Data scandal: the future for Facebook shareholders
On March 17, The New York Times and The Observer of London published an expose on Cambridge Analytica's use of over 50 million illegally obtained Facebook profiles to build a psychographic platform for targeting American voters and influencing their behaviour during the 2016 presidential election.
After hitting a record high of $US193 ($250) on February 1, the Facebook share price has declined 18% to $US159, and much of this decline occurred after the expose.
Although this raises concern for regulation, we believe this incident highlights just how powerful Facebook's data is.
Facebook's value is derived from the trove of proprietary personal data generated by its over 2 billion monthly users. However, the data has no value until it is monetised through targeted advertising and third-party websites or applications. It is through a third-party application that Cambridge Analytica ultimately got its hands on 50 million Facebook profiles.
In 2014, 270,000 Americans downloaded a survey app and consented to having their Facebook data harvested. At the time, Facebook permissions allowed users to "consent" to their friends' data being collected by third parties without their friends' knowledge (this permission has since been removed).
The current backlash against Facebook has to do with how it failed to prevent the personal data of 50 million users from landing in Cambridge Analytica's hands without the users' knowledge, and what can be done to prevent such breaches (in the practical sense) from happening again.
While Cambridge Analytica has denied the efficacy of its psychographic targeting on the Trump campaign, the thought that Facebook's user-generated data can be manipulated to sway said users' voting decisions hints at just how powerful and comprehensive Facebook's data is.
Regulation usually means trade-off, and heavy-handed regulation in the area of data privacy could inadvertently result in incumbents such as Facebook accruing even more market power (and thus control over more data).
The current share price may reflect a belief that Facebook CEO Mark Zuckerberg's response was inadequate and that regulators will now look at tech giants with an even more focused anti-trust lens.
The question, therefore, is whether Facebook's size and reach insure it against a MySpace-style fall from grace. (MySpace began a terminal decline in 2006 when Connecticut's Attorney General, Richard Blumenthal, launched an investigation into sexual predators on the site. By 2008, MySpace agreed to clamp down on sexual predators on the network but it was too little, too late.)
Keep in mind that for many of its two billion users, Facebook is not just a hangout; it's where all their memories are stored and it is their access key to log into their favourite and essential websites. Of course, on the other hand none of this has stopped Elon Musk from deleting his Tesla and SpaceX accounts, despite having 5 million followers.
We believe Facebook is a special business model and one of the world's great platforms.
The Montgomery Global Funds own shares in Facebook and thus we believe it is a hold.
Whatever happens to be the political or regulatory fallout from these recent developments, this will be an interesting space to watch, not only with respect to Facebook but also for the broader group of mega-cap technology companies.