For social network company, Facebook, the storm is not over. Indeed, more troubles are in the offing, as users threaten to take the company to court over data privacy issues. However, analysts expect the firm to leverage on its other platforms not affected by the data breach for survival. SAMSON AKINTARO reports.
Fallouts from the data breach scandal involving British political consulting, Cambridge Analytica and world’s biggest social network, Facebook, may be far from over. While the former has since shut down amidst intense investigations by various governments, the latter continues to bear the brunt in revenue, users, and investors’ confidence losses.
At the heart of the imbroglio is Facebook founder, Mark Zuckerberg, whose position as the Chairman of the company is now facing serious threat from shareholders. Indeed, since the news of the data breach scandal broke in March, Zuckerberg has been at the centre of the storm, having had to answer queries and appearing before parliaments over time to defend the company.
Missed revenue projections
Facebook’s struggle with data breach and fake news reflected conspicuously in the company’s second quarter performance. Although, the company’s specific global daily average users (DAU) rates were up 11 percent year-on year, with growth led through users in India, Indonesia and the Philippines, it was less than projections. Facebook also missed on advertising revenue projections, as it recorded $13.04 billion compared with $13.16 billion earlier projected. While there were still 2.5 billion users on the company’s array of apps, which include Instagram and WhatsApp, Facebook recorded flat performance in North America and the first setback in Europe. On a quarterly basis, the daily active users fell from 282 to 279 million and the monthly users from 377 to 376 million in Europe.
Besides, Facebook advised it expected its revenue growth rates to be lower than the year prior, especially in the second half of this year. Sequentially in the third quarter and fourth quarter, it expected the decline to be as much as high single digit percentages. Some reasons included Facebook investing in Stories, which has lower levels of monetization, as well as improving privacy features as a result of GDPR and other user demands.
After the announcement of its Q2 results, price of Facebook’s shares on July 26th plunged by 20 per cent, leading to a loss of about $120 billion in its market capitalization. The slide came as the largest decline in market capitalization in history, exceeding Intel’s $91 billion single-day loss in September 2000, according to Bloomberg data. Founder and CEO Mark Zuckerberg saw his fortune drop by $15.9 billion to roughly $71 billion. His personal loss alone, if only on paper, exceeds the value of companies such as Molson Coors and Macy’s, which have market values of $14 billion and $12 billion, respectively. A day after the announcement of its results, Facebook’s stock price closed at $176.26, down 19.6 percent from $217.50, which analysts said erased the entirety of the company’s 2018 gains.
Facebook stock had recovered from a decline earlier this year in the wake of the Cambridge Analytica scandal, one of several controversies and warning signs that the company had managed to weather with little damage to its stock. But declining revenue and user growth, topped by a warning from executives that it will continue, seemed to end that Analysts believe the investors’ decision on Facebook’s shares were not informed by the company’s below expectation performance, but rather on what is to come. The stock did not fall off a cliff until Chief Financial Officer David Wehner disclosed that the social-media giant expects the revenue-growth slowdown to continue. “Our total revenue-growth rates will continue to decelerate in the second half of 2018, and we expect our revenue-growth rates to decline by high-single-digit percentages from prior quarters sequentially in both Q3 and Q4,” he said on the conference call. Wehner also said Facebook still expects expenses to grow 50 per cent to 60 per cent from last year.
A class action lawsuit has been filed against Facebook on behalf of shareholders that bought company securities between 26 April and 25 July of this year. The lawyers supervising the case, Bronstein, Gewirtz & Grossman, are inviting investors to join if they qualify. The suit seeks to recover damages for alleged violations of the federal securities laws, alleging Facebook recent second quarter results show the company made false statements earlier about daily and monthly active user numbers and about its revenue and operating margin forecasts.
During the release of the results, Facebook CTO David Wehner said Facebook expected a revenue slowdown and lower operating margins in the second half, and that Facebook wanted to grow and promote experiences like Stories that currently have lower levels of monetization. The news sent Facebook shares spiralling almost 19 percent lower on 26 July. They have fallen further since. “Facebook’s public statements were materially false and misleading at all relevant times” during the period in question for the suit, the lawyers claim.
Meanwhile, lawyers for a group of UK residents whose Facebook data was harvested by Cambridge Analytica are also threatening to sue for damages. In a 27-page letter served to the company Tuesday, they accuse Facebook of violating British data privacy regulations. The letter before claim, as it’s called, is the first step in the UK’s legal process for filing a class action suit. It warns Facebook that if it does not adequately respond to a list of questions regarding user privacy within 14 days, the claimants may take legal action against the company in the United States, the United Kingdom, and Ireland. Nearly 1.1 million British citizens could be eligible to join such a suit if it goes forward.
The warning came from the UK-based law firm Irvine Thanvi Natas Solicitors, which is representing dozens of people who argue that Facebook misused their personal data in violation of UK law. It follows an announcement Monday by separate group, called the Fair Vote Project, that is also launching a class action suit against Facebook in the UK.
The UK Information Commissioner’s Office already said earlier in July that it intended to fine Facebook more than $600,000 under the country’s Data Protection Act for allowing Cambridge Analytica, the now-defunct political consulting firm, to collect information on tens of millions of users without their knowledge. But Ravi Naik, a lawyer with Irvine Thanvi Natas Solicitors, said the individuals affected also have a right to answers, and may have a right to damages if those answers aren’t satisfactory.
“People should realize that data rights are real rights, and we have a mechanism to enforce them,” Naik said.
Facebook is also facing several lawsuits in the United States after the Cambridge Analytica scandal broke. In its recent earnings report Facebook mentioned multiple lawsuits that have been filed since March, but the company wrote that it believes they are “without merit” and is “vigorously defending them.”
In a letter written to Facebook by through their lawyers, the UK users made a checklist of Facebook’s failures, dating back to its decision in 2009 to no longer allow users to keep their friend lists private. The letter also notes Facebook’s decision to let app developers scoop up data not just on their apps’ own users but on those users’ friends. Facebook didn’t put a stop to this practice until 2015. By then, Cambridge Analytica had already gained access to as many as 87 million Facebook users’ data through a personality quiz app designed by a University of Cambridge researcher named Aleksandr Kogan.
These original sins, the letter argues, opened Facebook up to legal liability from several angles. For starters, the UK’s Data Protection Act requires companies to get user consent to process their data. The lawyers said that Facebook essentially misled users about what they were consenting to. In Facebook’s privacy settings at the time, users could determine whether to share their posts with “only friends” or “friends of friends,” but this only applied to what other Facebook users could see. App developers had their own permissions, which, in some cases, gave them the ability to tap into their users’ friends’ data.
Surrounded by uncertainties, analysts believe Facebook will sustain its business by strengthening its other platforms. They urged the company to ensure that it keeps customers on board with Instagram, as well as WhatsApp and its Messenger apps. This came with the realisation that the underlying problems of Facebook as platform, with the issues of privacy and fake news, may not go away anytime soon.