Dealing with Risk and Uncertainty: Facebook

Dealing with Risk and Uncertainty: Facebook
Name
Course
Professor’s Name
Date
Dealing with Risk and Uncertainty: Facebook
Businesses encounter risk and uncertainty which affect their operations and profitability. These risks and uncertainties are unforeseen and unavoidable. However, businesses must put in place systems and protocols to deal with risks and uncertainties to enhance their survival in a competitive and sometimes volatile business environment. According to Sharma, Leung, Kingshott, Davcik, and Cardinali (1), risk and uncertainty stem from an inability to correctly predict something, mostly arising from a lack of knowledge about an issue. Risk and uncertainty can throw businesses off balance, which is why it is important to have measures put in place to manage any risk and uncertainty. Sharma, Leung, Kingshott, Davcik, and Cardinali (1) further posit that risk and uncertainty can be due to environmental, industry, and firm-specific factors. This paper explores the risk and uncertainty that Facebook has been facing since the beginning of 2021. It will outline the actions that Facebook has taken to deal with this uncertainty and propose ways in which Facebook can mitigate the risk and uncertainty for its bottom line. Further, the paper will explore the adverse selection, moral hazard, and principal-agent problems affecting Facebook, as well as its organizational structure and how it can be changed to improve profitability.
Facebook: Uncertainty and Revenue Generation
Facebook is a United States (U.S.) multinational technology company that was founded in 2004. Primarily, Facebook allows users to connect with their loved ones by sharing messages, photos, and videos. Its mission is to “Give people the power to build community and bring the world closer together (Facebook, 2).” Over the years, it has gained prominence to become one of the social media site companies with the widest global coverage.
Facebook’s main products are social networking sites such as Facebook, WhatsApp, Facebook Messenger, and Instagram (Facebook, 2). These networking sites are available to users for free; users only need to install the applications on their smartphones or computers and register using their emails or phone numbers. Other products include digital gaming sites such as Oculus and digital financial wallets such as Novi (Facebook, 2). To generate revenues, Facebook relies on advertisements which it sells to marketers. According to Black (3), the company generates about 99% of its revenue from advertisements. More than 2 billion people around the world use Facebook, WhatsApp, and Instagram, among other Facebook social media sites. This means that marketers can gain access to over 2 billion people, which is why most of them are willing to buy advertisements space from Facebook. What Facebook does is that it directly targets each user with advertisements (Black, 3). The cost of advertisement depends on targeting as well as engagement from each advertisement.
Facebook has experienced significant growth, even during the COVID-19 pandemic, because more businesses have embraced online commerce, making online advertising a priority (Facebook, 4). Also, there has been a shift in consumer demand from services to products as products can be purchased via online platforms. As a result, Facebook’s revenue from advertising has grown significantly over the last few years and more so in 2020. The revenue from advertising grew from $69, 655 million in 2019 to $ 84, 169 million in 2020 (Facebook, 4). This has enhanced Facebook’s profitability.
However, in 2021, Facebook’s primary source of revenue came under threat following changes in the advertisement market. Specifically, Facebook reported that it was facing significant uncertainty because of changes in advertisement targeting in platforms, specifically Apple’s recent iOS updates (Facebook, 5). Many users who use iPhones to access social media sites such as Facebook and Instagram have been provided with an opt-in option that allows them to decline or accept tracking by advertisers. According to Wagner (6), people are only allowing apps to track their online activities about 25% of the time, which means that they are denying advertisers the opportunity for targeted advertising. Facebook has been greatly affected by this iOS update for an opt-in option and expects its revenue from advertisement to decline in the third and fourth quarters of 2021 (Facebook, 5). As more iPhone users download this new iOS, Facebook’s advertisements will suffer. Advertisers will be unable to target new clients and re-target existing clients and it is estimated that Facebook’s revenue may decline by up to 13% in 2021 (Wagner, 6). As more users deny Facebook the ability to track their online activities Facebook will lose access to the data it has been using in targeted advertisements. Consequently, marketers will be very skeptical about buying advertisements from Facebook.
Recent Actions Dealing with Risk and Uncertainty
Facebook’s current uncertainty can be considered an industry uncertainty. According to Sharma, Leung, Kingshott, Davcik, and Cardinali (1), industry uncertainty affects businesses in the same industry and includes factors such as competition, demand, and technology. The change in the platform (iOS updates) not only affects Facebook but also other companies that sell mobile advertisements to generate revenue. The current uncertainty affects the demand for advertisements on Facebook, which will reduce Facebook’s revenue. According to Behl and Nayak (7), one of the actions in the management of risk and uncertainty involves assessing the potential impact of the risk and uncertainty on the business. Facebook has already assessed the potential impact (a decline in the revenue generated from advertising) and even anticipates when it will start experiencing this decline.
Another action involves responding to the risk and uncertainty by accepting, avoiding, or decreasing the impact of risk and uncertainty (Behl & Nayak, 7). Facebook’s response has been to decrease the impact of uncertainty. Specifically, Facebook has responded by encouraging more businesses to sell products directly on Facebook and Instagram (Rodriguez, 8). The company has introduced Facebook and Instagram Shops that allow businesses to sell directly to users on Facebook and Instagram. This shift will ensure that more commerce is conducted on Facebook’s social media platforms, which will become a source of revenue for the company.
Improving Risk Management
The uncertainty that Facebook is facing is industry-specific and poses a business risk to the company. According to Shao, et al. (9), business risk involves fluctuations of revenue streams for a business, which ultimately affects its profitability and survival. Facebook’s business risk stems from its over-reliance on one revenue stream. As stated earlier, it derives most of its revenue from advertising and the current uncertainty threatens this revenue stream. As a result, there is a business risk that if not well managed, could negatively affect Facebook’s survival. To improve its risk management, Facebook needs to incorporate other sources of revenue to reduce its dependence on advertising. It should diversify to ensure that it has multiple sources of revenue. As revealed by Shao, et al. (9), diversification involves having different income flows, which reduces sales and profit volatility and ultimately, reduces business risks. Facebook can focus on generating income from other sources. For instance, it can charge monthly subscription fees to users using any of the social media platforms. It already has billions of users and even though the number of users would reduce significantly if subscription fees were introduced, there would still be more users willing to pay to use one or all of its many platforms. Alternatively, Facebook can introduce more products that can g...