Facebook Has a Trust Problem Among Its Users

Summary

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WSJ Your Money Briefing

Episode: Facebook Has a Trust Problem Among Its Users
Date: March 21, 2018
Host: J.R. Whalen (The Wall Street Journal)
Guest: Dan Gallagher (Heard on the Street Columnist)

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Episode Overview

This episode examines the fallout from the Cambridge Analytica scandal and the resulting crisis of trust at Facebook. J.R. Whalen and columnist Dan Gallagher discuss the business and financial implications of Facebook’s data misuse, the lack of strong alternatives for users, and the increased likelihood of regulatory intervention. The conversation unpacks how user trust directly impacts Facebook's value and its unique dominance in the social media landscape.

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Key Discussion Points & Insights

1. The Immediate Impact on Facebook’s Value

• Stock Market Reaction:
  • Following the Cambridge Analytica revelations, Facebook experienced a sharp stock decline:
    • Monday: Stock down 7%
    • Following day: Down about 5% more
    • Estimated loss: $50 billion in market value ([02:48] Dan Gallagher)
• Key Quote:

  "I think we're seeing that actually play out in the stock price...That equates to about $50 billion, I think, in market value that is going just on this to people's data when they're using Facebook."
  — Dan Gallagher ([02:48])

2. Understanding the Core Issue: Trust

• Crisis Trigger:

  • The scandal centers on Facebook user data being harvested and used by Cambridge Analytica for political campaigns.

• User Concerns:

  • Users question:
    • What they are sharing
    • How it’s used
    • Potential misuse ([03:04] Dan Gallagher)

• Broader Context:

  • Trust compounding with existing concerns about misinformation and electoral interference over the past year.

• Key Quote:

  "It really puts to that question for people who use the service, what's happening to what am I sharing with this service? How is it going to be used...these questions really build up and I think really get to the core value proposition that Facebook offers."
  — Dan Gallagher ([03:04])

3. Regulatory Pressure Is Mounting

• FTC Investigation:
  • The controversy has led the FTC to open an investigation into Facebook’s data practices ([03:47] J.R. Whalen).
• Lawmakers’ Involvement:
  • Bipartisan and international calls for tighter regulation, due to Facebook’s unique position ([05:29] Dan Gallagher).
• Quote:

  "There's kind of these universal calls for something to change. There'll probably be a lot of disagreement about what needs to change. But in Facebook parlance, Facebook is kind of having a hard time finding friends right now in any place."
  — Dan Gallagher ([05:29])

4. Facebook's Business Model at Stake

• No True Substitute:

  • Alternatives like Snapchat and Twitter lack Facebook’s scale and functionality.

• Risk to Core Revenue:

  • Declining user engagement threatens Facebook’s ad-driven business model. Loss of user trust → reduced advertiser confidence ([05:29], [07:05])

• Investment Angle:

  • Facebook may appear cheap (low earnings multiple), but future uncertainties over legislation and user trust cloud valuations.

• Quote:

  "You don't really know...what is Facebook's business going to look like two years from now when possibly new laws have gotten enacted? How is that going to affect their business? Have users stayed with the service or have they started to decline? Have advertisers thought twice? Right now there's a lot of questions that I think get to the existential nature of what is Facebook."
  — Dan Gallagher ([07:05])

5. Historical Parallel: Microsoft & the EU

• Comparison:
  • Microsoft faced prolonged regulatory scrutiny and it hampered investor confidence, but its situation was different—Facebook's core business is directly under threat ([08:21] Dan Gallagher).
• Key Quote:

  "The difference is that...what's under attack is some of the core business, the core business proposition because Facebook uses its huge user base to sell to advertisers. So if that user base, if they lose the trust of that user base, that in turn hits the value proposition of what they sell to advertisers."
  — Dan Gallagher ([08:21])

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Notable Quotes & Memorable Moments

• On the uniqueness of Facebook's position:

  "It's not like there's a big alternative that you could go to where you think, okay, maybe my data is safer here. Snapchat's a lot smaller. Twitter is used for different purposes for the most part. So Facebook is really the only game in town."
  — Dan Gallagher ([05:29])

• On the scope of the issue:

  "Facebook really can't afford to have a high number of them start to think, is this a place I should spend time at? Because how am I exposed here?"
  — Dan Gallagher ([03:59])

