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Facebook's Latest Move Could Hurt Its Revenue Growth

By Adam Levy – Apr 4, 2018 at 1:46AM

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Facebook is restricting advertisers' access to third-party data.

Mark Zuckerberg gives himself a personal challenge every year and publicly broadcasts it on Facebook (META 2.24%). This year, he set out to "fix" Facebook.

"We won't prevent all mistakes or abuse, but we currently make too many errors enforcing our policies and preventing misuse of our tools," he wrote in January. Those words have never been more poignant given the uncovering of the Cambridge Analytica debacle.

At the end of March, Facebook announced its plans to shut down partner categories, which allows third-party data providers to offer their targeting data on Facebook. "While this is common industry practice, we believe this step, winding down over the next six months, will help improve people's privacy on Facebook," management wrote in a blog post.

The move could have a negative impact on Facebook's revenue as it restricts targeting data available to marketers. That could make Facebook ads less effective, reducing the return on investment for marketers and ultimately impacting how much they're willing to pay per impression.

It's not the first move Facebook has made this year that could negatively impact its top line, and it probably won't be its last.

Mark Zuckerberg standing, speaking into a microphone.

Image source: Facebook.

Facebook might have been planning this change anyway

The move to reduce third-party access to user data certainly seems like a response to the fallout from its mishandling of the Cambridge Analytica situation, but there's a good chance Facebook was headed this way already.

In May, the EU will start enforcing the General Data Protection Regulation (GDPR). GDPR requires people to give explicit permission to use their data. Any company found in violation of GDPR faces a fine equal to the larger of 20 million Euro or 4% of their global revenue, which could be $2.25 billion in the case of Facebook this year. It was expected the U.S. would follow with its own version of GDPR well before the Cambridge Analytica story surfaced.

The move to shut off data to third parties may have been the safest and easiest way for Facebook to ensure it's in compliance with GDPR. If it further addresses the privacy concerns of its users, that's an added benefit, especially in a time where users are losing trust in the company as a fiduciary of their private data.

What's the impact on Facebook?

Information from third-party data providers is most useful for companies without direct relationships with most of their customers. Think car brands or consumer packaged goods companies, which sell through distributors. Those companies have been able to use data from credit bureaus and shopper loyalty cards to target advertisements on Facebook. Facebook would simply pass along a percentage of the ad revenue to the company furnishing the data.

While most of Facebook's advertisers are small- and medium-sized businesses with direct relationships with their customers, some of its biggest spenders are international consumer packaged goods and car brands.

Those big brands still have the option to work with data furnishers directly and ensure they remain compliant with GDPR. Considering the size of many of those companies, they probably will do just that. In that case, those buyers may not be willing to spend as much per ad impression on Facebook, but Facebook also won't be sharing its ad revenue, so it shouldn't have a big impact on net revenue, except in Europe where those brands will be limited by GDPR.

That said, there will surely be some businesses where it doesn't make sense to work directly with data furnishers, which means there will be at least some pressure on Facebook's top-line growth.

A bigger threat than regulation

Perhaps a bigger threat to Facebook than any regulations put in place are the self restrictions it imposes upon itself. Facebook made changes to its news feed earlier this year to reduce the amount of time spent passively consuming videos and articles and to ensure the articles users do see come from credible sources.

It's also spending heavily to hire people to protect the security and integrity of its platform. As of the end of January, it had doubled its workforce in community ops, online ops, and security to 14,000 from just a year prior. That move will undoubtedly put pressure on Facebook's profit margin.

Now it's taking a step to further reduce access to data, which could negatively impact its top line.

Ultimately, however, putting the interests of its users first should pay off for Facebook in the long run. That's not something the company has always done, but it's good to see Facebook moving in the right direction.

Adam Levy owns shares of Facebook. The Motley Fool owns shares of and recommends Facebook. The Motley Fool has a disclosure policy.

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