Analyse the macro environment of Facebook and the social media industry using Pestel and the impact of external factors followed by a Facebook Swot Analysis

• Porters Five Forces Analysis of Facebook 2019 

1.0 Introduction

Facebook is an American social media and social networking company with its headquarters in Menlo park, California, United States. It was founded in 2004 by Mark Zuckerberg and co-founders Eduardo Saverin, Andrew McCollum, Dustin Moskovitz and Chris Hughes (Barr 2018).

Subsidiaries include Instagram, WhatsApp, Oculus VR, Onavo, LiveRail, among others. In 2017, Facebook recorded annual revenue of $40.65 billion, up from $27.64billion in 2016 according to Statista (2018c) with profits of $15.934billion profit in 2017, up from $10.217billion in 2016 (Statista 2018d).  

2.0 Facebook Pestel Analysis 2018

The following Pestel analysis of Facebook describes how various macro factors like the China-US trade war, demographic changes, privacy regulations, technological advancements like 5G network technology, among others are affecting the macro environment of the social media industry in which Facebook operates.

Using pestel, the report identifies major key drivers of change that constitute external opportunities and threats in the macro environment of Facebook, examining how these factors have affected or are likely to affect Facebook’s performance currently or in the future.

2.1 Political factors

2.1.1 Chinas continued blockade on Facebook

One of the biggest political factors affecting Facebook is Chinas continued blockade of Facebook. In 2009, Facebook was blocked from operating in China on political grounds. This was a political factor resulting from the July Urumqi riots, when Beijing believed Xinjiang activists were using Facebook to incite violence (Pham and Riley 2017). 

In July 2018, Facebook opened a $30million subsidiary in China, Facebook Technology, headquartered in Hangzhou, where Alibaba is also headquartered. Facebook Technology is wholly owned by Facebook Hong Kong Ltd and its main goal is to make small investments and give advice to local businesses (Lia0 2018). However, just one day after Facebook had gained permission to operate the subsidiary; it was blocked from launching. This is the closest the American social media giant had gotten to expanding in China since it was blocked in 2009 and its proving to be one of the biggest political factors affecting Facebook in the worlds most populous market.

2.1.2 The impact of the US and China trade tensions on Facebook

The continued political interference of Beijing has essentially locked Facebook out of the world’s most populous country. The issue has nevertheless been made worse by the tensions between the United States and China, as the two countries fight over dominance of the technology sector for the future.

The two countries have already exchanged tariff taxes worth $300billion on each other’s goods with Trump threatening additional tariffs in the future.

But what is the impact of the US-China trade war on Facebook?

For one, many US tech firms such as Google, Facebook, or Apple buy most of their components for their global cloud computing operations, from Chinese firms. Hence any increase in imports or export tariffs mean they will either have to find alternative suppliers or deal with increased component prices, both choices likely to affects profitability (Horowitz 2018). In 2017, China accounted for almost half of $23 billion of IT network equipment in the United States.

So while Facebook, like many US tech firms, can deal with small price increases in import tariffs, they are likely to disrupt their supply chain and cause delays in product or service rollout, a threat for Facebook operations, highlighting yet another political factor from external environment affecting the social media giant (Horowitz 2018).

2.2 Economic factors

According to Johnson et al (2016), economic factors such as exchange rates, business cycles and differential economic growth rates affect a business. Considering these factors, we can note that the high economic growth in the US gives Facebook an opportunity to grow. The 4.1% annual economic growth in the US has enabled decrease in unemployment rates that dropped from 4.87% in 2016 to 4.44% in 2017 according to Statista (2018a). With the low unemployment rate, consumer spending increased at an annual rate of 4% (Rushe 2018). Hence, advertisisers and consumers alike have the power and confidence to engage in commercial activities on Facebook and other social media platforms. Therefore, a low unemployment rate is one of the economic factors affecting Facebook positively, giving the social media giant an opportunity to improve its profit margins.   

2.3 Social factors

2.3.1 Rise of smartphones

According to Mintel (2018), two thirds of people in the UK use smartphones to access social media networks while globally, the number of smartphone users is rapidly growing and is expected to reach 2.87 billion by 2020 up from 2.53 billion in 2018 (Statista 2018). This gives Facebook an opportunity to improve its revenues and profit margins as most people use social media platforms like Facebook on their smartphones to communicate with other people, share videos, photos, among others. The global number of social media users is expected to reach 3.02 billion (monthly active social media users) by 2021 (Statista 2018b).

Growth of social and media networks like Facebook is mostly driven by younger demographics signing up for their first account according to Mintel (Reynolds 2018). Therefore, an increasing number of young people represent a major social factor that gives Facebook an opportunity to increase its number of users.

Growing social media trends like increase in creation and use of live videos is also leading to increased usage in social media platforms like Facebook Live, YouTube, Instagram and Periscope. In 2017, Facebook Live was the most used social media platform for creating live videos with over 91% users. Other social media platforms like Instagram, Periscope and YouTube accounted for 29%, 21% and 14% users respectively (Patel 2018). Increase in demand to create live videos influences usage of Facebook Live and represents a key social factor affecting the social media industry represents opportunities for growth.

2.4 Technological factors

One of the key technological factors likely to affect the use of social media and Facebook is the emerging 5G network technology. 5G is likely to give Facebook an opportunity to grow due to the fact that 5G network is expected to be 10 times faster than the current 4G network, with zero latency and average download speeds expected to reach 1GBps. Such statistics can only drive social media engagement even further, good news for the social media industry (Aitken 2018). It means Facebook can provide better video, text and voice communications with near zero latency throughout all its other social media and messaging platforms like WhatsApp and Instagram (Khosravi 2018). 5G thus represents a technological factor likely to affect Facebook positively.

