Facebook has finally been hit where it hurts the most Media Man Int

Facebook has finally been hit where it hurts the most - 20th March 2018

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Facebook accuses Cambridge Analytics of misusing data collected from hundreds of thousands of the social network users. Photo: AP

by John McDuling

Since Donald Trump's shock victory in the 2016 US elections, it has been one disturbing revelation after another for Facebook.

Yet one of the strangest (and most chilling) things about the myriad crises engulfing the social media behemoth over that period is how its owners - investors - have basically ignored them. Until now.

The extraordinary revelations in recent days surrounding data firm Cambridge Analytica's harvesting of Facebook user information could prove the tipping point in the way investors perceive the company.

On Tuesday morning, Facebook shares slumped 6.8 per cent in the US, wiping billions from the company's market value, and from the fortune of its founder and CEO Mark Zuckerberg who - disgracefully - hasn't been seen or heard from during this troubling episode.

Wall Street now thinks the risk of regulatory action against Facebook is rising. And Australia - with a ACCC investigation already under way, and warnings from the Privacy Commissioner about possible sanctions- could be among the first countries to move.

"We think this episode is another indication of systemic problems at Facebook," Pivotal Research analyst Brian Wieser, who is based in New York, told clients this week. "Regulatory risks will intensify."

Macquarie analyst Ben Schachter said he was "very much concerned" about systemic risks facing Facebook's management of user details and data driven online advertising

"The negative connotations around social media “feel” like they are growing," he wrote. "We don’t have any hard data to rely on here, but we simply can’t ignore what seems to be a real sense that more and more folks view social media negatively."

Let's consider the scandals Facebook has been involved in over the past year or so - which investors have largely shrugged off. (Facebook shares are up nearly 50 per cent since November 2016, compared with a rise of about 25 per cent for the broader US stockmarket).

The company utterly failed to stem the spread of fake news on its platform during the US elections. And then spent months denying there was even a problem, let alone taking responsibility for it.

It admitted Russian troll groups came through its front door to buy ads that reached millions of Americans during the campaign.

The genuinely creepy power of its targeting tools - allowing advertisers used to target everyone from insecure teens to white supremacists - has also been laid bare.

A string of former executives and investors broke ranks to criticise the company, arguing that it is harming children's brains, undermining democracy and 'destroying' society.

Now, we have revelations that Cambridge Analytica, a data firm used by the Trump campaign in 2016, harvested the data of 50 million Facebook users to create what has been described as a "psychological warfare tool".

Submissions to the ACCC's review of internet giants are due in two weeks. That process will take the rest of the year to play out, and could get very interesting.

For ACCC chairman Rod Sims, it represents is one of the relatively few times in his distinguished career that the eyes of the world will be watching.

An issues paper released last month suggests scutiny over misuse of data by tech giants is very much on the table.

Meanwhile, the Privacy Commissioner Timothy Pilgrim on Tuesday for the first time warned about possible regulatory repercussions against Facebook if any Australians were caught up in the breach.

The statement released by his office pointedly noted that the Privacy Act contains all sorts of powers, including the ability to investigate companies involved in alleged breaches, to call for enforceable undertaking,s and even for civil penalties.

Labor frontbencher Ed Husic is already calling for a parliamentary inquiry into the social media behemoth.

"The news about the 50 million accounts being compromised should send a chill through people," he said. "But as is often the case with Facebook, just like what we saw in the aftermath of the 2016 presidential election, Facebook just thinks it can ride this out."

Regardless of what happens in Australia, noises offshore suggest some form of regulation is inevitable.

Senators from both sides of the political aisle in the US have called for an investigation into Facebook following the revelations. The president of the European Parliament made a similar call.

Europe has never been afraid to take on the tech giants. The EU last year levied a record €2.42 billion fine against Google for breaching competition laws.

That related to online shopping, which sounds relatively trivial compared to this episode.

“If parliaments in the UK and the US are demanding action, I don’t see any reason why Australia shouldn’t expect Facebook to front up and explain itself,” said Husic.

The brutal reality with markets, though, is that investors were never going to be too concerned about Facebook scandals until they started affecting its advertising business. Not everyone is convinced that they will.

"There could be some regulatory backlash," Andrew Macken, Portfolio Manager at Sydney based Montgomery Global said. "But the question is: what will the value impact be? Facebook is a $600 billion business. Any new reporting requirements or fines to be paid, for example, would be immaterial in value terms."

Yet among lawmakers and regulators pressure on the company is growing. It is unlikely to subside until Zuckerberg acts. And if he doesn't, it could get ugly, quickly, for him.

"The bottom line is that these headlines matter," said Macquarie's Schaecter. "The political/regulatory/legal risks are rising."

"And most importantly, Zuckerberg controls the [shareholder] vote. He can do what he feels is necessary to reply to these headlines, and we fully expect that he will."

(The Sydney Morning Herald)