The high price of privacy - Facebook sees $150 billion wiped from its market cap

Profile picture for user slauchlan By Stuart Lauchlan July 25, 2018
Summary:
Privacy comes at a high cost as the past catches up with Facebook - and not before time.

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Sandberg and Zuckerberg

What price privacy? A high one for Facebook as the firm saw $150 billion wiped off its market capitalization yesterday as the firm warned that tougher privacy regimes would eat into future profit margins.

It was the first real sign that the events of recent months around privacy scandals, as well as the introduction of GDPR (General Data Protection Regulation), are finally catching up with the firm.

It was pretty much bad news all round as the company turned in second quarter numbers that featured the slowest sales growth in three years, 42% year-on-year to $13.2 billion. More alarming for Facebook is that it also reported the sixth straight quarter of decline in user numbers, down to 1.5 billion worldwide.

Daily active users in Europe declined by 3 million as GDPR kicked in, although CEO Mark Zuckerberg made a brave attempt at a ‘glass half full’ spin when talking to analysts:

GDPR was an important moment for our industry. We did see a decline in monthly actives in Europe, down by about 1 million people as a result. At the same time, it was encouraging to see the vast majority of people affirm that they want us to use context, including from websites they visit, to make their ads more relevant and improve their overall product experience.

In reality, it's too early to tell just how badly GDPR will impact Facebook, admitted Chief Operating Officer Sheryl Sandberg:

GDPR has not had a revenue impact, but we also recognize it wasn't fully rolled out this quarter. It was very encouraging for us to see that the vast majority of people affirmed that they want us to use information, including from the websites they visit, to make their ads more relevant. But, as we look further out, we recognize that there's still risk, and we're going to watch closely. Advertisers are still adapting to the changes, so it's early to know the longer-term impact. And things like GDPR and other privacy changes that may happen from us or may happen with regulation could make ads more relevant.

Going to be good

Overall, Sandberg  was on a mission to sell the idea that Facebook has learned its lesson and is a reformed character that is a transparency champion:

We are working to ensure that Facebook is a safe place for people and businesses. We've taken strong steps to address a number of issues, including election integrity, fake news and protecting people's information. One of the most important things we can do to affect change is to increase transparency because transparency leads to greater accountability.

For example, when anyone can see any ad on Facebook, advertisers have to stand behind the ads they run. Transparency also allows us to get more input from our community and from experts around the world, so that we can find and fix problems. We wish we could find everything ourselves, but we never will, so we're building tools to make it easier for people to report issues to us.

This quarter we took major steps to make advertising in pages more transparent. Now anyone can see all the ads a page is running across Facebook, Instagram, Messenger and Audience Network. You can also learn more about pages even if they don't advertise. You can see when a page was created and if they've changed their name.

The other angle on this is around the role that Facebook may or may not have played in influencing electoral votes, such as the US Presidential Election or the Brexit vote in the UK. Sandberg said:

For political and issue ads, we're going even further. Advertisers placing ads with political content are now required to verify their identity and location. These ads will be labeled with a disclosure about who paid for them and saved in a searchable archive.

The vast majority of ads on Facebook are run by legitimate organizations from small businesses looking for new customers to advocacy groups raising money for their causes. But we've seen that bad actors can misuse our products too, so we're erring on the side of transparency. We're being intentionally broad in our interpretation of political and issue ads. This includes ads for books about politicians and brand campaigns that touch on national issues.

For his part, Zuckerberg insisted that with the US mid-term elections looming in November, Facebook would have clean hands:

We're much more confident that we're going to get this right for the elections in the 2018, which include the U.S. midterms, but also the elections in Brazil and upcoming elections in early-2019 in India and the EU. And the reason why we're confident that we can get this right is because there have been several elections since the 2016 ones that have had much better results, including the French presidential election, the German elections, the Alabama special election, and the Mexican election about a month ago.

We've built the playbook out that has included building AI tools to identify thousands of fake accounts and groups and pages that violate the policies. It's included growing the security and content review teams to 20,000 people to be able to handle the volume of work that we need to do. And it includes a lot of the transparency work around advertising in general, but also the political and issue ads archive and verifying all advertisers who are trying to run political and issue ads.

There are a number of other things that we're doing too, including creating an external program for independent academics to study how the impact of social media and how foreign governments try to interfere in elections. And that will have a longer-term impact as well.

But the short answer here is we've been very focused on this. 2018 is a big year. And because of the successful results that we've seen in a number of elections recently, we feel like our road map and our level of preparation is much higher now than it has been. And we feel relatively confident going into these elections.

My take

Hmmm - is “relatively confident” good enough? Time will tell. For now, Facebook has taken a long-overdue pasting where it hurts - on the bottom line. It had to happen. Zuckerberg has breezed through the ‘show trials’ in the US and in Europe, emerging essentially unscathed after parroting well-rehearsed pleas of mea culpa en route. Now Wall Street is spooked, it’s going to take more than ‘I’m sorry’ to restore balance.