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Important Timestamps

• [02:48–03:47] — Discussion of the financial impact and user trust issues
• [03:47–04:59] — Recap of prior controversies and users' growing concern
• [05:10–06:52] — The problem of few viable social network alternatives and regulatory urgency
• [07:05–08:13] — Facebook’s business risk and investment concerns
• [08:21–09:37] — Historical context: Comparing Facebook’s crisis to Microsoft’s past regulatory battles

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Summary

This episode focuses on Facebook's data scandal as a pivotal moment in the company's history, threatening both user trust and long-term profitability. Dan Gallagher explains the high stakes for Facebook in retaining users and advertisers amidst mounting legal, political, and public pressure. The episode stresses that with no immediate alternative for the social connections Facebook provides, the company's dominant market position also makes it uniquely vulnerable—raising the likelihood of regulation and continued financial turbulence.

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Transcript

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[J.R. Whalen]

I'm J.R. whalen in New York. If social media users can't trust Facebook, who can they trust? We'll have those details in a moment. But first, here are some money items you need to know. The Wall Street Journal Market Data Group reports recent weakness in large tech stocks is reordering the list of the biggest US Firms during this week's sell off that's dragged down the broader market. Amazon's market value was in position to pass that of Amazon parent Alph. Amazon was edging closer Tuesday to close as the second biggest US Company, topping Alphabet for the first time ever. Apple remains the market cap leader in Tech at $890 billion. The Wall Street Journal heard on the street team says small and mid sized banks are eyeing a loosening of the regulation chains by Washington lawmakers and they could have reason to be optimistic. The Senate last week passed a bill that would raise the threshold for stricter Federal reserve oversight to $250 billion of assets and from the current $50 billion. But the House won't vote on the bill as is, however and wants to negotiate with the Senate. That's raised fears in the industry that House leaders could push for too much deregulation. And the Money Beat team also reports regulators looking into potentially widespread violations in cryptocurrency markets have taken a bite out of the once soaring investor demand for token deals. More than 180 coin offerings are expected to launch in March. That would exceed January's total of 175 and and fall only a bit below February's 197 offerings. But the March projects are expected to raise only $795 million. That's a 45% decline from February's $1.4 billion. This is your Money Briefing from the Wall Street Journal. Welcome back everybody. Facebook's steep stock decline in response to the controversy surrounding Cambridge Analytica's collection and unauthorized use of user data has brought to light a crucial element of that's hard to quantify and that's Trust Wall Street Journal Heard on the Street. Columnist Dan Gallagher joins us from our San Francisco bureau to discuss. So, Dan, in your column in the Wall Street Journal, you say trust is something you can put a price on. But for Facebook, the lack of trust among its users, well, that can get very expensive.

[Dan Gallagher]

I think we're seeing that actually play out in the stock price. Monday, the stock fell 7%. Today it's down so far about 5%. That equates to about $50 billion, I think, in market value. That is going just on this

[Small Business Owner]

to

[Dan Gallagher]

people's data when they're using Facebook. The stories we saw over the weekend concern this firm that a few years ago ended up getting possession of this data to use it in political campaigns. But it does. When you pile it onto all the concerns about Facebook over the last year about its role in elections, misinformation and so forth, it really puts to that question for people who use the service, what's happening to what am I sharing with this service? How is it going to be used with me or against me or whatever? And these questions really build up and I think really get to the core value proposition that Facebook offers.

[J.R. Whalen]

For Facebook, which is now the target of an FTC investigation into this matter, this is just a fresh round of criticism. The social media company has had controversy in one form or another chasing it around for some time.

[Dan Gallagher]

Yeah, it is. And like we said, pretty much since the 2016 election, there's been, there's been all these questions about it. I think this is the most significant impact we've seen on the stock because I think one part of it is I think there was some misunderstanding out there that Facebook got hacked and the data was stolen. It was more a sense of it was shared with a firm under some policies the company had a few years ago. It turns out that firm may have broken the policies and shared the data. The story may be a little more complex than some people had realized, but I do think it does cut to the basic value proposition for the 1.4 billion doll billion people that go onto Facebook every day. Right now, Facebook really can't afford to have a high number of them start to think, is this a place I should spend time at? Because how am I exposed here? What am I seeing? All these things build up into the idea of how quality is the Facebook experience for people who are using it. And if those people start not using it as much or coming off it, then that really cuts to the core of what how Facebook makes its money, which is selling advertisers access to you.