2.5 Legal factors

2.5.1 The impact of the Cambridge Analytica scandal and GDPR

Many of the legal factors affecting Facebook arise from its use of user data and issues of privacy. According to a Mintel 2018 report, 63% of people are concerned about the safety of their social media information and 81% agreed to stop sharing data with companies compromised in cyberattacks. Over 87 million Facebook accounts were accessed by a political data analysis company, Cambridge Analytica in March 2018. But following the strict data protection law known as the General Data Protection Regulation (GDPR) in EU that ensures that users should not be forced to click yes to sign up and that users should know, understand and consent to data collected about them, Facebook could face fines (Tiku 2018).

In Europe, Facebook could face up to $1.6 billion in fines over the data breach (Kharpal 2018). However, considering the data protection Act 1998, Facebook was fined £500,000 by the Information Commissioner’s Office, the UK privacy watchdog, for lack of transparency and failure to protect user data of upto 1 million UK users (Hern and Pegg 2018; Grothaus 2018). Facebook lost 3 million European users after the Cambridge Analytica data breach, a demonstration of the impact of legal factors on Facebook.

2.5.2 EU Digital turnover tax

Also, in March 2018, the European Commission proposed to tax world’s biggest technology firms such as Google, Apple, Amazon, Airbnb, Uber for operating in Europe with claims that they pay little tax. With this proposed tax, the EU is expected to collect taxes exceeding $339billion in 10 years (Wallace 2018). This “digital tax” proposed tax bill is different from other taxes because it targets revenues rather than profits and any technology company with annual global revenues exceeding 750million euros or with EU revenues exceeding 50 million euros faces a 3% tax charge on its revenues (Mehreen 2018). If implemented, it will represent a key legal factor that will affect the profitability of over 100 technology companies including Facebook, Google, Apple, Amazon among others as they face an additional £4.4billion tax bill each year to operate in Europe (Wallace 2018). However, the proposed tax bill cannot be signed into law without support from the 28-member states of the European Union (Blenkinsop 2018).

2.6 Environmental factors

Most governments have set out environmental regulations against green house emissions to reduce on the carbon foot print and urged companies to adopt sustainable energy sources. Facebook is currently creating a smaller carbon footprint across all its applications like Instagram, WhatsApp, among others by using clean and renewable energy or adopting greenhouse gas protocol. In 2017, Facebook’s total carbon print was 979,000 metric tons with offices and business activities accounting for 38% and data centers accounting for 62% of the carbon footprint. However, Facebook used 50% clean and renewable energy in 2017 and plans to use 100% renewable energy across all its operations by 2020 (Facebook 2018).

3.0 Facebook Swot Analysis 2018

3.1 Strengths

• Facebook has managed to engage its users by providing them with the convenience of logging into other sites using its login data which not only saves time of creating a new user name and password but also ensures that the user is less likely to stop using Facebook (Akin 2018).
• Facebook has a diversified portfolio including WhatsApp messaging app, Instagram, Messenger, Oculus, among others which enable multiple sources of revenue (Godlewski 2018). 

3.2 Weaknesses

• Facebook has a poor reputation for privacy protection. Following the Cambridge Analytica scandal where over 87million Facebook user accounts data was accessed by the political data analysis company; 3 million European users left the social network.
• Facebook is also listed as one of America’s top hated companies because of its bad reputation (Stebbins 2018).
• Facebook has failed to negotiate and reinstate their operation in China, since 2009, the social media giant is still blocked from accessing the Chinese market limits its reach (Pham and Riley 2017).

3.3 Opportunities

• The high annual economic growth of 4.1% in the US has enabled a low unemployment rate which gives Facebook an opportunity to improve its profit margins as people have more spending power and confidence to purchase smartphones and computers to access social media platforms like Facebook, Instagram, and messaging apps like WhatsApp (Statista 2018a).
• The growing number of smartphone users gives Facebook an opportunity to improve its revenues as most people use social media platforms on their smartphones to communicate (Statista 2018).

3.4 Threats

• The US-China trade war threatens the profitability of Facebook as its components from China used for its global cloud computing operations could be heavily taxed resulting in increase in component prices which affects the profitability of Facebook. (Horowitz 2018).
• The rapidly growing elderly population in UK threatens the profitability of Facebook as an aging population affects the demand for new innovations and entrepreneurships because the elderly are reluctant to adopt new technologies (Randall 2017).
• The proposed digital tax by the European Union also threatens the profitability of Facebook as it faces a 3% increment in taxes (Mehreen 2018). This tax targets companies with global revenues exceeding 750million euros or EU revenues exceeding 50million Euros that include Google, Apple, Facebook, Amazon, among others.

Conclusion

An environmental analysis of the social media market reveals certain key drivers of change that are shaping the way social media networks operate. The most critical of these factors is stringent privacy regulations that many countries are starting to implement especially in light of the Cambridge Analytica scandal. GDPR is the most comprehensive of these, highlighting a tough regulatory environment that Facebook will increasingly face in the future its efforts to grow and expand its users.  But while China remains a distant dream, a situation exacerbated by China-USA trade war tensions, growing smartphone use across the globe offers Facebook new opportunities to add new users. As populations across the developing world skyrocket, new markets beckon. If it can find ways of monetizing the growing markets in the developing world, Facebook’s financial performance will only get better.

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