Facebook Inc. (NasdaqGS:FB) is in a heap of trouble.
Users are deleting their accounts and threatening a class-action suit.
Congress wants CEO Mark Zuckerberg to testify before them.
U.K. regulators could file charges against the company.
And, worst of all, Facebook likely violated a 2011 consent agreement with the FTC (Federal Trade Commission) to safeguard users’ personal information and could be subject to trillions of dollars in fines.
Here’s the fiasco facing Facebook, what it means for its once highflying stock price, and the far more insidious things that are going on behind the scenes.
Zuck Let Hackers into His Network
What looks like a new problem is actually Facebook’s business model.
The current firestorm in front of Facebook, which over the past two weeks knocked $100 billion off the company’s equity value, centers around British data-mining company, Cambridge Analytica.
Cambridge Analytica’s co-founder, Christopher Wylie, for reasons no one’s sure about, blew the whistle on his company after they got 270,000 Facebook users’ information (obtained legally with their consent). Then through those users, the company illegally acquired personal data on 50 million of their Facebook friends.
Rather than mining all that information to figure out how to hard-target advertisements to users, Cambridge used personal data to create “psychographic profiles” to target users with political ads, news, and who knows what else, to try to influence how they might vote in elections.
Cambridge sold data to Donald Trump’s campaign, to the “Vote Yes on Brexit” campaign, to politicians in Kenya, and probably other political entities around the world.
The outrage over Facebook letting Cambridge “hack” into its databases, as Facebook’s Mark Zuckerberg called the breech, is what’s front and center today. What Cambridge did, with whom, to what ends, and how effective it may have been is another story.
#DeleteFacebook
Facebook’s in trouble because its business model includes allowing advertisers and others access to its databases. That’s how they sell tens of billions of dollars’ worth of ads a year. Facebook is paid by advertisers because of their ability to target ads.
That’s all fine and good when someone’s trying to sell a pair of sneakers or a vacation package; not when someone’s trying to influence democratic processes – like voting.
High profile Facebook users like Elon Musk, his Tesla Inc. (NasdaqGS:TSLA) car company and his SpaceX company have publicly deleted their Facebook pages. So has Playboy. There’s a huge #DeleteFacebook movement.
Facebook’s earnings come out in early May. We’ll see then what’s happened to user engagement, total subscribers, and to ad revenue. If they’re all off, and they could be, Facebook’s stock is headed even further south.
The stock’s already been hit as investors flee the unknown. And that’s not about users and ad dollars.
Regulators in the U.S. and around the world are looking at Facebook and likely to file charges against the company for its part in allowing Cambridge to continue doing what Facebook knew it was doing.
Things aren’t looking good for Zuckerberg and company because this isn’t the first time the company’s been in trouble for playing fast and loose with user information.
There’s Even More Beneath the Surface
At the time this all started, which was when a Cambridge University data analytics professor created an app called “thisisyourdigitallife” to gather research on users who granted access to their Facebook information, Facebook’s policy allowed for the collection of friends’ data by app creators and academics. Selling data to third parties or using it for advertising wasn’t prohibited.
However, in 2015, Facebook found out the researcher’s company violated its policies when it passed data onto Cambridge Analytica. In March of 2015, Facebook said it had been assured that Cambridge Analytica, Kogan (the researcher), and Christopher Wylie had deleted the data.
Facebook never told users their data was hijacked and took “limited steps to recover and secure the private information of more than 50 million individuals,” according to the London Observer newspaper.
The thisisyourdigitallife app was removed from Facebook in 2015, but Facebook didn’t suspend Cambridge Analytica and SCL Group – the firm that serviced contracts won by Cambridge Analytica until March 16, four days after the Observer contacted Facebook for comment on the breech it reported.
On top of the political blaze and likely fallout Facebook’s going to face for years to come, it’s potentially facing a more immediate problem.
If Facebook violated its 2011 consent decree with the FTC to not share personal user information, it could be subject to fines of up to $40,000 per incident. That per incident number times 50 million users, well, it’s astronomical.
David Vladeck, formerly director of the FTC’s Bureau of Consumer Protection, who oversaw the investigation of alleged privacy violations by Facebook and the subsequent consent decree resolving the case in 2011, recently said to the Washington Post about Facebook’s sharing of data with Cambridge Analytica “raises serious questions about compliance with the FTC consent decree.”
Jessica Rich, former deputy director for the Bureau of Consumer Protection, who oversaw the FTC’s privacy program and also led the investigation into Facebook before the 2011 consent decree, said in an e-mail to the Washington Post, “Depending on how all the facts shake out, Facebook’s actions could violate any or all of [the consent decree] provisions, to the tune of many millions of dollars in penalties. They could also constitute violations of both US and EU laws. Facebook can look forward to multiple investigations and potentially a whole lot of liability here.”
Wednesday morning, Sens. Amy Klobuchar, D-Minn., and John Kennedy, R-La., wrote this letter to the chairman of the Senate Judiciary Committee, Richard Grassley, calling for hearings:
Dear Chairman Grassley:
We write to express serious concern regarding recent reports that data from millions of Americans was misused in order to influence voters, and to urge you to convene a hearing with the CEOs of major technology companies – including Facebook, Google, and Twitter – regarding the security of Americans’ data in light of this significant breach.
Reports indicate that private information from the Facebook profiles of more than 50 million users – representing nearly a quarter of potential U.S. voters in 2016 – was taken to conduct sophisticated psychological targeting for political ads in order to influence voters. The reports further indicate that Facebook knew about this breach more than two years ago and failed to acknowledge it and take swift and meaningful action.
It is for these reasons that we request that you announce a hearing of the Judiciary Committee at which Senators can publicly question the CEOs of technology companies. We would be happy to discuss this matter with you further and we appreciate your consideration of this request.
Make no mistake about it, Facebook’s in deep trouble. That’s been clear from the beginning of these revelations. When the stock was at about $165, I publicly said it was going to $150, a 10% drop. Which it got to in less than a week.
The stock’s going to be under intense pressure, and it wouldn’t surprise me to see it test $120.
Sincerely,
Shah
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Source: Wall Street Insights and Indictments