists and even some inside of Amazon saying, not only should the technology not be used, but Amazon should not be producing and selling it.

Proponents see recognition as a useful tool to quickly find criminals out in the real world, but civil liberties groups see this as a dangerous surveillance tool that could be used to monitor protesters, undocumented immigrants, and, basically just any member of the public, criminal or no. And the American Civil Liberties Union has stepped up its criticism of the technology in a rather dramatic and high-profile way. The ACLU released the results of a test that it ran of the recognition systems, which used the software to compare the photos of everyone in Congress with a database of 25,000 publicly available mugshots of criminal suspects. In the test, the Amazon on technology incorrectly matched, 28 sitting members of Congress with the faces of people who had been arrested.

And what was worse, it tended to disproportionately misidentify African American and Latino members of Congress. Jacob Snow, a technology and civil liberties lawyer with the ACLU of Northern California, told the New York Times, quote, this test confirms that facial recognition is flawed, biased, and dangerous, end quote. In a blog post, the ACLU wrote, quote, identification, whether accurate or not, could cost people their freedom or even their lives. Matching people against arrest photos is not a hypothetical exercise. Amazon is aggressively marketing

its face surveillance technology to police, boasting that its service can identify up to 100 faces in a single image, track people in real time through surveillance cameras, and scan footage from body cameras. A sheriff's department in Oregon has already started using Amazon recognition to compare people's faces against a mugshot database without any public debate, end quote. In a statement to Ars Technica, Amazon defended the recognition technology saying, quote, it is worth noting that in real world scenarios, Amazon recognition is almost exclusively used to help narrow the field and allow humans to expeditiously review and consider options using their judgment and not to make fully autonomous decisions, where it can help find lost children,

restrict human trafficking, or prevent crimes. Finally, today, Samsung has announced that it has developed flexible OLED displays for smartphones and other devices, that it has certified as unbreakable, capable of surviving repeated drops with no damage. And this is an official certification, too, from the underwriters' laboratories. Here's how Android Central describes this breakthrough, quote, The traditional way to have a super tough screen was to simply harden the covering that went over top of it. Phonemakers have been covering displays with synthetic sapphire for years, which is much stronger than traditional glass found on phones. Synthetic sapphire is extremely difficult to break when reinforced properly by the phone's hardware,

and when paired with an OLED panel underneath, the entire package is very rugged. But it can eventually break because it's brittle. This new unbreakable panel from Samsung is covered by a fortified platform. plastic rather than glass, which makes it flexible during impact, unquote. During the Underwriters' Laboratories testing, the display panel in question survived 26 successive four-foot drops without any damage. Samsung said it has also tested the panels for six feet drops as well with similar results. So how soon will this new tech be showing up in that smartphone in your pocket?

Android Central says it is still several years off, but Samsung thinks, that this could also have applications in other areas, for example, central consoles on cars, and rugged tablets for kids. Hey guys, guess what? Today marks the 100th episode of the TechMeme Ride Home podcast. I crunched a few numbers, which is easy to do with a nice round number like 100.

Each episode tends to average around 18 minutes, give or take from day to day. So if you go back and listen to all of the extant episodes back to back, that would take you 30 hours to do so. But more impressive, I write about 2,500 words each day for the scripts for this show. So at 250,000 words, that means that I've written a pretty substantial book in a little under five months. If you stick around for our 1,000th show, that would take place sometime in 2022. Let's hope the whole world and all of us are still around for that. But thank you for helping get the show this far.

I can't tell you how much I appreciate it that tens of thousands of you, literally, have made this a part of your daily routine each and every day. Thanks for helping us get to 100, and we'll be back tomorrow for episode 101.