Are the walls closing in for Facebook?

“If I were an investor I would be concerned with the way facebook has conducted itself over the last couple of years."

Key Takeaways:

  1. Facebook has done nothing in the face of controversy.

  2. Regulatory and advertising pressures could increase.

  3. Major changes are needed to make this a good long term investment.


By: Allan R Kirby


Inaction


Tired of inaction from Facebook, there is a coordinated effort by many large corporations from around the world joining the #StopHateForProfit campaign. To date there are now over 150 companies including some of the world’s biggest advertisers of iconic brands that include Starbucks, Coke, Honda, Unilever and Levi’s, that will boycott the social network for a month and possibly longer for some.


It comes as no surprise since facebook has done very little to stop the rampant fake news and hate that seems to be prevalent on their platform. It’s not just politicians and #deletefacebook advocates, many within the tech industry itself are concerned. For example; Joanna Hoffman, former advisor to the late Apple CEO Steve Jobs, has recently criticized the leadership at Facebook for not being accountable for some of the harmful effects the social media platform has had on society.[1]


Not too long ago, Facebook defiantly stated that it would continue to allow political campaigns to use the site to target advertisements to particular slices of the electorate and that it would not police the truthfulness of the messages sent out. [2] And recently Facebook has faced ongoing pressure by choosing not to take down a controversial post by US President Donald Trump about the nationwide anti-racism protests. This clearly shows that inaction seems to be the best policy in the face of controversy for facebook but long term this could hurt investors.


Are the walls closing in?


Faced with ongoing backlash and continued in action on their part the question now is whether facebook can continue to be a successful platform or are the walls finally closing in?


First many people may not realize that almost all of Facebook's approximately 70 billion in revenues comes from ads. [3] Being primarily an advertising platform it does not bold well for facebook to frustrate their core customers. If I was a shareholder this is something I certainly would not like to see a company to do, ignoring good corporate responsibility.


Secondly we are seeing more and more politicians on all sides of the political spectrum from around the world are getting frustrated with facebook and other large technology companies. Not only for allowing the spread of misinformation, hateful content and political interference but also for the collection and selling of big data. Facebook has in fact on numerous occasions shown their inability to regulate themselves. One example is when ProPublica bought dozens of rental housing ads on Facebook back in 2017. The ads specifically excluded African Americans, mothers of high school kids, people interested in wheelchair ramps, Jews, expats from Argentina and Spanish speakers. All in violation of the federal Fair Housing Act.


Then there is the Cambridge Analytica scandale in 2016. The scandale set off a chain of events that would land Facebook’s Mark Zuckerberg in front of the Senate Commerce and Judiciary Committees. This is never a good thing even if he did reasonably well when he spoke to the committee.


"The $5 billion Facebook fine was the largest FTC fine in the history of the country but it's basically less than month of Facebook’s revenue"

Shockingly the record-breaking $5 billion penalty to settle Federal Trade Commission charges that the company violated a 2012 FTC order by deceiving users about their ability to control the privacy of their personal information[4] has clearly done nothing to change the companies attitude and culture.


These past misbehaviours along with the more recently frustrations through the #StopHateForProfit campaign and choosing to not self police for political ads all add up to a long term issues that will cause concern for many long term investors.



Long Term


It is becoming more likely facebook is going to be faced with regulatory headwinds. One reason is the #StopHateForProfit protest which has shown Facebook will make quick changes but only after a considerable show of force is used. Force was needed because until the protest Facebook had at most tweaked their policies on content moderation to tackle hate speech and misinformation.


"Could a Brand benefit more by leaving the Facebook platform? it's possible"

As for advertising, the current #StopHateForProfit campaign could be very dangerous for facebook if it becomes apparent that leaving the platform is value added for major brands. I can assure you many brands will be closely monitoring how consumers are reacting to their stance on the #StopHateForProfit campaign. Additionally there is competition abound and even though none have really taken hold, major corporations may eventually find other platforms to leverage with far less controversy and a better return on investment.


Basically Facebook cannot continue to stumble and just react to every major issue that arises, The longer facebook takes to make real fundamental changes to their platform the more likely they will be regulated. Keep in mind Facebook is a international social platform which can hardly regulate itself, can you imagine how tough it would be to follow multi country regulation.


At some point changes will be made but for now we do not know for certain if any changes such as regulatory will significantly affect Facebook as a growth story. Cap ex may increase significantly while revenue from ads may slow. Even though Facebook has an incredible moat and lots of growth I just cannot get inspire to own such a stock until a see an improvement to how they conduct themselves and remove the regulatory overhang. However it may be too late for this company, only time will tell but so far it's not looking good for them.


This is a MySmallBank.com blog written by Allan R Kirby, who writes and produces Personal Finance articles and videos along with My Success Magazine.

Disclosure: mysmallbank.com nor the author received any compensation from any organization for the mentioned security: facebook.com (FB) . The article is our opinion only and is written to help readers learn more about facebook.com current situation. Consider this as basic information only and utilize professional services and additional sources before making an investment decision.

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