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Dozens of cardboard cutouts of Facebook CEO Mark Zuckerberg are seen during an Avaazorg protest outside the US Capitol in Washington
Image: Dozens of cardboard cutouts of Facebook CEO Mark Zuckerberg are seen during an Avaazorg protest outside the US Capitol in Washington. REUTERS/Aaron P. Bernstein

Can Facebook Really Fall?

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Image: Dozens of cardboard cutouts of Facebook CEO Mark Zuckerberg are seen during an Avaazorg protest outside the US Capitol in Washington. REUTERS/Aaron P. Bernstein

As Facebook lurches from one controversy to another and skittish investors place the stock under pressure, questions remain whether the 14-year old company can maintain its stronghold as the world’s largest social network.

Facebook On the Hot Seat

With the company still reeling from last year’s allegations that a Russian organization used its platform to sway the U.S. election, Facebook is once against scrambling to defend itself. In March, newspapers revealed that Cambridge Analytica, a political consulting firm that worked for Donald Trump’s presidential campaign, had obtained and used personal data from an estimated 50 million Facebook users without their consent.  (Facebook later estimated that up to 87 million people may have had their information “improperly shared.”)

The stock has slumped more than 20% since the news broke, erasing almost $120 billion off its market value. With the shares seemingly in freefall, Founder and CEO Mark Zuckerberg took five days to respond to the scandal, drawing criticism from politicians and prompting many users to close down their accounts amid privacy concerns. Zuckerberg this week has been grilled by US lawmakers at a series of congressional hearings.

“Big tech firms are going from being darlings to being devils in the public imagination,’’ said Andre Spicer, a professor at Cass Business School in London after the data leak was first reported. The recent revelations “put pressure on not just Facebook, but many large tech companies. They will be forced to expand their compliance, privacy and social responsibility functions.’’

Late Crisis Responding

Facebook’s chief operating officer Sheryl Sandberg admitted to journalists that the company took too long to respond to the scandal and crucially, in an interview with Bloomberg News, revealed that some advertisers had started to curtail spending on their platform. A worry for shareholders when the vast majority of Facebook’s revenue is generated from advertising.

With the company now in damage control, steps have been taken to restore confidence. These range from making their terms and data policy clearer to users to restricting data access for various app developers. They’ve removed accounts on Facebook and Instagram controlled by Russia-based Internet Research Agency and ended partnerships with third-party data providers, a key source of information that had previously helped advertisers target the right audience.

All eyes will be on Facebook’s quarterly results due April 25, which may provide the first insights into what impact the scandal has had on the company. With the saga still unfolding, Facebook’s longer term outlook remains unclear.  Still, when weighing its future prospects here are a few key points to consider:

1. The Numbers:

Facebook, for now anyway, remains overwhelmingly the world’s most popular social media network. Of the roughly 3.2 billion social media users worldwide, around 2.2 billion of them belong to Facebook, according to data compiled by We Are Social. Next in line is YouTube with 1.5 billion users, followed by Instagram with 800 million users. So even if campaigns to close down Facebook accounts gather pace, and more companies and high profile names like Billionaire Elon Musk reject the platform, with YouTube a mainly video-sharing site, next in line to potentially fill the void is Instagram which is owned by Facebook anyway.

“Facebook is such a large part of the fabric of many people’s lives,’’ said Dr Dave Chaffey, co-founder and content director of SmartInsights.com. “There is limited impact evident so far, it seems that the trade-off between personal value of using Facebook is not offset by privacy fears.’’

2. Global Reach:

Whether you are a lover or a hater of the ubiquitous social media platform, Facebook’s global reach and influence is undeniable. Despite the company being founded and based in the U.S., eight of its top ten countries by the number of users are in the emerging markets. India boasts 250 million users, while Brazil and Indonesia each have 130 million, data compiled by Statista show. In its home market of the US, Facebook has 230 million registered users, while the U.K. comes in at 10th spot with 44 million.

In China, the world’s second-largest economy, Facebook remains blocked but that hasn’t stopped the company from building a toehold in the country via other business lines. In January, it announced plans to partner with Chinese company Xiaomi to make virtual reality headsets.

3. Brand:

Last year, Facebook made the top 10 list of the world’s most valuable global brands, coming in at number eight, according to the annual Interbrand report. In fact, it saw the biggest growth over the past year of any company, with its value climbing 48% to $48.2 billion. With this year’s report not due out for several months, it remains anyone’s guess where Facebook will find itself ranked in 2018.

Still, clues can be drawn from Volkswagen’s experience, another global company that found itself immersed in an equally damaging scandal in 2015. The value of the carmaker’s brand declined sharply between 2014 and 2016 but started to show signs of stabilizing in 2017, posting a modest 1% increase on the year.

4. Advertisers:

Despite Zuckerberg’s efforts to diversify his company, buying both WhatsApp and virtual reality headset company Oculus in 2014 and expanding into payments, the vast majority of Facebook’s revenue still comes from advertising. In fact, of the $12.97 billion of revenue generated in Q4, about $12.8 billion came from ads.

With the company cutting ties with third-party data providers and talk of advertisers curtailing spending, investor concerns about Facebook’s main revenue stream will continue to put pressure on the stock. Even so, Morgan Stanley analyst Brian Nowak says he remains broadly bullish. In a report published last week, he wrote that of the eight agencies/advertisers that the bank had spoken to about Facebook, they didn’t “sense any material reduction in ad spend.’’

5. And finally, Regulation

Calls for tighter control over data privacy were inevitable after a data leak of this magnitude but the writing has been on the wall for some time. In fact, a survey by Pew Research Centr in January 2017 found that around half of Americans do not trust social media companies to protect their data. And in Europe, companies including Facebook have already had to prepare for a new set of rules known as the General Data Protection Regulation. Due to come into effect on May 25, it’s been regarded as potential blue print for best practice elsewhere in the world.

Professor Spicer of Cass Business School says the biggest issue for tech firms will be if regulators starting questioning their business models, that is where consumers give away their data in exchange for free services. But given its taken Europe more than five years to update their data protection rules, it will be business as usual for now anyway.

Note: The opinions expressed in this article are the author's own and do not necessarily reflect the view of Alvexo on the matter.