Some of the best performing stocks in the US are the large Internet-centric technology stocks like Facebook. There is even an acronym, FANG, to describe Facebook, Amazon, Netflix and Google. Add Apple and, together, these five stocks account for one quarter of the Nasdaq’s total market capitalization. They are huge. And Facebook’s data breach represents a threat to them.
The Facebook trade-off
And while the animus is directed at Facebook, the potential regulatory risk represents a threat to all of these players, particularly the one that operate across multiple business lines, including Verizon since it owns Yahoo and AOL.
Here’s why Facebook is important.
Facebook has created an ecosystem where people who know one another can share photos, opinions, messages, links and a ton more. No other social network allows one to share so much private information in such a multitude of different ways. And so Facebook has strong networks effects that make joining and staying in the network compelling. This is especially true now that so many users are in Facebook’s database.
But since the network itself is free in order to maintain those network effects, Facebook must rely on advertising to monetize its site. The beauty of the Internet is that it allows advertising to be targeted. And so Facebook actively petitions users for more and more data as a quid pro quo; you reveal more about your preferences and life history, and we will put you in touch with more people, more organizations and more news that fit those preferences without your having to search for anything on your own. In turn, we get to use that data to target advertising at much higher ad rates. Win-win!
As the utility of Facebook has increased, people have become more comfortable sharing a lot of private information on Facebook with family and friends. But, the trade-off, of course, is privacy.People might say, “I have nothing to hide. What’s the big deal”. But when data leaks happen, those same people recoil in horror. And then they want the government to crack down. No one wants their whole life exposed for all to see.
Facebook data sharing
Here’s what happened with Cambridge Analytica and why I believe regulatory risk is acute.
Now, most people are fine with Facebook’s storing private data as long as it remains at Facebook and remains ‘anonymized’ when used for advertising targeting. The same is true about Amazon, Netflix, Microsoft, Google or Verizon.
But Facebook didn’t keep all of your data private. If you consented, it shared the data with third parties in a way that allowed those third parties to also store your anonymized data as well. And while supposedly no one can reverse engineer identities, we know from the Snowden leaks that’s actually not true. So effectively, third parties would now have your data and be able to manipulate it for their purposes.
The Facebook data leak and cross-platform data sharing
That’s what Aleksandr Kogan did. He received consent from Facebook to take psychological profiles for academic purposes with user consent. But then he took the data provided by Facebook access – and remember, this is new data that even Facebook didn’t have — and then he passed that data on to be used by Cambridge Analytica for political purposes.
Is that a leak? Would you call it a breach? In a world of rancorous and divided politics, it is certainly a toxic development for Facebook. And its toxic for all of the other big data companies on the Internet. How do we know the same things aren’t happening at Apple or Google, for example? The fact that the data were used for political purposes in a disputed and divided election campaign makes this breach much more difficult to wish away.
So these companies have a major problem. And it isn’t just a public relations problem. it’s a trust problem, one that could become a regulatory problem. See companies like Facebook are in multiple lines of business. Facebook owns Instagram and WhatsApp, for example. These are two totally different apps, two totally different social media ecosystems. But from Facebook’s perspective, having user data matched across platforms gives it a wider reach. And that means more advertising dollars.
Google, for instance, allows people who install Google Analytics to measure how popular their website is to also link that account with its advertising platform AdWords and AdSense That’s definitely useful for Google in collecting data to target advertising.
Facebook’s leak threatens cross-platform sharing
The Cambridge Analytica data leak threatens all of this. The European Commission has already fined Facebook 110 million euros for “incorrect or misleading” information regarding data sharing between Facebook and WhatsApp. And now, the two are forbidden from sharing data before the EU’s upcoming General Data Protection Regulation goes in effect.
But a breach like the Cambridge Analytica could
- force the EU to consider not allowing any cross-platform data sharing.
- encourage the EU to prevent other big multi-platform Internet companies from sharing data across business silos and Apps.
- cause the US to move in the same direction as the EU due to an outcry from consumers.
- encourage regulators to prevent the storage of any user data by third parties, even with the express consent of users.
- eventually lead to the dismantling of cross-platform companies like Facebook, Amazon, Apple and Google.
Some people are saying “Facebook will never be the same after the Cambridge Analytica scandal.” Maybe. If I had to bet with my wallet though, I would say this storm will eventually pass just like all the other ones that Facebook has weathered. Nevertheless, this is a serious breach and we should consider what kind of consequences could result.