Zuckerberg at bay: Is Facebook too big to fail? | Analysis

Zuckerberg at bay: Is Facebook too big to fail? | Analysis

Internet of Business says

The question ‘Is Facebook to big to fail?’ is on Wall Street’s mind, in the wake of a torrid week for the social network.

On Wednesday night, Facebook announced quarterly results that many business leaders would give their right arms for: Q2 revenue growth of 42 percent year on year to $13.2 billion (38 percent in constant currency), $13 billion of which came from advertising.

Facebook reported 2.2 billion monthly active users (MAUs), or one-third of the world’s population, and almost 1.5 billion people using the platform every day (DAUs) – 20 percent of the population.

However, by Friday CEO Mark Zuckerberg and other executives found themselves facing a lawsuit in the wake of disappointing trends within the results that saw $120 billion wiped from the company’s shares on Thursday – the biggest ever one-day fall in a company’s market capitalisation, according to the Guardian.

Shareholder James Kacouris accused Zuckerberg and CFO David Wehner of making misleading statements about, or failing to disclose, slowing revenue growth, falling operating margins, and declines in active users. By the end of the week, Facebook shares had lost 20 percent of their value.

However, the company’s valuation is still higher than it was after the US Federal Trade Commission began investigating the company’s privacy practices following the Cambridge Analytica scandal.

So what’s going on?

The Europe problem

“European ad revenue growth decelerated more quickly than other regions and was impacted primarily by reduced currency tailwinds and, to a lesser extent, the rollout of GDPR,” said Wehner in the company’s earnings call to analysts.

Facebook is also becoming a much more expensive business to operate, he said: “Total expenses were $7.4 billion, up 50 percent. We ended Q2 with over 30,000 full-time employees, up 47 percent.”

So the uncomfortable truth for the social network is that it is being forced to take on more and more human staff to help tackle the problems it is facing with misinformation, election interference, fake accounts, and data privacy issues, revealing the deep problems that can hit any highly automated businesses in a messy human world.

These trends are likely to continue for the foreseeable future.

Another uncomfortable truth is that, on IPO, Facebook had revenues of roughly one dollar per user. A couple of years ago, they stood at about $40 per user. Today, the run rate appears to be about $25 per user, based on its current quarterly revenues.

Slowing growth

Facebook revealed that, as a result of its soaring costs, growth would continue to slow throughout the second half of the year, shifting the company from a period of hyper-growth (40 percent-plus year on year) to merely high growth – a problem that many companies would still appreciate having.

But that is to ignore the fact that Facebook is a bull being ridden by people who want to get rich in a spectacular, low-risk fashion – one of the problems facing an economy in which ‘now’ is measured over shorter and shorter timescales, and success needs to be big and showy rather than flirt with the tedious predictability of compound interest.

Anyone who thought this kind of investor behaviour was consigned to history by the 2008-09 crash was badly misinformed.

“We expect our revenue growth rates to decline by high single-digit percentages from prior quarters sequentially in both Q3 and Q4,” acknowledged Wehner.

Is GDPR really to blame?

Zuckerberg, meanwhile, was quick to point to privacy regulations as being one of the main culprits – a extraordinarily disingenuous move in the current political context for the company.

“GDPR was an important moment for our industry,” he said. “We did see a decline in monthly actives in Europe, down by about one million people as a result. And 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.

“Looking ahead, we will continue to invest heavily in security and privacy because we have a responsibility to keep people safe. But, as I’ve said on past calls, we’re investing so much in security that it will significantly impact our profitability. We’re starting to see that this quarter.

“But, in addition to this, we also have a responsibility to keep building services that bring people closer together in new ways as well.”

Another challenge for Facebook is that GDPR-style regulation in the US is becoming ever more likely, in the wake of California’s decision to introduce new data privacy laws, which could become a de facto standard across the the country. Facebook, Google, and others, opposed the new rules, which come into force in 2020, but before then will throw money at watering them down – assuming president Trump doesn’t declare war on them first.

A social platform tax

But Facebook’s problems don’t end there. At the weekend, British MPs called for a levy on social platforms such as Facebook and Twitter to pay for the costs of policing them, following revelations about Russian interference in the Brexit referendum, the US election, and other campaigns within the US.

Damian Collins, Conservative chair of the UK’sDigital Culture Media and Sport (DCMS) Committee, said that Parliament has so far only uncovered “the tip of the iceberg” of Russian interference in British politics, and yet the UK is still pursuing the separatist policy that Russia poured money into influencing.