[J.R. Whalen]

But, you know, in your column, you make an interesting point. You mentioned that if the latest controversy drives users away from Facebook or encourages them to do so, there aren't many social media alternatives of Facebook's scale and reach for them to go. And that makes things more urgent for lawmakers to find a solution here. What did you mean by that?

[Dan Gallagher]

Well, you know, because social networking, you could argue, has now become a part of a lot of people's lives in terms of, you know, people use it to stay in touch with relatives. A lot of people use it for business purposes. Small businesses use it very frequently. And it's something that it's not the same thing, doesn't really exist. It's not like there's a big alternative that you could go to where you think, okay, maybe my data is safer here. Snapchat's a lot smaller. Twitter is used for different purposes for the most part. So Facebook is really the only game in town in the sense of what it does. And when you have that kind of situation, that's when lawmakers say, okay, well, maybe we do need to step in here, because there's not a lot of alternatives. This company is very powerful, sits on all this data. And I think that's a big reason why we're seeing calls and calls from both sides of the aisle, Republican and Democrat, here in the US and in Britain. There's kind of these universal calls for something to change. There'll probably be a lot of disagreement about what needs to change. But in Facebook parlance, Facebook is kind of having a hard time finding friends right now in any place. And that raises, I think, the political risk of, like, okay, what kind of rules could take place to affect their business in the years ahead?

[J.R. Whalen]

But trepidation among users is one thing. An image of a smart investment is another. And you highlight Facebook's relatively low multiple with regard to its forward earnings, and that could actually attract new investors.

[Dan Gallagher]

It could. But again, when you get to the, if you look at it purely on that basis, sure, you know, they have some of the highest margins of some of their tech peers and are still growing revenue at a significant rate because advertisers keep coming using the platform to get access to the user base, which keeps growing. What we've outlined is the risk that if that user base starts to decline, advertisers start to think twice about where do they put their money then how would rules and regulations passed by lawmakers affect that? I think the concern right now is even if the stock looks cheaper than it has been historically, you don't really know. What is Facebook's business going to look like two years from now when possibly new laws have gotten enacted? How is that going to affect their business? Have users stayed with the service or have they started to decline? Have advertisers thought twice? Right now there's a lot of questions that I think get to the existential nature of what is Facebook. It makes it very hard to put a value number on where you think the business is going to be two years from now, because there's a lot of possibilities.

[J.R. Whalen]

We've seen a similar scenario, albeit under different circumstances, when Microsoft tangled with the European Union about 15 years ago.

[Dan Gallagher]

That was similar in the sense that it was big and it got bigger as years go on. And it lasted for years. As I noted, that really, I think weighed on the multiple on Microsoft stock precisely because investors were saying, okay, well, how do I value this business when regulators are really trying to attack it and try to limit the reach? The difference is that that wasn't quite to the core of what Microsoft's core business was at the time, which, you know, their core business wasn't really under threat of having its operating system on PCs all over the world. In the case of Facebook, you know, what's under attack is some of the core business, the core business proposition because Facebook uses its huge user base to sell to advertisers. So if that user base, if they lose the trust of that user base, that in turn hits the value proposition of what they sell to advertisers. So you have a potentially cascading effect. I don't know if the same thing is going to happen to the stock as what happened to Microsoft. That was years ago. Different factors at play. But I think what happened to Microsoft does outline what could end up being a significant risk for Facebook, even as much as the stock is down right now.

[J.R. Whalen]

All right, that's heard on the street columnist Dan Gallagher joining us from our San Francisco bureau. Dan, thanks for being with us.

[Dan Gallagher]

My pleasure.

[J.R. Whalen]

And that's your money briefing. I'm JR Whalen in New York for the Wall Street Journal.

[Small Business Owner]

Access to affordable credit helps me pay my employees, but I don't really need it.

[Retail Industry Representative]

Inflation is killing me, but who cares? Big retailers are making record profits. That's why we support the Durbin Marshall credit card bill.

[Small Business Owner]

See, banks and credit unions help small businesses make payroll. This bill would cut the vital resources

[Retail Industry Representative]

they need while increasing megastore profits. They deserve it, don't they?

[Small Business Owner]

Tell Congress, stop the Durbin Marshall money grab for corporate megastores paid for by the Electronic Payments Coalition.