The share price of Facebook Inc. is under pressure following reports that the personal data of over 50 million users were obtained by an analytics firm. The firm helped elect President Donald Trump. Regulators in the US and the UK are now looking into the matter. Since the news broke on the 17th of March the share price is down 9.28 per cent. Is this justified?
What actually happened?
In 2014, Cambridge Analytica hired a Soviet-born American researcher, Aleksandr Kogan. Kogan developed an app that gathered profile information from Facebook users along with what they chose to like. The app was downloaded 270,000 times. However, if the user privacy settings allowed it, the data on those users Facebook friends was collected as well. This increased the universe (sample size) to over 50 million users.
To be fair (!!), the app, in its terms of service, disclosed the above. So Kogan may actually have had the permission to collect the data from users. But this fact, in my opinion, raises a very important point: does anyone ever read the term and conditions on apps? And are they intended to be read by the end user? Does clicking 'yes' actually give blanket permission to whatever is included in the very, very small text?
Add to this that Kogan went on to sell the information to Cambridge Analytica, which, Facebook claims, violated the company’s policies. Facebook also went on to demand that all data gathered should be destroyed. Recent media reports say that it was not - despite Cambridge Analytica maintaining that it deleted all the data.
How was the data used?
Cambridge Analytica claims that it used the data to target messages on Facebook and other online services. Cambridge Analytica says that the psychological profiles built by Kogan could be used to target voters during the political campaigns. The firm was confident that Kogan’s method would be a better predictor of how to influence voters than traditional party registration and voting patterns. Whether this is effective or not is debatable and is difficult to verify. The main point of contention at this stage is whether data-protection laws were breached.
In 2011, Facebook agreed with the US Federal Trade Commission to get clear consent from users before sharing their material. Facebook is now being investigated for violation of these terms. However, the maximum penalty Facebook would face would be a fine amounting to a few (for Facebook) million dollars.
What about Facebook’s earnings outlook?
Facebook’s focus on user experience, strong market share and the company’s sheer size, position the company to become an enduring blue-chip ‘media’ company in the long-term. Growth and profitability continue to drive investment value.
Over time, the transformation into a mature company will carry costs. However, the social medium so successfully pioneered by Facebook still has huge potential for development and is becoming increasingly important to advertisers. Regulation will remain a concern and the current saga just highlights what is likely to happen each time investors find it difficult to discern what exactly is going on.
Disclaimer:
This article was issued by Antoine Briffa, investment manager at Calamatta Cuschieri. For more information visit, www.cc.com.mt. The information, view and opinions provided in this article are being provided solely for educational and informational purposes and should not be construed as investment advice, advice concerning particular investments or investment decisions, or tax or legal advice.