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.
Libra is described as ‘a simple global currency and financial structure that empowers billions of people’ in the Libra Association’s white paper. Similar to other cryptocurrencies, such as Bitcoin and Ethereum, Libra will be encrypted and transactions will be recorded on blockchain. However, this digital currency differs from others as it will be backed by real assets (‘bank deposits and government securities from stable and reputable central banks’) and will have the Libra Association acting as it’s central regulating authority. As a founding member of the Libra Association, Facebook believes that the digital currency will make transferring money online a cheaper and easier process. Through Facebook’s new subsidiary Calibra, a digital wallet that will be available in Messenger, WhatsApp and as a standalone app, users will be able to save, spend and send Libra instantly, without having an active bank account. This is expected to launch as early as 2020, however, there are various hurdles that Facebook must overcome for this to be a successful endeavour.
Facebook has been criticised in regards to data privacy due to the Cambridge Analytica scandal and many are worried about how Calibra will store its user’s data. Facebook have stated that Calibra’s data will be stored separately from Facebook and data will only be shared with third parties in limited cases. Coupled with concerns that Facebook will be a dominant power in the regulatory body, the company will have to convince many that this is not a ploy to gain access to their user’s financial information. Additionally, many countries believe Libra will undermine the financial stability of sovereign currencies as it aims to compete with those issued by central banks. This has resulted in France and Germany blocking Libra, stating that ‘no private entity can claim monetary power, which is inherent to the sovereignty of nations’ in September 2019. Consequently, many of the original corporate partners in the Libra Association, including PayPal, Ebay, Stripe, MasterCard and Visa, dropped out in October 2019. The association will have to find other companies that have similar expert knowledge in payments and transfers technology to mitigate these losses. Finally, legislators are concerned that Libra will encourage money laundering, fraud and other scams due to the anonymity of cryptocurrency transactions. Overall, these issues must be adequately addressed by Facebook before Libra is launched as it risks altering the financial landscape greatly.
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 2.45 billion – this is still a growth of 9% over 2017 but is slower in comparison to previous years. The growth was driven by countries in the Asia-Pacific region, such as India, Indonesia and the Philippines. Growth in the U.S and Canada remained at about 242 million users in 2018. Conversely, Facebook daily active users have increased in Europe after the decline in 2018 due to the implementation of GDPR laws. This highlights the fact that most people are still willing to be subjected to receiving relevant ads at the cost of sharing data. Facebook revenue has fallen from 30% in 2018 to 28% in 2019 which is an improvement from the 7% drop in 2017. In addition, the company’s costs have increased 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.