In this segment from an episode of Motley Fool Answers, Robert Brokamp and Alison Southwick are joined by Matt Argersinger of Million Dollar Portfolio and Supernova to talk Facebook (META -0.54%). The first of the powerful and popular FAANG stocks has been snakebit recently by multiple issues, but the biggest may be the Cambridge Analytica data-harvesting mess.
Its market cap has plunged, and its hundreds of millions of users are, if not fleeing, at least rethinking their relationship to its apps and social media platform. But CEO Mark Zuckerberg won some points with the public in his testimony before Congress. The three Fools ponder the data-driven, ad-powered business model that underlies Facebook, the way people trust it with their data, and what may change for the company in the wake of this scandal. They also pivot for a bit to consider Alphabet (GOOG -1.98%) (GOOGL -1.82%), the most valid company to consider as a real competitor to Facebook in the broadest sense.
A full transcript follows the video.
This video was recorded on April 17, 2018.
Alison Southwick: We are going to turn this into more of a long-term conversation, because I'm pretty interested to start talking a bit about what Facebook is going through. Of course, Mark Zuckerberg testified on Capitol Hill last week. The company, Cambridge Analytica, harvested the data of up to 87 million Facebook users, so everyone on Capitol Hill wanted their five minutes to ask him some questions. How do you think it went?
Matt Argersinger: Well, for Facebook [and Zuckerberg, in general], I think it went a lot better than they could have hoped. I think Zuckerberg was really well prepared. He came across well prepared. As robotic, as ever, but he did a good job. The best meme I saw online, by the way, was him [as the character, Data, from Star Trek].
Robert Brokamp: Yes, that was pretty up there.
Argersinger: It was pretty good. I said, "Man, that's pretty effective." To put all this together, you have to go back to 2014 when this all started. Aleksandr Kogan was a researcher at Cambridge University in London. He got permission from Facebook, like a lot of apps and a lot of people do, to pull data from Facebook. He happened to be doing it using a personality quiz that he came up with.
Southwick: Well, I'm looking at my Facebook feed and there's this, "What kind of dog are you?" And I'm like, "OK, I'll take that personality quiz." Then I click on it and it takes me somewhere and then I answer questions. Something like that.
Southwick: I'm a Pug, by the way, in case you're wondering.
Argersinger: Oh, cool!
Southwick: That's my dog personality.
Argersinger: Good to know. And one of the things this app did, which a lot of the apps do, is they ask users to consent to the app [accessing their data] and the data of their friends on Facebook. So, taking the app, you probably clicked on some permissions and said, "Yeah, sure. Why not? Do it." So around 300,000 people, or so, took this quiz back in 2014 and 2015. It doesn't seem like a big number, but when you connect all the friends of these 300,000-odd people, it ballooned this number that initially was 50 million and now it's become 87 million, including Mark Zuckerberg's data...
Brokamp: That's right.
Argersinger: Maybe he took the quiz -- I don't know -- but they got his data, as well, and that was actually OK at the time.
What happened is this Kogan fellow in some way or another [and the details are still murky] ended up selling or licensing this data to Cambridge Analytica, which has a bit of a storied past itself. I'm not going to go into it because it's a little bit of a political rabbit hole...
Southwick: You don't need to go into the politics of it.
Argersinger: You can google it if you want. They ended up acquiring this data of these 87 million Facebook users and used it [for targeted conservative political ads] in the 2016 election. That is the scandal, so to speak. Cambridge Analytica, who was working with Kogan, misrepresented and misused the data outside the scope of what Facebook thought the data was going to be used for.
But, this has been going on for many years. Many apps -- I would say thousands of apps -- have taken the same exact approach, and it wasn't really until this happened in 2015 [when Facebook found out about it], that they really walled off the garden and became much more secure about the way apps and programs use, or scrape, Facebook data.
None of this came out until recently, which caused this big scandal, and now people are thinking, "Oh, my God, my user data and profile have been used in nefarious ways." It caused this big hubbub and that's how he ended up in Congress.
Southwick: I feel like I'm one of the few people who is shrugging this off. Is that fair? I know how Facebook makes money. Facebook makes money by delivering me ads that they think I'm going to like based on my profile and all the information that I give it, and then it delivers back, "Well, you might be interested in buying this." So, knowing that, I'm not that outraged, but maybe I need to be. Do I need to be more outraged?
Argersinger: Alison, I think right there you demonstrated that you know more than the average senator or congressman. You're right to shrug it off a little bit, because [and maybe I'm a glass half-full kind of a guy], I happen to think that most people who use Facebook by getting into the network, [posting] things, having events, and setting up relationships with people realize that you're giving up some of your security [some of your behavior to Facebook], which makes money, like you said, via ads. I feel like most people get that, and maybe the hubbub around this is just a little overdramatic.
