Has this Scandal Made Facebook Worth Buying?

It was hard to miss the Facebook Inc. [NASDAQ:FB] scandal this week.

News outlets painted it all over their pages.

The problem of always trying to be first is that sometimes the facts take a back seat.

It seems many are happy to publish news that is just semi-accurate.

I’m not saying everyone has got the Facebook story wrong. But with time, we can better gage what’s really happened. And what’s happened is not a whole lot.

Facebook was lax protecting user’s data. And because this isn’t the first time, investors believe that users are losing patience with the social network.

It’s why Facebook has seen almost US$50 billion wiped from their market cap since Friday.

So is Facebook heading for the doldrums? Or is one of the biggest, most powerful US companies now suddenly worth buying?

Mistake or scandal?

For advertisers, Facebook is the best platform.

Why? Because they can target potential customers with accuracy.

Imagine you sell pet food online. You have the best prices and the widest selection. But for the moment, no one knows about your business.

One way to spread the word is to run ads on Facebook.

Facebook users obviously go online — a key target market for your business. What’s more, you can also target your ads to users who post about their pets.

You’ll be advertising to actual potential customers. This means the return on your ad dollars spent will be that much higher.

It’s how Facebook continues to grow sales and earnings each year. Advertises see the value in ad spending on Facebook and thus increase their ad budget.

But with so much data about users, you would think a leak would eventually happen. And that’s exactly what happened in this latest ‘scandal’.

It all started with political consulting company, Cambridge Analytica.

Behind the consultancy is a family of conservative hedge fund moguls. And in 2016, some believe it was Cambridge that helped Donald win the election. Others just chalk it up to rumour.

The former believe Cambridge manipulated Facebook data to target campaign ads.

Ars Technica writes:

Where conventional political advertising uses crude demographic factors like age and ZIP code to target advertising, Cambridge supposedly used a technique called psychographics, which involves building a detailed psychological profit of a user that will allow a campaign to predict exactly what kind of appeal will be most likely to convince any particular voter.

‘…Motherboard – and other reports circulating around the same time – portrayed Facebook-derived data as the key to this targeting effort. They pointed to work by researcher Michal Kosinski that found he could predict a lot about a person based on Facebook likes.

‘…“on the basis of an average of 68 Facebook ‘likes’ by a user, it was possible to predict their skin colour (with 95-percent accuracy), their sexual orientation (88-percent accuracy), and their affiliation to the Democratic or Republican party (85-percent accuracy),” Motherboard reported.

So where does Facebook come into all this?

A man by the name of Alexksandr Kogan asked to buy Kosinski’s data. When Kosinski declined, Kogan created his own app.

He harvested data from 270,000 Facebook users through an online personality quiz. And at the same time he collected unauthorised data from those user’s friends.

Kogan then gave this data to Cambridge. Yet he told Facebook it was for academic purposes.

According to The Guardian, Cambridge then used this data to work on the Ted Cruz campaign. Facebook quietly reported the data leak. They also told Cambridge to delete the unauthorised data.

But of course, many believe that didn’t happen.

Sandy Parakilas, a previous Facebook platform operations manager, said in an interview:

My concerns were that all of the data that left Facebook servers to developers could not be monitored by Facebook, so we had no idea what developers were doing with the data.

Once the data left Facebook servers, there was not any control, and there was no insight into what was going on.

In the time I was there, I didn’t see them conduct a single audit of a developer system.

Parakilas estimates potentially hundreds of apps took advantage of this opportunity —harvesting data from Facebook user’s unwitting friends.

So rather than Facebook handing out data, developers were exploiting a glitch in Facebook’s software.

Seems like more of a mistake than a scandal to me.

Potentially a long-term buy…

As I mentioned, this scandal has seen billions wiped off of Facebook’s value. But I’ll bet most sellers today are simply looking a few quarters into the future.

The data leak might cause more users to stop using Facebook. As a result, user engagement could also fall, making it less attractive to advertise on Facebook.

User engagement had already been dropping for a time, and this latest ‘scandal’ is just the cherry on the top.

But if you were to take the long-term view, Facebook’s shares might be worth buying. What is Facebook’s rival in the West?

Yeah, I can’t think of one either.

It would be incredibly hard to imagine anyone competing away Facebook’s ad revenues. And that’s because their platform has reached such scale. It would be incredibly hard to convince users to make a switch.

All their friends and family are on Facebook. Why switch to another social network, where none of their friends and family are?

This is not to say Facebook is worth buying at any price.

But at a price almost US$50 billion cheaper, surely it’s worth putting the ruler over?

Kind regards,

Härje Ronngard,
Editor, Money Morning


Money Morning is Australia’s most outspoken financial news service. Your Money Morning editorial team are not afraid to tell it like it is. From calling out politicians to taking on the housing industry, our aim is to cut through the hype and BS to help you make sense of the stories that make a difference to your wealth. Whether you agree with us or not, you’ll find our common-sense, thought provoking arguments well worth a read.

Money Morning Australia is published by Port Phillip Publishing, an independent financial publisher based in Melbourne, Australia. As an Australian financial services license holder we are subject to the regulations and laws of Corporations Act and Financial Services Act.


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