Facebook Biggest Mistake Has Nothing to Do With Data

Never pick a fight with people who buy ink by the barrel – Mark Twain

Unless you’ve been living under a rock, you’re aware of the Facebook scandal. To quickly recap: data analysis and strategic communications firm Cambridge Analytica gained access to data from 270,000 Facebook accounts who opted-in and agreed to their terms.

However, due to lax oversight and/or a lack of concern, Facebook allowed Cambridge Analytica to mine data from those user’s friends, which did not agree to Cambridge Analytica’s terms. The difference between the two groups is significant, as in approximately 50 million people. Market Foolery, Motley Fool’s[i] podcast, covers the scandal in more detail.

In the media, the common narrative are users are angry about privacy concerns.

News flash: it was never about privacy and data concerns. The reason why I’m confident on this is that’s not the conversation we’re having right now. This is a clear contrast to the Equifax breach, which focused on how to protect yourself from stolen data. Here’s why Facebook is different:

1.       According to multiple sources, Cambridge Analytica was less CIA mind-manipulation system and more Keystone Cop. The New York Times wrote a scathing profile of Cambridge Analytica’s system, interviewing a dozen Republican consultants that found the service lacking at best. It appears to be a way for candidates to gain access to the deep pockets of Cambridge Analytica’s owner.

2.       Second, this data appears to be relatively benign[ii] – likes and personal information like name and geographical location – and was paired with significantly more data from other sources, some sourced from public records.  

When investing, often we are enamored with minute details when a simple framework can be just as insightful. To wit, the most effective CEOs are those who properly balance stakeholder conflicts – for Facebook, this includes users, journalists, advertisers, shareholders, and employees – while producing a sustainable profit. Recently, Facebook has mismanaged many of those key stakeholder relationships.

·         Users engagement has waned amid concerns Facebook’s use is harmful for well-being.

·         Advertisers -- Facebook’s real customers – are increasingly taking the company to task on a host of issues including faulty engagement metrics/ad fraud alongside brand safety and reputation issues.

·         Journalists have soured on the site due to unfruitful partnerships and the company’s dominant position in digital advertising, a key source of revenue for many media companies.

In the end it was the confluence of disaffected stakeholders that created the perfect storm that shaved off $50 billion of Facebook’s market capitalization ($9 billion from Zuckerberg alone).

In my humble opinion, here’s how this will shake out.

Headline risk will continue in the short-term as journalists chase clicks[iii] and are motivated by antipathy for the company.[iv] A few marginal users will close accounts in protest, but most will remain on the site. For the most part, advertisers were unaffected and will continue to pay as long as they consider the ad spend efficacious. In the long run, this will be a footnote in Facebook’s history.

That said, it would behoove Facebook to take a more-proactive approach to resolving stakeholder conflicts in the future, even if it means less profit in the short term.  

 

[i] Full disclosure (CFA stuff), I do have a business relationship with The Motley Fool but legitimately enjoy the podcast.

[ii] Hat tip to colleague Jordan Wathen for this.

[iii] Ironically, it’s Facebook’s digital advertising dominance that has created the scenario where digital journalists have to pile on to monetize rage clicks.

[iv] It doesn’t help that Cambridge Analytica was affiliated with the Trump campaign, as journalists are often a liberal lot.  

 

Jamal Carnette