The DCMS report was intended for publication on Sunday, but was leaked on Friday by Dominic Cummings, former head of the UK’s Vote Leave campaign. Cummings was accused of “contemptuous behaviour” in the document.

“Companies like Facebook made it easy for developers to scrape user data and to deploy it in other campaigns without their knowledge or consent,” said DCMS’ Collins, in an official statement released on Sunday.

“They must be made responsible, and liable, for the way in which harmful and misleading content is shared on their sites.”

However, UK technology industry association, techUK, has responded that it will be difficult to hold social networks to a higher standard than the country’s newspapers or politicians – hardly a vote of confidence, given the sustained levels of dishonesty among both in the run-up to the referendum.

“Sometimes decisions about what is and isn’t ‘fake’ will be highly political and contentious,” said techUK’s deputy director, Antony Walker. “Determining what is and is not accurate information is not always straightforward and both traditional media and elected politicians can often be sources of news that is inaccurate or untrue.”

AI vs a democratic crisis

“We are facing nothing less than a crisis in our democracy – based on the systematic manipulation of data to support the relentless targeting of citizens […] by campaigns of disinformation and messages of hate,” said DCMS’ Collins.

But Facebook’s Zuckerberg believes things can only get better. “Over the next 18 months, there are important elections beyond the US in Brazil, India, and the EU, and these will all be real tests for Facebook,” he said.

“But I’m confident that we will get this right given our results during last year’s French and German elections, the Alabama special election, as well as this month’s presidential election in Mexico, where our systems found and removed thousands of fake account pages and groups that violated our policies.

“Of course, security is not a problem that you ever fully solve. We face sophisticated well-funded adversaries who are constantly evolving. But, during each election, we learn and improve too.

“We’re also making progress in the fight against misinformation. We’re getting rid of the financial incentives for spammers to create fake news, much of which is economically motivated. We stopped pages that repeatedly spread false information from buying ads. And we also use AI to prevent fake accounts that generate a lot of the problematic content from ever being created in the first place.

“Our investments in AI mean that we can now remove more bad content quickly because we don’t have to wait until after it’s reported. It frees our reviewers to work on cases where human expertise is needed to understand the context or nuance of a situation.

“In Q1, for example, almost 90 percent of graphic violence content that we removed or added a warning label to was identified using AI. This shift from reactive to proactive detection is a big change, and it will make Facebook safer for everyone.

“Now, in light of increased investment in security, we could choose to decrease our investment in new product areas, but we’re not going to, because that wouldn’t be the right way to serve our community and because we run this company for the long term, not for the next quarter.”

Unfortunately, his bull-riding investors disagree, which is why the company’s problems are likely to continue long into the future and a certain breed of thrill-seeking investor will keep baying for blood. Meanwhile, right-wing thinkers are now accusing the social network of a witch hunt against conservative policies – a case of damned if you do, damned if you don’t for the beleaguered company.

Right now, Facebook is a tired bull with dozens of swords in its back. Whether it can shake them off and recover from the flesh wounds will come down to one critical factor: the crowd – or rather, Facebook’s users.

As long as the network can keep faith with them, it will survive. But hyper-growth can only go so far in a world of 7.6 billion people, with 1.4 billion of them living in China.

Facebook claims to be a global platform, but the core issue it faces is that it is a Californian enterprise at odds with its own state’s data protection policy, while trying – and failing – to present a neutral face to the world.

In short, the situation it finds itself in was always going to happen. It’s major error was not to see it coming, and to allow itself to become a pawn in a complex political game: a sign of overwhelming naivety on Zuckerberg’s part. It seems the multibillionaire is still a student at heart.

Chris Middleton
Chris Middleton is former editor of Internet of Business, and now a key contributor to the title. He specialises in robotics, AI, the IoT, blockchain, and technology strategy. He is also former editor of Computing, Computer Business Review, and Professional Outsourcing, among others, and is a contributing editor to Diginomica, Computing, and Hack & Craft News. Over the years, he has also written for Computer Weekly, The Guardian, The Times, PC World, I-CIO, V3, The Inquirer, and Blockchain News, among many others. He is an acknowledged robotics expert who has appeared on BBC TV and radio, ITN, and Talk Radio, and is probably the only tech journalist in the UK to own a number of humanoid robots, which he hires out to events, exhibitions, universities, and schools. Chris has also chaired conferences on robotics, AI, IoT investment, digital marketing, blockchain, and space technologies, and has spoken at numerous other events.