Cambridge Analytica Scandal
Facebook was involved in one of the biggest data misuse and misappropriation event ever in March 2018. Cambridge Analytica founded by CEO Alexander Nix was a company that specialised in using data points collected from users on social media platforms. In Facebook’s case, the company targeted users to influence their political perceptions and overall ambience of the elections. The company employed the Global Science Research (GSR) who used a survey app which integrated into Facebook named, “thisisyourdigitallife” and collected data points of Facebook users. Crucially, the people who took the survey were paid and were told their data was being collected solely for academic purposes. The app however, went further into each of volunteer’s profile and gathered information about the friends of the volunteer without the consent of either the volunteer or the friend. The data harvested was then used to tailor political propaganda and it has been alleged that the data was used to influence the outcome of the 2016 US elections and even the Brexit referendum. Facebook has since come under heavy scrutiny of politicians and regulators who have summoned Mr Zuckerberg to provide explanations on several occasions. The aftermath of the scandal was hard felt at Facebook HQ as the news resulted in $119 billion drop in valuation of Facebook. Mr. Zuckerberg saw the value of his 17% share of Facebook drop from $86.5 billion to $70 billion sending him from 3rd richest man to 6th richest in a matter of days. Any future revelations of similar sorts could further damage the value of the business and will undoubtedly lead to increased scrutiny and control by the regulatory authorities.
Facebook Acquires Instagram
On April 9, 2012, Facebook announced that it had reached an agreement to acquire Instagram, a popular photo-sharing app for mobile devices. The total consideration for San Francisco-based Instagram was approximately $1 billion in a combination of cash and shares of Facebook. When Facebook acquired Instagram, the move was somewhat controversial as there was lack of confidence about its growth potential. Years later it is clear that the sceptics were wrong. Instagram now has more than 1 billion users and could reach more than 2 billion users within the next five years. Instagram would be worth more than $100 billion if it was an independent company. Instagram accounted for roughly 10% of Facebook’s revenue last year. This figure is expected to rise to 16% in coming years.
Initial Public Offering of Facebook
On May 18, 2012, Facebook held its Initial Public Offering(IPO). The IPO was the biggest in technology sector, with a peak market capitalization of over $104 billion. Media pundits called it a “cultural touchstone”. It quickly became apparent however, that the hype surrounding the IPO exceeded the actual appeal to investors. On the opening day the stock took a tumble and the price plummeted more than 40% over several months. The price reached a low of $20.01, down 47% from its offering price of $38.00. A reason for sudden fall in the stock price was the fact that Facebook’s early backers sold significant portions of their shares in the selloff. 57% of the shares came from Facebook insiders. In a typical IPO the percentage sale of insider sellers is less than 10%. Another factor for the decline was the decision by General Motor’s to pull $10 million in advertising from Facebook due to ineffectiveness. Eventually however, Facebook returned to its offering price by May next year based on an unexpected performance of Earnings Per Share of $0.13 as against expected $0.09 by the analysts. Fast forward six years and the stock has continuously performed well. A $1000 investment in Facebook on the day of IPO at $38 would be worth nearly $5500 as of early 2018.
Facebook Acquires Atlas
On February 28 2013, Facebook announced that it was acquiring Seattle based Atlas Advertiser Suite from Microsoft for $100 million. Atlas is an important tool for Campaign management and measurement for marketers and agencies. Acquiring of Atlas was aimed to integrate the system with Facebook infrastructure in a way that enhances the usability and profitability for current Facebook advertisers. Atlas was built to be used as an alternative to DART tracking system by Google which is used to track and monitor advertising campaigns across various platforms. Facebook can provide a platform to target real people across platforms more precisely. This means that advertisers can use Atlas and Facebook’s targeting precision in a manner which allowed greater reliability and efficiency.
Facebook Acquires WhatsApp
On February 19 2014, Facebook announced that it had reached a definitive agreement to acquire WhatsApp, a cross-platform mobile messaging company, for a total of approximately $16 billion, including $4 billion cash and approximately $12 billion worth of Facebook shares. At the time WhatsApp had 465 monthly active users (compared to Facebook’s 1.2 billion) and while it was still growing, it wasn’t particularly popular in the United States. In hindsight it seems that Facebook swooped in at the right time considering WhatsApp’s user base has more than tripled since. Today the most popular messaging service in the world connects more than 1.5 billion people, who send an astronomical 65 billion messages per day using WhatsApp’s mobile app. This acquisition was an important strategic move for Facebook as there was a good chance that a competitor such as Google would have been interested in buying out WhatsApp to jumpstart its late-to-the-game Hangouts messenger. WhatsApp in the hands of a rival could have posed serious threat to Facebook’s iron grip on social networking.
