Facebook (FB 1.83%) CEO Mark Zuckerberg didn't mince his words on the company's recent earnings call.
"I do want to highlight that we increasingly see Apple (AAPL 4.08%) as one of our biggest competitors," the Facebook chief said.
It's rare for company executives to speak in such direct terms about rivals, especially on earnings calls, as management usually seeks to downplay prospective competition and generally doesn't mention competitors by name.
This isn't the first time Apple and Facebook have thrown shade at each other. Referencing Facebook's use of tracking tools, Apple CEO Tim Cook called such companies "totally out of control" in 2018, and responded to Zuckerberg's recent call-out by saying, "Technology does not need vast troves of personal data" in order to succeed, another reference to Facebook.
The two companies have long feuded over privacy issues, but the stakes are about to get a lot higher with billions of dollars now being fought over in this battle.
Uncertainty ahead for Facebook
Facebook destroyed analyst estimates in its fourth-quarter report, but the stock price still fell on the report as management warned of "significant uncertainty ahead," primarily because of ad targeting headwinds tied to Apple's rollout of iOS 14, its new mobile operating software.
iOS 14 includes a number of changes designed to increase user privacy and control over their data. Apps like Facebook will now have to ask users for permission to track them or to use the device's advertising identifier, which allows the kind of ad targeting that is a central part of Facebook's ad product.
For Facebook, this change is introducing an unusual level of uncertainty in its business. And it's warned its millions of advertisers repeatedly of the disruptions that iOS 14 is likely to cause. On the earnings call, Zuckerberg laid the blame on Apple:
Apple has every incentive to use their dominant platform position to interfere with how our apps and other apps work, which they regularly do to preference their own. This impacts the growth of millions of businesses around the world, including with the upcoming iOS 14 changes, many small businesses will no longer be able to reach their customers with targeted ads. Apple may say that they're doing this to help people, but the moves clearly track their competitive interests.
Regarding the removal of ad targeting tools, Chief Operating Officer Sheryl Sandberg added: "Small businesses are really concerned because they're worried that they're not going to be able to buy effective advertising. If all personalized ads went away, small businesses would see a 60 percent cut in website sales."
Small businesses make up the bulk of Facebook's 10 million advertisers, driving the vast majority of the company's revenue, and those businesses are clearly worried about the changes.
In an interview last week, Dee Deng, CEO of Right Hook Digital, a digital ad agency in Australia, compared the threat to what small businesses just faced with the COVID-19 pandemic, saying: "There are so many similarities between this and [COVID-19]. New phenomenon, uncertain future, people freak out and stem their spend as a knee jerk." He also told me he expects more inexperienced advertisers to be driven off of Facebook as the economics change and said the policy could even lead to weaker businesses failing in some cases.
Facebook's worst-case scenario of a 60% drop in return on advertising spending would be disruptive or even catastrophic to many of the businesses that depend on the platform. The company is hearing those concerns right now and responding accordingly.
For Facebook, which is often called a monopolist itself, Apple serves as a useful foil. The social media giant often casts itself as a hero of small businesses, providing free and paid tools that millions of small businesses depend on, and Sandberg shares success stories of small businesses on Facebook on every earnings call.
Positioning itself on the side of small businesses is a smart strategy for a company that's often at the center of controversy and antitrust inquiries more recently, as small businesses are crucial to the economy and it's good politics to claim to be on their side.
Based on Apple's telling of this saga, Facebook is invading user privacy without their permission, but according to Facebook, this strategy is in the best interest of millions of small businesses. The company also says that users prefer ads that are relevant to them.
By blaming Apple, the company also portrays itself as a victim of even a larger tech giant that's harming Facebook in order to advantage its own apps like iMessage. Apple is also the subject of an antitrust investigation, particularly regarding its relationship with apps, so it's a smart argument for Facebook to make.
What it means for Facebook investors
It's hard to doubt Facebook's business after the quarter it just reported. Revenue jumped 33% year over year to $28.1 billion, and operating income jumped 44% to $12.8 billion, delivering a fat operating margin of 46%.
However, the company faces a number of risks ahead, including the potential for increased regulation and the threat of another backlash like the advertiser boycott last year, but management seems most concerned about the impacts of iOS 14.
The good news is Facebook's guidance doesn't seem to anticipate a major impact from the rollout and even calls for accelerated growth through the first half of the year as it laps the worst of the pandemic. It did, however, anticipate slower growth in the second half of the year and expected the disruption for iOS 14 to begin by the end of the first quarter.
Investors should also remember that Facebook has been nimble before when it needed to adapt, whether that was transitioning to mobile in the company's early days as a publicly traded company, or changes it made in response to Russian hacking of the 2016 election and the Cambridge Analytica scandal. Facebook surely won't be standing still this time around, either, as it will adjust its algorithms and continue to build out new features like e-commerce.
Overall, the issue deserves attention from investors, but it's not a reason to sell, especially given the solid value in the stock. Keep an eye on the iOS 14 rollout in the coming months as tensions with Apple are only going to heat up from here.