Southwick: But, on Capitol Hill, Mark Zuckerberg and other Silicon Valley people whose opinions matter on this are saying that yes, there probably should be increased regulation on online privacy and what companies can retain from us. At the same time, it's next month that GDPR privacy standards are going to go into effect in Europe.
Southwick: That means if companies do business with Europeans -- Europeans have the right "to be forgotten" in Europe. You have the right to say, "No, don't keep any data on me. You never get to keep any data on me." In the U.S. it's not like that. We can't say, "No, you can't remember me." You can delete cookies, or you can do whatever.
So, companies like Facebook say their customers are not me. I know that I'm not Facebook's customer. I am Facebook's product and the customers are actually their advertisers. I am not a Facebook investor, but if I were, how concerned do I need to be that the company that depends on making money off of my data is suddenly going to have less data to sell?
Brokamp: The privacy rule and the lack of trust or lower amount of trust that people have in Facebook I think is going to affect how many people use Facebook.
Argersinger: I think there will be an effect. I guess I just don't know how big it's going to be. I don't think most people are necessarily going to change their behavior that much on Facebook. You've got to remember. The power of Facebook and the competitive advantage of Facebook is the network effect. The size of the network.
I don't really use Facebook very much, but if you've been using Facebook for years and you've got friends, relationships, and photos, [I don't know it's an option to] suddenly delete all that, switch everything off, and not use Facebook anymore.
Southwick: Do you guys know anyone that's quit Facebook because of this?
Argersinger: I personally don't.
Brokamp: Not personally. I've read about people doing it, but I don't know.
Southwick: They exist. There are dozens of us!
Argersinger: Honestly, with all this I can see someone stepping away from Facebook for two weeks, but I guarantee you something's going to pop up on their phone. They're going to leave a message and they'll say, "OK, well someone's just done something. I'm going to check it out and see what's going on..."
Southwick: Just go check in and see what's going on.
Argersinger: ... and they're right back in. I think the bigger issue -- I think what Congress is more worried about -- is just the influence that Facebook has and these other companies we're going to talk about have now, given how big they are. Given how many users are using them. Where the data's ending up. I'm not sure Congress wants to get in the business of regulating Facebook to the extent where they can't make money on user data.
Where it gets murkier to me is something Zuckerberg said during the hearings. He seems to evoke that Facebook owns or is responsible for the data -- the content on its platform -- which I thought was a really surprising admission if it is an admission. One thing you worry about with Facebook is what the line is between free speech and hate speech. What the line is between news and opinion.
Southwick: Facts and truth.
Argersinger: Right. Fake news and lies, and all of this. Facebook has never had to deal with that tension until, obviously, the last year or two, and I think especially now that's something they're going to be worried about. I feel like that's a risk factor for Facebook as an investor and one I didn't think a lot about until the recent election and what's gone on since. That, I think, is where there's going to be some problems with how Facebook uses, maintains, secures, and shares data now and in the future.
Southwick: There was an interesting exchange during the Zuckerberg testimony where Lindsey Graham asked, "Who's your biggest competitor?" He was probably trying to raise the question of whether Facebook is a monopoly. And Zuckerberg had this long answer where he was saying, "Well, we look at it in three different categories." But my brain immediately thought Google. Google's your biggest competitor.
I think Lindsey Graham was looking at it from the perspective of what other social network there is out there for people like me to use. I guess to some extent they have to worry about remaining competitive in that space, but Google also relies largely on advertising revenue.
Southwick: Let's move on and talk about them. How's Google doing these days?
Argersinger: Google has already been in the crosshairs of regulation. They recently paid a huge fine to the EU -- unrelated to their business -- but more for privacy concerns. But I think Google is a great point to look at, because Alphabet/ Google, in a way, have many more touchpoints in our daily lives than Facebook even has. I wouldn't say it's a competitor to Facebook. To me the competitor to Facebook is Instagram, which Facebook owns...
Southwick: They own.
Argersinger: ... so if you think about it in terms of social networks, there really isn't a viable competitor to Facebook. I even think is more of a social media site than a social network site. What they're competing on is your time -- your time online and what you're doing with your phone -- and I think they're a very viable competitor in terms of email, YouTube, search. AlI that they're doing. E-commerce. Shopping online. Searching to buy things. Payments.
There are a lot of touchpoints that Alphabet has to deal with and you're right. Their core intellectual property is just like Facebook's. It's your data. It's your search. It's what you're looking for. It's things you're writing about in your emails. Alphabet has access to all that, and they use it to monetize their business, as well. I think they're just as much in the crosshairs as Facebook is, and they already have been. They've already paid the piper in a lot of ways and they probably will more in the future now that Facebook has come under scrutiny.