1. Data protection
The Information technology industry is particularly prone to cyber-attacks by parties seeking unauthorized access to data. Any failure to prevent such attacks or substantial loss of data could be detrimental to businesses’ reputation and therefore have a significant impact on investor interest and future revenues. On May 25 2018 the General Data Protection Regulation (GDPR) came into force. The underlying aim of the policy is to limit the amount of personal data that can be stored by online platforms such as Facebook while at the same time to enhance transparency and user control. It is obligatory for Facebook to ask for consent, or present an “opt-out” choice, at different times and for different layers of information to give greater amount of control to the user. Facebook has invested heavily in beefing up its data security and policies, for good reason. Failure to comply with GDPR requirements can now result in penalties of up to 4% of the global annual turnover of the preceding financial year. The potential cost of data breaches can now run into billions for big tech firms so it presents an on-going and continuous challenge. Albeit, the cautionary statement for financial impact of GDPR was put out by Facebook in last quarter of 2016, the effect still hasn’t shown up on the company’s revenue statements. The future implications of the tightening policies in various regions will require Facebook to evolve their data collection and processing policies at the same rate too.
2. Political Controversies
Facebook’s role in Rohingya: In March 2018 the United Nations called out Facebook for its role in instigating violence and not taking prompt evasive actions to contain the spreading of hate speech against the members of the Rohingya community of Burma. Facebook was criticised for its negligence through its inability and failure to detect local dialects effectively. This meant its automatic systems could not sufficiently recognise racist and abusive content. Top company officials admit that the current systems are incapable of handling the volume and type of content that is being shared in the region. For instance, a Burmese sentence which read “Kill the kalars that you see in Myanmar; none of them should be left alive” when ran through Facebook’s translation software, translates to “I shouldn’t have a rainbow in Myanmar”. The current system is dependent on users flagging objectionable material which is then sent to Facebook HQ, none of which are physically in Myanmar, for review. Facebook must develop a proactive system which quickly detects inappropriate content, in the way done for English content, and takes necessary action. Failure to do so could damage its relationship with Myanmar and several potential untapped markets too.
Western Politics: In the wake of the Cambridge Analytica scandal (see biggest moments) politicians in the western world are quickly losing patience with the tech giant. Allegedly, Russia created thousands of fake Facebook user accounts to influence the 2016 Presidential Election in favour of Donald Trump. Data harvested in the Cambridge Analytica scandal was also used to promote pro-Trump propaganda. In April 2018, Mark Zuckerberg was grilled by the US congress over the Cambridge Analytica scandal. Zuckerberg was apologetic and committed to improve the protection of user data. This “guarantee” was far from sufficient for the political world. US congress has hinted a bringing in regulation to curb the colossal social power held by social media giants. In the UK, Zuckerberg failed to appear before the UK parliament both in April and November. Instead, Richard Allan, director for Policy in Europe filled in, to the dismay of Parliament. The more agitated politicians become with Facebook, the more draconian the political clampdown will be. Facebook’s encroachment into the global political sphere poses a significant challenge for the firm due to the huge responsibilities it has rightfully been forced to undertake.
3. User growth and increased costs:
Facebook users now total 1.47 billion – that is still a growth of 11 percent over 2017 but is the slowest since 2011. The growth was driven by countries such as India, Indonesia and Philippines. Growth in the U.S and Canada remained flat at about 185 million users. Conversely, since the implementation of GDPR laws in Europe the Monthly Active Users (MAU) fell by a million. Despite the changes, Facebook says that most of the people were willing to be subjected to receiving relevant ads at the cost of sharing data. Revenues have fallen by 7% this year and Facebook believes that they will only touch high single digits for this year. In addition, the company’s costs have increased by 50% on the back of rise in staff by 47%. Facebook says that most of the recruitment comes in a drive to strengthen security in all aspects. Despite the increased costs, Facebook plans on accelerating its acquisition drive to better position itself for long term growth. These expansions could however, have a negative short-term effect on the financial performance of the company.
Facebook holds its position as an industry leader when it comes to social media irrespective of growing competition from Twitter, Snapchat and, Google. The exponential growth of its share price indicates the fundamental strength of the business, at least in the short/mid-term. The consistent increases in monthly active users (MAU) and daily active users (DAU) shows that Facebook remains capable of successfully expanding into new markets, despite the market appearing saturated. MAU for combined Facebook products including Instagram, WhatsApp and Oculus has now crossed 2 Billion. This presents Facebook with opportunities to boost their top line growth by expanding their current product line. Mr. Zuckerberg pointed towards accelerated spending in capital expenditure and recruitment to make sure that Facebook is better positioned to monetize its newer features including Instagram TV and Facebook Watch. The “Stories” feature which the company only recently began to monetize remains to be inefficiently monetized and presents a potential positive future growth driver for the social media giant.
Facebook remains unavailable in some major markets such as China and Bangladesh where penetration could lead to huge revenue boosts for the company. Despite the strong stock performance, the greatest challenge will be to remain on the right side of politicians and regulators who are becoming increasingly frustrated with the firm. Scandals such as the Cambridge Analytica case have triggered a crackdown on social media companies and this could have significant implications for Facebook if and when action is taken. Regardless, Facebook has been on “Buy” recommendation of major industry analysts as the cautionary slow-down in ad revenues and the impact of regulations such as GDPR are yet to appear in the company’s financial statements. Facebook is praised by the industry for continuous innovation, expansion and to be able to spot winning start-ups, sweeping them at the right time providing the investors with a healthy Return on Investment (ROI) and proving Facebook to be a long-term winner in the industry.