Facebook (NASDAQ:FB) is apparently in big trouble.
Shares of the social media giant have lost more than 10% over the last two days as the company again found itself facing questions about how its data and site could have been used in efforts to interfere in the 2016 U.S. election.
After anger at Facebook mounted over it allowing Russian actors to place ads designed to manipulate Americans on its platform, the company is now grappling with another debacle involving a data analysis firm using information that was collected on Facebook but used against the social network's rules.
A brief background
Cambridge Analytica is a data analysis firm funded by conservative billionaire Robert Mercer and was at one time headed by Steve Bannon, who went on to become chief executive of Donald Trump's presidential campaign. The firm took private information from 50 million Facebook users in 2014, according to reports by The New York Times and the Observer of London. The data helped Cambridge Analytica design methods of influencing voter behavior, according to the report. The firm was hired by Trump's campaign in 2016.
Christopher Wylie, who helped obtain the data and helped found Cambridge Analytica, explained the process to the Observer, saying, "We exploited Facebook to harvest millions of people's profiles. And built models to exploit what we knew about them and target their inner demons. That was the basis the entire company was built on."
Facebook failed to report the incident even though it knew about it as early as 2015; the company only announced last week that it was suspending Cambridge Analytica for violating its terms of service. Facebook does allow research firms to use its data, but it does not permit it to be used for advertising purposes.
The revelations add to demands for increased transparency from tech giants such as Facebook and could lead to stepped-up regulation over privacy issues for companies like the social network and Google's parent company, Alphabet.
While the news could have consequences for the company as far as its relationship with regulators and advertisers are concerned, it's unlikely to change the level of engagement from Facebook's users.
A complicated story
While there has been an uproar in the media over the revelations and the Federal Trade Commission has opened an investigation into the allegations, the average Facebook user's perception of the tumult is likely much different. The average political reporter, who is paid to follow the details of such a situation, will have a much a deeper understanding of something like Cambridge Analytica debacle than the average American.
This is a complicated story and one that is not easily packaged into a brief parable for mass consumption. Facebook had no willful intent to harm its users. The blame being placed on the social network has to do with its vulnerability to manipulation, its failure to report what Cambridge Analytica did and its responsibility to its users. Cambridge Analytica gathered data on identities, friend networks, and "likes," and used that information for targeted digital ads.
However, the average American Facebook user understands little of this and is probably only superficially aware of the incident. In general, Americans have much less knowledge of current events than the media gives them credit for. According to the Pew Research Center, just 62% of Americans know that Paul Ryan is the Speaker of the House; only 45% know that Neil Gorsuch is a Supreme Court justice, and just 47% are aware that Robert Mueller is leading the investigation into Russian interference in the 2016 election.
The stickiness factor
Even if Facebook users were outraged at the company, it's unlikely that there would be a major backlash against the social network. Facebook is deeply ingrained in its users' lives, and there is no easy substitute for it. Americans have also shown themselves time and again to be complacent in the face of corporate wrongdoing.
Wells Fargo opened more than 2 million unauthorized bank accounts, in addition to other infractions, as part of an internal effort to meet company goals, yet there was no significant effort on the part of its customers to switch banks, and only warranted a slap on the wrist from regulators. Similarly, BP's massive 2010 Deepwater Horizon oil spill in the Gulf of Mexico elicited outrage, but nothing like a consumer-level boycott.
And changing banks or gas stations is arguably easier than ditching Facebook. The average Facebook user spends 50 minutes a day on its properties, which include Messenger, Instagram, and What's App. There is no good alternative for sharing photos or articles with friends and family, posting invitations, or exchanging messages, especially since users have already put together an extensive social network on the platform.
The idea that billions of Facebook users would simply migrate to another platform, as some seem to be predicting in forecasting its downfall, just doesn't seem realistic. Whether the company receives a backlash from regulators or advertisers remains to be seen, but advertisers tend to go where the most people are, and Facebook has 2 billion of them. This story is still developing, especially on the regulatory front, but so far, this sell-off looks overblown.